Chapter 15.

The Strategy and Structure of IB

Basic Decisions Firms Firms expanding internationally must decide
Make When Expanding Q1. Which markets to enter?
Globally Q2. When to enter them and on what scale?
Q3. Which entry modes to use?
In order: - exporting
1. Market - Licensing
2. timing of entry - Franchising to a company in the host nation
3. scale - Establishing a joint venture with a local company
4. entry mode
- Establishing a new wholly-owned subsidiary
- Acquiring an established enterprise
The Choice of Entry -
Mode Several factors affect the choice of entry modes including: transport costs, trade
barriers, political risks, economic risks, costs, and firm strategy.
- The optimal mode varies by the situation – what makes sense for one company
might not make sense for another.
Q1. WHICH Foreign
Markets Should Firms 1. Favorable markets:
Enter? - are politically stable
- The choice depends - have free-market systems
on their LONG-RUN - have relatively low inflation rates
PROFIT POTENTIAL - have low private sector debt
2. Less desirable markets:
- are politically unstable
- have mixed or command economies
- have excessive levels of borrowing
Q2. WHEN should a
firm enter a Foreign
1. Entry is EARLY when the firm enters a foreign market BEFORE other foreign firms
Market?
- FIRST-MOVER ADVANTAGES
- Must consider the
timing of entry  The ability to preempt rivals by establishing a strong brand name.
 The ability to build up sales volume and ride down the experience curve
ahead of rivals and gain a cost advantage over later entrants.
 The ability to create switching costs that tie customers into products or
services makes it is difficult for later entrants to win business
- FIRST-MOVER DISADVANTAGES
 Pioneering costs - arise when the foreign business system is so different
from that in the home market that the firm MUST devote considerable
time, effort, and expense to learning the rules of the game.
o the costs of business failure if the firm, due to its ignorance of the
foreign environment, makes some major mistakes.
o the costs of promoting and establishing a product offering,
including the cost of educating customers.

2. Entry is LATE when the firm enters the market AFTER firms have already established
themselves in the market.

Q2. On What Scale

Should A Firm Enter
Foreign Markets? - Firms that enter a market on a significant scale make a strategic commitment to the
market.
 The decision has a long-term impact and is difficult to reverse.
- Small-scale entry has the advantage of allowing a firm to learn about a foreign market
 while simultaneously limiting the firm’s exposure to that market.

SUMMARY
- Basic Decisions Firms Make When Expanding Globally: Market  Timing of entry  Scale  Entry mode

- There are no “right” decisions when deciding which markets to enter, and the timing and scale of entry – are
just decisions that are associated with different levels of risk and reward.

Exporting Turnkey Projects Licensing Franchising Joint ventures Wholly owned

subsidiaries
Def A common first The contractor handles A licensor grants the A specialized A firm that is jointly The firm OWNS
step for many every details of the rights to intangible form of owned by 2 or more 100 % of the
manufacturing project for a foreign property to the licensing in otherwise, stock
firms. client, including the licensee for a which the independent firms.
 later, firms training of operating specified time, and in franchisor NOT Establishing can
may switch to personnel. return, receives a only sells (most joint ventures be done in 2
another mode. royalty fee from the intangible are 50:50 ways:
(At the completion of the licensee. property to the partnerships) - set up a new
contract, the foreign franchisee, but operation
client is (Patents, inventions, also insists - acquire an
handed the "key" to a formulas, processes, that established firm
plant that is ready for full designs, copyrights the franchisee
operation) trademarks) agrees to
abide by strict
rules as to how
it does
business
Pros - it avoids the - They are a way of - The firm avoids - It avoids the - Firms benefit from - They reduce
costs of earning economic development costs costs and risks a local partner's the risk of
establishing returns from the know- and risks associated of opening knowledge losing control
local how required to with opening a foreign of the local market, over core
Manufacturing assemble and run a foreign market. Market. culture, language, Competencies.
Operations. technologically complex political - They give a
process. - The firm avoids - Firms can systems, and firm the tight
- it helps the barriers to quickly build a business systems. control over
firm achieve an - They can be less risky investment. global different
experience than conventional FDI presence. - The costs and risks countries
curve and - The firm can of opening a foreign necessary for
location capitalize on market market is shared. global strategic
economies opportunities coordination.
without developing - They satisfy - They may be
those applications political required to
itself considerations for realize location
market entry. and experience
curve
economies.

Cons - There may be - The firm has no long- - the firm doesn’t - It inhibits the - The firm risks The firm bears
lower-cost term interest in the have the tight control firm's ability to giving control of its the full cost and
manufacturing foreign country. required for take profits out technology to risk of setting
locations. realizing experience of one country its partner. up overseas
- The firm may create a curve and location to support - The firm may not operations
- High competitor. economies. competitive have the tight
transport costs - The firm’s ability to attacks in control to realize
and tariffs can - If the firm's process coordinate strategic another. experience curve or
make it technology is a source of moves across - Geographic location
competitive advantage, countries are limited. distance of the economies.
uneconomical. then selling this - Proprietary (or firm from its - Shared ownership
- Agents in a technology through a intangible) assets franchisees can can lead to conflicts
foreign country turnkey project is also could be lost make it + battles for control
may not act in selling competitive -> Reduce this risk difficult to if goals and
 the exporter’s the advantage to can use detect poor objectives differ or
best interest. potential and/or actual “cross-licensing quality change over time.
competitors. agreements)

How Do Core The optimal entry mode depends on the nature of a firm’s core competencies.
Competencies
Influence Entry - When competitive advantage is based on proprietary technological know-how
Mode?
 Avoid licensing and joint ventures unless the technological advantage is only
transitory or can be established as the dominant design.
- When competitive advantage is based on management know-how
 The risk of losing control over the management skills is not high, and the benefits
from getting greater use of brand names are significant.

When pressure for cost reductions is HIGH, firms are more likely to pursue some
How Do Pressures
COMBINATION of exporting and wholly-owned subsidiaries.
for Cost
Reductions - Allows the firm to achieve location and scale economies and retain some control over
Influence Entry product manufacturing and distribution.
Mode? - Firms pursuing global standardization or transnational strategies prefer
wholly owned subsidiaries

Greenfield or The choice depends on the situation confronting the firm.

Acquisition?

1. Greenfield Greenfield venture may be better when the firm needs to transfer organizationally embedded
strategy competencies, skills, routines, and culture.
- build a subsidiary
from the ground Pros: it gives the firm a greater ability to build the kind of subsidiary company that it wants.
up. Cons: are slower to establish.
 Greenfield ventures are also risky

2. Acquisition - Acquisition may be better when there are well-established competitors or global competitors interested
strategy in expanding
- acquire an existing The volume of cross-border acquisitions has been rising for the last two decades.
company
Pros:
- they are quick to execute
- they enable firms to preempt their competitors
- they may be less risky than greenfield ventures
Cons:
- the acquiring firm overpays for the acquired firm
- the cultures of the acquiring and acquired firm clash
- anticipated synergies are slow and difficult to achieve
- there is inadequate pre-acquisition screening

Avoid:
- carefully screen the firm to be acquired
- move rapidly to implement an integration plan