Entry Strategy and Strategic Alliances
Chapter 14
Basic Entry Decisions
Which markets to enter?
When to enter the markets?
What scale of entry?
© McGraw Hill Companies, Inc., 2000
14-2
Which Foreign Markets
Favorable benefit-cost-risk-trade-off:
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 mixed
or command economy or where the financial unstable
have led to increase borrowing..
14-3
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.
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 competitors to rethink market entry.
May lead to domestic competitive response.
Small scale entry:
Time to learn about market.
Reduces exposure risk.
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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 location
economies.
Disadvantages:
May compete with low-cost location manufacturers.
Possible high transportation costs.
Tariff barriers.
Possible lack of control over marketing representatives.
14-8
Turnkey Projects
Advantages:
Can earn a return on knowledge asset.
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.
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Licensing
Advantages:
Reduces costs and risks of establishing enterprise.
Overcomes restrictive investment barriers.
Others can develop business applications of
intangible property.
Disadvantages:
Lack of control.
Cross-border licensing may be difficult.
Creating a competitor
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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 control.
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Joint Ventures
Advantages:
Benefit from local partner’s knowledge.
Shared costs/risks with partner.
Reduced political risk.
Disadvantages:
Risk giving control of technology to partner.
May not realize experience curve or location
economies
Shared ownership can lead to conflict.
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Wholly Owned Subsidiary
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
Entry Mode Advantage Disadvantage
Exporting Ability to realize location and High transport costs
experience curve economies Trade barriers
Problems with local marketing
agents
Turnkey Ability to earn returns from Creating efficient competitors
contracts process technology skills in Lack of long-term market
countries where FDI is presence
restricted
Licensing Low development costs and Lack of control over technology
risks Inability to realize location and
experience curve economies
Inability to engage in
global strategic
coordination
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Advantages and Disadvantages of
Entry Modes
Entry Mode Advantage Disadvantage
FranchisingLow development costs andLack of control over quality
risks Inability to engage in global strategic
coordination
Joint Access to local partner’s Lack of control over technology
ventures knowledge Inability to engage in global strategic
Sharing development costs coordination
and risks Inability to realize location and
Politically acceptable experience economies
Wholly Protection of technology High costs and risks
owned Ability to engage in global
subsidiaries strategic coordination
Ability to realize location and
experience economies
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Selecting an Entry Mode
Technological Know- Wholly owned subsidiary,
How except: 1. Venture is structured
to reduce risk of loss of
technology.
2. Technology advantage is
transitory.
Then licensing or joint venture
Management Know- Franchising,
OK. subsidiaries
How (wholly owned or joint
venture).
Pressure for Cost Combination of exporting and
Reduction wholly owned subsidiary.
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Strategic Alliances
Cooperative agreements between potential or actual
competitors.
Advantages:
Facilitate entry into market.
Share fixed costs.
Bring together skills and assets that neither company has or
can develop.
Establish industry technology standards.
Disadvantage:
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
Companies join to attain world leadership
Each partner has significant strength to
bring to the alliance
A true global vision
Relationship is horizontal not vertical
When competing in markets not part of
alliance, 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 before
committing
14-20
Characteristics of a Global Alliance
Players are independent prior to the creating
of the alliance
Players share
benefits of the alliance
control over operations
Players continue to contribute
technology
products
14-22
Problems with Strategic
Alliances
Have to give up some authority/control
Could be strengthening a future competitor
Technology transfer
Management practices
Operating procedures
14-24