Chapter
7
Entry Strategy and Strategic
Alliances
Basic Entry Decisions
Firms entering foreign markets make three
basic decisions
which markets to enter
when to enter them and on what scale
which entry mode to use
Entry modes include:
exporting
licensing or franchising to a company in the host
nation
establishing a joint venture with a local company
establishing a new wholly owned subsidiary
acquiring an established enterprise
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Basic Entry Decisions
Several factors affect the choice of entry mode
including:
Transportion costs
trade barriers
political risks
economic risks
costs
firm strategy
The optimal mode varies by situation – what makes sense
for one company might not make sense for another
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1. Which Foreign Markets to Enter?
Favorable markets are
Politically stable developed and developing nations
Free market systems
No dramatic increase in inflation or private-sector debt
Less desirable markets are
Politically unstable developing nations with mixed or
command economies
Developing nations with excessive levels of borrowing
2. Timing of Entry
Once attractive markets are identified, the firm must
consider the timing of entry
Early Entry
Late Entry
Advantages in early market entry:
First-mover advantage.
Build sales volume.
Move down experience curve and achieve cost advantage.
Create switching costs (make it difficult for later entrants to win business).
Mobile created a switching cost by selling Sim card around 3500-4000PKR
Disadvantages:
First mover disadvantage - pioneering costs (time and effort spent learning the
rules of a new market)
the costs of business failure
the cost of educating customers
Changes in government policy (e.g., Uber, drivers # 3 years # no criminal record).
Classroom Performance System
refers to the time and effort spent learning the
rules of a new market.
a) First mover advantages
b) Strategic commitments
c) Pioneering costs
d) Market entry costs
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Classroom Performance System
refers to the time and effort spent learning the
rules of a new market.
a) First mover advantages
b) Strategic commitments
c) Pioneering costs
d) Market entry costs
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Scale of Entry
After choosing which market to enter and the timing of
entry, firms need to decide on the scale of market
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 (Local) competitive response.
Small scale entry: has the advantage of allowing a firm to
Learn about market.
Reduce exposure risk.
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Market Entry Modes
Six different ways to enter a foreign market:
Exporting
Turnkey Projects
Licensing
Franchising
Joint Venture
Wholly Owned subsidiary
Managers need to consider the advantages
and disadvantages of each entry mode
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Market Entry Modes
Entry Modes
1. Exporting
Exporting is selling of goods or services produced in one
country to another country.
Direct Exporting: involves selling directly to your target
customer in-market (e.g., selling Online).
Indirect Exporting: is selling to an intermediary, who later
sells the goods or services either directly to importing
wholesalers or to customers.
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1. Exporting
Advantages:
Avoids cost of establishing manufacturing operations
May help achieve experience curve and location
economies
Disadvantages:
May compete with low-cost location manufacturers
Possible high transportation costs
Tariff barriers
Possible lack of control over marketing reps
agents in a foreign country may not act in exporter’s best interest
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2. Licensing
A licensing agreement is an arrangement whereby a licensor
grants the rights to intangible property to another entity (the licensee)
for a specified time period, and in return, the licensor receives a royalty
fee from the licensee.
e.g., a royalty fee equal to 5, 10, or 15 percent of the net sales revenue
Intangible property includes
patents,
inventions,
formulas,
processes,
designs,
copyrights,
and trademarks
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2. Licensing
Licensors with experience in the field of research and
product development may find it more efficient to license
out new products rather than take up production
themselves.
e.g., Coca cola
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2. Licensing
Licensing is attractive because firm:
1. Reduces development costs and risks of establishing foreign
enterprise.
2. Overcomes restrictive investment barriers.
3. Firms with intangible property that might have business
applications can capitalize on market opportunities without developing
those applications itself.
For example, American Telephone & Telegraph (AT&T) company originally invented
the transistor circuit in the 1950s, but AT&T decided it did not want to produce
transistors, so it licensed the technology to a number of other companies, such as
Texas Instruments.
2. Licensing
Licensing is unattractive because:
1. the firm doesn’t have the tight control over manufacturing,
marketing, and strategy required for realizing experience curve and
location economies
Licensing typically involves each licensee setting up its own production
operations.
This limits the firm's ability to realize experience curve and location
economies by producing its product in a centralized location.
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2. Licensing
Licensing is unattractive because:
2. it limits a firm’s ability to coordinate strategic moves across
countries by using profits earned in one country to support
competitive attacks in another (because firms have to pay certain
amount as royalty)
3. Technological know-how constitutes the basis of many multinational
firms' competitive advantage.
Most firms wish to maintain control over how their know-how is
used, and a firm can quickly lose control over its technology by
licensing it.
e.g., RCA Corporation (a major American electronics company) once
licensed its color TV technology to Japanese firms and then
Japanese firm improved the existing TV and launched in U.S
market 14-18
3. Franchising
Franchising is basically a specialized form of licensing in which the
franchisor not only sells intangible property to the franchisee, but also
insists that the franchisee agree to abide by strict rules as to how it does
business
Franchising is used primarily by service firms
Major U.S. companies with franchise operations in Pakistan include
- Marriott,
- Day's Inn,
- Pizza Hut,
- KFC,
- Subway,
- McDonald's,
- Dunkin Donuts,
- Domino's Pizza
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3. Franchising
Franchising is attractive because:
Firms avoid many costs and risks of opening up a foreign market
Firms can quickly build a global presence
Franchising is unattractive because:
It may inhibit (slow down) the firm's ability to take profits out of
one country to support competitive attacks in another
the geographic distance of the firm from its foreign franchisees can
make poor quality difficult for the franchisor to detect
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Licensing vs. Franchising
Licensing Franchising
Royalty Management Fees
15-20 years 5/10 Years
Concerned with specific existing products Franchisor passes to the franchisee the
and technologies benefits of ongoing research programs
Licensee enjoys substantial measure of Standard fee structure. Any variation will
fee negotiation cause confusion
Lesser control Exerts higher control
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4. Joint Ventures
A joint venture: when two or more business entities come
together to achieve a common purpose, it’s called a joint
venture.
Under a joint venture arrangement, a foreign company invites an
outside partner to share stock ownership in the new unit –
minority or majority or 50:50 share
Example:
Google and NASA developing Google Earth
Banks collectively funding research to prevent cyber-crime
BMW and Toyota co-operate on research into hydrogen fuel vehicle electrification
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4. Joint Ventures
Joint ventures are attractive because:
they allow the firm to benefit from a local partner's knowledge of the host
country's competitive conditions, culture, language, political systems, and
business systems
the costs and risks of opening a foreign market are shared with the
partner
When political considerations make joint ventures the only feasible entry
mode
Joint ventures are unattractive because:
the firm risks giving control of its technology to its partner
the firm may not have the tight control over subsidiaries need to realize
experience curve or location economies
shared ownership can lead to conflicts and battles for control if goals and
objectives differ or change over time
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5. Wholly Owned Subsidiaries
In a wholly owned subsidiary, the firm owns 100 percent
of the stock and have complete control and ownership of
international operations,
Firms can establish a wholly owned subsidiary in a
foreign market by:
setting up a new operation in the host country (Greenfield operation)
acquiring an established firm in the host country (acquisition)
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5. Wholly Owned Subsidiaries
Acquisition
A company can acquire a foreign company and all its resources in a
foreign market
Acquisition provides speedy access to the resources of a foreign
company such as skilled man power, the company’s product and brand
and its distribution channels
Acquisitions are attractive because:
they are quick to execute
they enable firms to preempt their competitors
acquisitions may be less risky than Greenfield ventures
5. Wholly Owned Subsidiaries
Acquisitions can fail when:
the acquiring firm overpays for the acquired firm
the cultures of the acquiring and acquired firm clash
attempts to realize synergies run into roadblocks and take much longer
than forecast
there is inadequate pre-acquisition screening
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5. Wholly Owned Subsidiaries
Green field operation
The firm creates the production and marketing facilities on its own from
scratch
Green field operations preferred under following situations
Smaller firms with limited resources
Have the option of selecting own location on the basis of their own screening criteria.
Disadvantage:
Greenfield ventures are slower to establish
Greenfield ventures are also risky
Greenfield or Acquisition?
The choice between a greenfield investment and an
acquisition depends on the situation confronting
the firm
Acquisition may be better when the market already has well-
established competitors or when global competitors are interested
in building a market presence
A greenfield venture may be better when the firm needs to transfer
organizationally embedded competencies, skills, routines, and
culture
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6. Turnkey Projects
Turnkey projects: It is a contract under which a firm
agrees to fully design, construct and equip a manufacturing/
business/service facility and turn the project over to the
purchaser when it is ready for operation for a remuneration
Turnkey projects are common in the
chemical,
pharmaceutical,
petroleum refining,
metal refining industries
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6. Turnkey Projects
Advantages:
Can earn a return on knowledge asset
Less risky than conventional FDI
Disadvantages:
Lack of long-term market presence
May create a competitor
Selling process technology may be selling competitive
advantage as well
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MCQ
What is the main disadvantage of wholly owned
subsidiaries?
a) they make it difficult to realize location and experience curve economies
b) the firm bears the full cost and risk of setting up overseas operations
c) they may inhibit the firm's ability to take profits out of one country to support
competitive attacks in another
d) high transport costs and tariffs can make it uneconomical
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MCQ
What is the main disadvantage of wholly owned
subsidiaries?
a) they make it difficult to realize location and experience curve economies
b) the firm bears the full cost and risk of setting up overseas operations
c) they may inhibit the firm's ability to take profits out of one country to support
competitive attacks in another
d) high transport costs and tariffs can make it uneconomical
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Selecting an Entry Mode
All entry modes have advantages and disadvantages
The optimal choice of entry mode involves trade-offs
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Selecting An Entry Mode
Pressures for Cost Reductions and Entry Mode
When pressure for cost reductions is high, firms are more likely to
pursue which of the following strategies?
Exporting
Turnkey Projects
Licensing
Franchising
Joint Venture
Wholly Owned subsidiary
Strategic Alliances
A strategic alliance is a legal agreement between two or more
companies to share access to their technology, trademarks or
other assets.
A strategic alliance does not create a new company.
Example:
Faysal Bank, Audi Pakistan, IGI Insurance enter into strategic alliance.
Meezan Bank has entered into a strategic cooperation alliance with Pak China
Investment Company (PCIC) for the promotion of bilateral trade and investment
between the two countries.
National Bank of Pakistan (NBP), Telenor Pakistan (TP) and Telenor
Microfinance Bank Ltd formed a strategic alliance to further financial inclusion
in Pakistan.
The Advantages of Strategic Alliances
Strategic alliances:
facilitate entry into a foreign market
allow firms to share the fixed costs of developing new products.
bring together complementary skills and assets that neither
partner could easily develop on its own
can help a firm establish technological standards for the industry that
will benefit the firm
Disadvantage:
Strategic alliances can give competitors low-cost routes to new
technology and markets.
Classroom Performance
System
Which of the following is not important to a
successful strategic alliance?
a) establishing a 50:50 relationship with partner
b) creating strong interpersonal relationships
c) a shared vision
d) learning from the partner
Classroom Performance
System
Which of the following is not important to a
successful strategic alliance?
a) establishing a 50:50 relationship with partner
b) creating strong interpersonal relationships
c) a shared vision
d) learning from the partner