ch 7 entry strategies and alliances

8/7/2019 Ch 7 Entry Strategies and Alliances

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Chapter

Entry Strategy and

Strategic Alliances

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International Business, 5/e 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Case: Diebold

Began to sell ATM machines in foreign marketsin 1980s

1980s Distribution agreement with Philips 1990 Diebold establishes joint venture with IBM 1997 foreign sales 20% of Diebolds total

revenues Diebold decides to go it alone with local

manufacturing presence for local customization Through acquisitions joint ventures


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Basic foreign expansion entry decisions

A firm contemplating foreign expansion must

make three decisions Which markets to enter

When to enter these markets

What is the scale of entry


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Which foreign markets

Favorable Politically stable developed and developing nations Free market systems No dramatic upsurge in inflation or private-sector

debt Unfavorable

Politically unstable developing nations with a mixedor command economy or where speculative financial

bubbles have led to excess borrowing


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Timing of entry

Advantages in early market entry: First-mover advantage.

Build sales volume.

Move down experience curve and achieve cost advantage. Create switching costs.

Tie customers to your product.

Disadvantages:

First mover disadvantage - pioneering costs. Changes in government policy.


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Scale of entry

Large scale entry

Strategic Commitments - a decision that has a long-term impact and is

difficult to reverse.

May cause rivals to rethink market entry.

May lead to indigenous competitive response

Jollibee Example

? Good or Bad? .

Small scale entry:

Time to learn about market. Reduces exposure risk.

Lack of Commitment problems


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Entry modes

Exporting

Turnkey Projects

Licensing Franchising

Joint Ventures

Wholly Owned Subsidiaries


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Exporting

Advantages: Avoids cost of establishing manufacturing operations

May help achieve experience curve and locationeconomies

Disadvantages: May compete with low-cost location manufacturers

Possible high transportation costs

Tariff barriers Possible lack of control over marketing reps

Local Agent Problems


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Turnkey projects

Advantages:

Can earn a return on knowledge asset Earn $ on Know How

Less risky than conventional FDI Disadvantages:

No long-term interest in the foreign country

May create a competitor

Selling process technology may be selling competitive

advantage as well

Contractor agrees

to handle everydetail of project

for foreign client


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Licensing: Advantages

Reduces development costs and risks of establishingforeign enterprise.

Lack capital for venture.

Unfamiliar or politically volatile market. Overcomes restrictive

investment barriers.

Others can develop businessapplications of intangible

property.

Agreement where

licensor grants rights to

intangible property to another

entity for a specified periodof time in return

for royalties.


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Franchising

Advantages: Reduces costs and risk of establishing enterprise

Disadvantages: May prohibit movement of profits from one

country to support operations in another country

Quality controlFranchiser sells

intangible property

and insists on rules

for operating business


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Joint Ventures

Advantages: Benefit from local partners knowledge. Shared costs/risks with partner.

Reduced political risk. Disadvantages:

Risk giving control of technology to partner.

May not realize experience curve or locationeconomies.

Shared ownership can lead to conflict

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Wholly owned subsidiary

Subsidiaries could be Greenfield investments oracquisitions

Advantages: No risk of losing technical competence to a

competitor

Tight control of operations.

Realize learning curve and location economies. Disadvantage:

Bear full cost and risk

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Advantages and disadvantages of entry modes

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Selecting an entry mode

Technological Know-How

Management Know-How

Wholly owned subsidiary, except:

1. Venture is structured to reduce risk of

loss of technology.

2. Technology advantage is transitory.

Then licensing or joint venture OK

Franchising, subsidiaries (wholly

owned or joint venture)

Pressure for Cost

ReductionCombination of exporting and wholly

owned subsidiary

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Acquisition and Green-field- pros & cons

Pro: Quick to execute

Preempt competitors

Possibly less risky

Con:

Disappointing results

Overpay for firm

optimism about value creation

(hubris)

Culture clash.Problems with proposed

synergies

Pro: Can build subsidiary it

wants

Easy to establish

operating routines Con:

Slow to establish

Risky

Preemption by

aggressive competitors

Acquisition Greenfield

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Acquisition or Green-field?

Well-established,

incumbent firms.

Competitors

interested inentry.

embedded skills,

routines, culture.

No competitors

Acquisition

Green-field

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Strategic Alliances

Cooperative agreements between potential or actualcompetitors.

Advantages:

Facilitate entry into market Share fixed costs Bring together skills and assets that neither company has

or can develop Establish industry technology standards

Disadvantages: Competitors get low cost route to technology and markets

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Alliances are popular

High cost of technology development

Company may not have skill, money or people to

go it alone Good way to learn

Good way to secure access to foreign markets

Host country may require some local ownership

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Global Alliances, however, are different

Firms join to attain world leadership

Each partner has significant strength to bring

to the alliance

A true global vision

When competing in markets not part ofalliance, they retain their own identity

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Partner selection

Get as much information as possible on the

potential partner

Collect data from informed third parties

Former partners

Investment bankers

Former employees

Get to know the potential partner beforecommitting

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Structuring the alliance to reduce opportunism

Fig 14.1

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Characteristics of a strategic alliance

Independence ofParticipants

SharedBenefits

OngoingContributions

Markets

Cooperation

Benefits

Control Products

Technology

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ch 7 entry strategies and alliances

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