14

International Business

Entry Strategy and Strategic

Alliances
 Learning Objectives
■ Basic Entry decisions
-Which Foreign Markets
-Timing of Entry
-Scale of Entry & Strategic Commitments
■ The Six Entry Modes
■ Greenfield Venture vs Acquisition
■ Strategic Alliances
 Basic Entry decisions

Which Foreign Markets?

Choice should be based on assessment of nation’s relative
long-run growth & profit potential.
Attractiveness of a country for IB depends on:
■ Size of the market ( in terms of Demographics)
■ Purchasing power ( present wealth)
■ Economic growth rate ( underlying growth potential)
■ Value of product
 Basic Entry decisions
Timing of Entry
The entry is early when an international business enters a foreign market
before other foreign firms and late when it enters after other
international businesses have already established themselves.

■ First Mover Advantages gives the ability to

-preempt rivals & capture demand by establishing brand name
-build sales volume in that country & ride down experience curve ahead of
rivals & have a cost advantage.
-create switching costs that tie customers to their product and services

■ First Mover Disadvantage give rise to

-“Pioneering costs” (cost of business failure and cost of promoting &
establishing product offerings)
 Basic Entry decisions
Scale of Entry and Strategic Commitments
■ Entering a market on a large scale involves the commitment of significant
resources and implies rapid entry
Eg-ING entered on a large-scale into the US insurance market in 1999

Large scale entry

Pros: Easier to attract customers & distributors; more likely to capture first-mover
advantage; gives signal of commitment
Cons: limits strategic flexibility, as committing in one country heavily leads to having
fewer resources to support expansion elsewhere
Small scale entry
Pros: Enable to learn about foreign market while limiting firm’s exposure to that
market & reducing risk; more flexibility in strategic decision making
Cons: Difficult to build market share and capture early mover advantage due to lack
of commitment
 International Entry Modes
1) Exporting

Advantages
■ Avoids the substantial costs of establishing manufacturing operations in host
country
■ Help a firm achieve experience curve and location economies by manufacturing
from a centralized location and exporting

Disadvantages
■ Exporting from the firm’s home base may not be appropriate if lower cost
locations for manufacturing the product can be found abroad
■ Uneconomical due to high transportation costs, specially for bulk products
■ Uneconomical due to tariff barriers
■ When a firm delegates its marketing, sales and service in each country where it
does business to another company
 Entry Strategy and Strategic
Alliances
2) Turnkey Projects

Advantages
■ Through this, great economical returns can be earned from the valuable
know-how to assemble & run complex process (eg- petroleum refining
technology)
■ Less risky than conventional FDI

Disadvantages
■ Have no long-term interest in a foreign country
■ May inadvertently create a competitor
■ Selling the technology means losing the competitive advantage

Getting round the problem

■ Take equity stakes in the venture
Entry Strategy and Strategic
Alliances
Licensing (intangible property) Fuji-Xerox
Advantages
⑤ The firm does not have to bear development costs and risks associated with opening a foreign
market
⑤ Attractive option if firms are unwilling to commit substantial financial resources to an unfamiliar or
politically volatile foreign market
⑤ Used if firm is prohibited from participating by investment barrier
⑤ Used if firm that have business application, which it doesn’t want to develop for itself (Coca-cola
Clothing).

Disadvantages
⑤ It does not give a firm tight control over manufacturing, marketing and strategy that is required for
realizing experience curve and location economies
⑤ Limits ability to global strategic coordination (using profits out of one country to support
competitive attacks at the other).
⑤ A firm can quickly lose control over its technology by licensing it

Ways to reducing the risk

⑤ Cross licensing (High-tech industries)
⑤ Take important equity stakes in the venture (Joint-venture: fuji-xerox)
 The Strategy of International Business

Franchising (Specialized form of Licensing- strict rules to adher:

McDonalds )
Advantages
■ The firm is relieved of many of the costs and risks of opening a foreign market
on its own
■ Issue of considering experience curve & location economies are not applicable

Disadvantages
■ Limits ability to global strategic coordination (using profits out of one country to
support competitive attacks at the other).
■ Quality control (Four Seasons Hotel)

Getting round the Quality control challenge

■ Establish a master franchisee in many countries (Joint venture with a local firm)
 The Strategy of International Business

Joint Ventures (Fuji-Xerox)

Advantages
■ Benefits from local partner’s knowledge of the host country’s competitive conditions, culture,
language, political system and business systems
■ At high development costs and/or risks of opening a foreign market, firm might gain by
sharing these costs and /or risks with a local partner
■ In many countries, political considerations make it the only feasible entry mode

Disadvantages
■ Risks giving of its technology to its partner (Boeing & Mitsubishi)
■ It does not give a firm that tight control over subsidiaries that it might need to realize
experience learning curve or location economies (eg- TI in Japan)– Global Strategic
Coordination (using profits from one country to support competitive attacks in another)
■ May lead to conflict & battles for control between firms if goals & objectives changes

Ways to getting round the problem

■ Hold majority ownership in the venture
■ Wall off from a partner technology
 The Strategy of International
Business
Wholly owned subsidiary

Advantages
■ When a firm’s competitive advantage is based on technological competence, it
is the preferred entry mode because it reduces the risk of losing control over
the competence (High-tech: Semiconductor, electronics, and pharmaceuticals)
■ It gives tight control over its operations in many countries through global
strategic coordination
■ May help firms to realize location and experience curve economies (each
subsidiary may specialize manufacturing in only one part of product line or
certain components).
■ Gives the firm a 100% share in profits generated in a foreign market

Disadvantages

■ The most costly method of serving a foreign market

■ The risk associated with learning to do business in a new culture
 Greenfield vs Acquisition?
Acquisition
■ Pros and Cons of Acquisition
■ Pros:
1) Quick to execute & rapidly build presence in target market (eg-DaimlerChrysler)
2) help prevent competition in rapidly globalized markets (Airtel in BD)
3) Less risky than Greenfield ventures (known revenue & profit stream).
■ Con: huge failure: only 17% succeeded, 50% eroded shareholder value, 33% created
marginal returns.

■ Why do acquisitions fail?

1) Acquiring firms often overpay (premium) for assets of acquired firms: Hubris
Hypothesis.
2) Clash between cultures of acquiring & acquired firms (DaimlerChrysler).
3) Attempts to realize gains by integrating operations of acquired & acquiring entities
into roadblocks & take much longer than forecast (due to factors like time differences).
4) Inadequate pre-acquisition screening (without thoroughly analyzing potential benefits
& costs)
 Greenfield vs Acquisition?
Acquisition

■ For reducing the risk of failure

- Screening, including detailed auditing of operations, financial position &
management culture help to make sure that the firm:
(1) doesn’t pay much for acquired unit
(2) doesn’t uncover nasty post-acquisition surprises
(3) acquires a firm whose organization culture is not antagonistic that of
acquiring firm.
 Greenfield vs Acquisition?
Greenfield Ventures
■ Pros & cons:
■ Pros:
-It gives the firm a much greater ability to build the kind of subsidiary it wants.
-It is much easier to build an organizational culture or operating routines than
changing those of acquired firm (Lincoln Electric in Europe)
■ Cons:
-It is slower to establish & risky.
-Degree of uncertainty in future revenue & profit prospects.
-Possibility of being attacked by more aggressive global competitors who enter via
acquisitions & build a big market presence.
 Role of Strategic Alliances
Strategic alliances (MS-Toshiba, Boeing-Mitsubishi, Fuji-Xerox)

-formal joint ventures,

-short-term contractual agreements

Pros:
(1) May facilitate entry into a foreign market (Warner Bros in China)
(2) Allow firms to share fixed costs (and associated risks) of developing new products
or processes (Boeing & Japanese firms)
(3) Bring together complementary skills and asset that neither a company could easily
develop on its own (MS & Toshiba).
(4) May help the firm establish technological standards for the industry that will
benefit the firm (Nokia licensed Windows operating system– Window Phone).

Con: give competitors a low-cost route to new technology & markets.

 Role of Strategic Alliances
■ Choosing the right ally or partner
Qualities of good ally:
1. Helps the firm achieve its strategic goals
2. Shares vision for purpose of alliance
3. Does not exploit the alliance for its own ends.

Partner Selection steps:

(1) collect pertinent, publicly available information on potential allies.
(2) gather data from informed third parties.
(3) get to know the potential partner (face-to-face meetings) as well as possible
before committing to an alliance.
 Role of Strategic Alliances

■ Alliance structure
(1) can be designed to make it difficult to transfer technology (Boeing)
(2) contractual safeguards can be written into an alliance agreement to guard against the
risk of opportunism by partner (TRW Automotives)
(3) both parties can agree to swap skills & technologies, thereby ensuring a chance for
equable gain.
(4) if the firm extracts a significant credible commitment from its partner (Fuji-Xerox).

■ Managing the Alliance

Keys to maximize the benefits from alliances:
-making allowances for difference in management style (due to cultural differences)
-building trust & informal communications networks: interpersonal relationship or
“Relational capital” (Ford & Mazda)
- taking proactive steps to learn from alliance partners (Toyota & GM).
Value Chain
Value Chain – Competitive Scope