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Entry Strategy and Strategic Alliances

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Agenda

1. Opening case

2. The market(s) to enter (WHERE) 3. The time of entry (WHEN)4. The scale of entry (HOW MUCH)5. The mode of entry to be utilized (HOW)

6. Acquisitions and Alliances 7. Closing case

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1. Opening case: TESCO

• Tesco is the largest grocery retailer in UK, with a 30% market share

• In the early 90s it was generating strong cash flows that wasinvested in internationalization

• They decided to invest in emerging markets

Eastern Europe (1994-1996): Hungary, Poland, CzeckRepublic, Slovakia

Asia (1998-2004): Thailand, South Korea, Taiwan, Malaysia, China

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Opening case

• Entrances were done by acquiring shares from local retailers

• In the case of China, the company developed a 50/50 JV with Hymall

• At the end of this process, Tesco had some 1900 stores in UK (£25.000 billion in revenues), 260 in the rest of Europe (£4.000 billion) and 180 in Asia (£2.700 billion)

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Opening case

• Core competence tranfer (marketing, store selection, logistics and inventory management, own labelling)

• Choosing good companies, with a deep knowledge of local markets, although lacking Tesco’s financial strenghts and core competencies.

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2. Market choice

Country Attractiveness

RISKSPolitical (stability)Economic (stability; market freedom)Legal (property right protection)

COSTSCorruptionLack of infrastructureLegal costs

BENEFITSSize of EconomyLikely economic growth

Where?

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Gross National Income Where?

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Corruption as of 2011 Where?

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The Spread of Market-Based Systems

Where?

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Piracy of Intellectual Property

Where?

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Example of market choice

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Example of market choice

• ING grew thanks to a rapid international expansion through acquisitions

• In the first half of the 90s they targeted central Europe (Germany and Belgium); in the second half the USA

- The world largest financial service market- Low legal barriers to entry and to compete- More and more americans were responsible for their own

retirement- Less difficulties in acquisitions (national pride in France

avoided entrance)- Better infrastructure to develop on-line banking

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3. Timing of Entry

• “First-mover advantages”- preempting rivals and capturing demand by establishing a strong

brand name- building sales volume (and riding down the experience curve)- creating switching costs

• “First-mover disadvantages”- Pioneering costs

(understanding new customers; educating them)- Possibility that regulations may change

When?

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4. Scale of Entry

Small-scale entry Large-scale entry

•Resource committment

•Strategic committment (low reversibility)

•Risk

•Rewards (economies of scale and experience)

How much?

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A large scale of Entry

• By entering on a significant scale, ING has signaled its committment to the market: the company will remain for long, thus raising customers’ trust.

• Hernan Cortez, in 1519, arrived in Mexico to conquer it. He decided to burn its ships to induce his men to fight hard and win against the Aztec (no way to get back to Spain!)

How much?

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An example: Jollibee

• While large corporations expand internationally, local players have the possibility to learn from them, as in the case of Jollibee.

• The company started in Quezon City in 1975 as a 2-branch ice cream parlor. It then expanded the menu including sandwiches and other meals.

•When it had 11 stores, in 1981, McDonalds arrived in the Philippines and Jollibee used McDonalds as a benchmark to improve process efficiency.

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In the meanwhile…

• Jollibee identified a weakness in McDonald’s global strategy: no adaptation to local tastes.

• The company decided to design the ideal fast food for the Philippine taste and to offer it not only in the home country (today 300 stores) but also abroad, where Filipino workers are strongly present (27 stores)

- Indonesia- Middle East- USA

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5. Entry Modes

• Firms can use 5 different methods to enter a market- Exporting- Licensing- Franchising- Joint Ventures- Wholly Owned Subsidiaries

How?

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Exporting

• Advantages:- It avoids the costs of establishing manufacturing

operations- It may help achieve experience and location economies

• Disadvantages:- May compete with low-cost location manufacturers- Possible high transportation costs- Tariff barriers- Possible lack of control over marketing reps (especially if

multi-brand)

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Licensing

• An agreement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specific period, and in return receives royalties

• Intangible properties include patents, inventions, formulas, copyrights and trademarks.

Advantages• Reduces development costs

and risks of establishing a subsidiary • Overcomes restrictive investment barriers• Suitable if markets are unfamiliar

How?

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Licensing

Disadvantages• Loss of control over activities

- No experience- Less international coordination

• Loss of control over technology

• In order to overcome the last disadvantage

- Build up CROSS-LICENCING- Develop a JV

How?

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Franchising

• The franchisor - Sells intangible

properties - Assists the franchisee in

doing business - Insists that the franchisee

agree to abide strict rules- Receives royalties

How?

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Franchising

Advantages: see licensingDisadvantages: see licensing, but less

pronounced- The main one is quality control: a

bad consumer experience in State A, has an effect in State B…

- Ways to cope with this issue are • to establish a subsidiary in each

country/region in which the firm expand

• To place own managers to monitor quality

How?

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Joint Ventures

• It entails establishing a firm that is jointly owned by two or more independent firms

Advantages• Local partner knowledge of

the host country market• Sharing costs and risks• Avoiding local government

aversion

How?

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Joint Ventures

Disadvantages• Loosing control of its own

technology- Hold majority- “Wall off” from a partner

technology• No total control (it is less

dependent than an owned subsidiary)

• Potential (cultural) conflicts

How?

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Wholly Owned Subsidiary

• Advantages:- No risk of loosing competence control

(used in high-tech industries)- Tight control of operations- Realizing learning economies

• Disadvantage:- Bear full cost and risk

How?

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Selecting the entry strategy

EL

F

WOSJVCosts and complexity

Risk of loosing control over core competencies

How?

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6. WOS by acquisitions?

• Subsidiaries could be greenfield investments or can be acquired

• Over the last decade, 50%-80% of all FDI have been in the form of M&A.

• Advantages: - Quicker (good for rapidly

globalizing industries, where competitors preemption is needed)

- Less risky than greenfield WOS (ceteris paribus)

Acquisitions Alliances

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However…

• Mercer Management Consulting examineted 150 acquisitions between ’90-’95: only the 17% was judjed successfull…

• KPMG examinated 700 acquisitions between 1996-1998: only 30% created value…

WHY? • Price overestimation (e.g. Chrysler was acquired for $40

Billions, with a premium of 40% of real market value)• Cultural clashes (e.g. many Chrysler managers left because of

Daimler management directive style)

Acquisitions Alliances

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So…

• Either companies deal with these risks in advance….

- Screening (auditing of operations, financials, management)

- Integration plans

• ….or it is better to establish a greenfield venture! (e.g. LE in the mid 90s was not able to transfer its organizational architecture)

Acquisitions Alliances

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A rule of choice

1. Are well-established incumbents present?2. Are global competitors interested

in establishing a presence soon?

Is the competitive advantage based on the transfer of organizationally embedded competencies or culture?

Y NY

N A

GF

Acquisitions Alliances

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International Strategic Alliances

• Cooperative agreements between potential or actual competitors (from JV to short-term agreements)

- Facilitate entry into market- Share fixed costs

Acquisitions Alliances

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Strategic Alliances

- Bring together complementary skills and assets that neither company could easily develop on its own

- Help the firm to establish technological standards

Acquisitions Alliances

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Making Alliances work

Alliance Success

Partner Selection

Alliance Structure

Managing Alliance

Acquisitions Alliances

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Partner Selection

The ideal partner share the goals of the company and is unlikely to try to opportunistically exploit the alliance for its own ends

1. Get as much information as possible on the potential partner2. Collect data from informed third parties

- Former partners- Investment bankers- Former employees

3. Get to know the potential partner before committing

Acquisitions Alliances

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Selecting partners is not easy..

• MG Rover was spun out by BMW in 2000

• For 3 years the company wasnot successful, thus looking for a partner to develop the business (in terms of productsand markets)..

• Since 2008 MG Rover is ownedby SAIC, Chinese multinationalautomotive manufacturercompany headquartered in Shanghai.

Acquisitions Alliances

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Alliance Structure

• Walling off critical technologies: modularize the business and exclude partners to access critical areas

• Establish contractual safeguards

• Agreeing to swap valuable skills and technology: e.g. cross licencing

• Seeking credible committment in advance (investing money for long run in a JV)

Acquisitions Alliances

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Managing the Alliance

• Sensitivity to cultural differences• Building the so called “relational capital”

• Learning from partners and apply the knowledgewithin the company

Acquisitions Alliances

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7. Closing case: DIEBOLD