Entry Strategy and Strategic

Alliances
Vorravee Pattaravongvisut
The Focus
Examine:
The decision on which foreign markets to enter,
when to enter them, and on what scale.
The choice of entry mode.
The role of strategic alliances.
Which Foreign Markets
Politically unstable
developing nations.
Speculative financial
bubbles have led to
excess borrowing.
Favorable benefit-cost-risk trade-off
Politically stable nations.
Free market systems
No dramatic upsurge
in inflation or
private sector debt.
Mixed or command
economies.
Timing of Entry
First-mover advantage.
Preempt rivals and capture demand.
Build sales volume.
Move down experience curve before rivals and
achieve cost advantage.
Create switching costs.
Disadvantages:
First mover disadvantage - pioneering costs.
Changes in government policy.
Costs early entrant
bears that later
entrant can avoid.
Scale of Entry and Strategic
Commitments
Strategic Commitments - a decision that has a
long-term impact and is difficult to reverse.
Large scale entry:
Commitment of significant resources.
Easier to attract customers (will remain in market).
May cause rivals to rethink market entry.
Fewer resources to commit elsewhere.
May lead to indigenous competitive response.
Plus
Minus
Scale of Entry and Strategic
Commitments
Small Scale Entry:
Time to learn about the market.
Limits company exposure.
May be difficult to build market share.
Difficult to capture first-mover advantages.
Plus
Minus
Entry Modes
Exporting
Turnkey
Projects
Licensing
Franchising
Joint
Ventures
Wholly Owned
Subsidiaries
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.
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.
Contractor agrees
to handle every
detail of project
for foreign client.
Licensing
Advantages:
Reduces development costs and risks of establishing
foreign enterprise.
Lack capital for venture.
Unfamiliar or politically volatile market.
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.
Agreement where
licensor grants rights to
intangible property to another
entity for a specified period
of time in return
for royalties.
Risk Reduction
Cross-licensing
Joint venture
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.
Franchiser sells
intangible property
and insists on rules
for operating business.
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 location
economies.
Shared ownership can lead to conflict.
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.
Greenfield
Acquisition
Advantages and Disadvantages of
Entry Modes
Exporting Ability to realize location and
experience curve economies
High transport costs
Trade barriers
Problems with local marketing
agents
Turnkey
contracts
Ability to earn returns from
process technology skills in
countries where FDI is
restricted
Creating efficient competitors
Lack of long-term market
presence
Licensing Low development costs and
risks
Lack of control over technology
Inability to realize location and
experience curve economies
Inability to engage in
global strategic
coordination
Disadvantage Advantage Entry Mode
Advantages and Disadvantages of
Entry Modes
Franchising Low development costs
and risks
Lack of control over quality
Inability to engage in global strategic
coordination
Joint
ventures
Access to local partners
knowledge
Sharing development costs
and risks
Politically acceptable
Lack of control over technology
Inability to engage in global strategic
coordination
Inability to realize location and
experience economies
Wholly
owned
subsidiaries
Protection of technology
Ability to engage in global
strategic coordination
Ability to realize location and
experience economies
High costs and risks
Entry Mode Disadvantage Advantage
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
Reduction
Combination of exporting and
wholly owned subsidiary.
Pro:
Quick to execute.
Preempt competitors.
Possibly less risky.
Con:
Often produce
disappointing results.
Overpay for firm.
Too optimistic about
value creation (hubris).
Culture clash.
Problems with proposed
synergies.
1. Dont pay
too much.
2. Avoid
surprises.
3. Pick
compatible
culture.
Establishing a Wholly Owned Subsidiary
Green-field or Acquisition?
Pro:
Can build subsidiary it
wants.
Easy to establish
operating routines.
Con:
Slow to establish.
Risky.
Preemption by
aggressive competitors.
Acquisition Green-field
Acquisition or Green-field?
Well-established,
incumbent firms.
Competitors
interested in
entry.
Acquisition
No
competitors.
Organizationally
embedded skills,
routines,
culture.
Green-field
Strategic Alliances
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.
Cooperative agreements between
potential or actual competitors.
Making Alliances Work
Partner Selection
Alliance Structure
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
Structuring the Alliance to Reduce
Opportunism
Opportunism by partner
reduced by:
Seeking credible
commitments
Agreeing to swap
valuable skills
and technologies
Establishing
contractual
safeguards
Walling off
critical technology
Managing the Alliance
Building
Trust
Learning
from
Partners