Chapter 14

Entry Strategy and

Strategic Alliances

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 Introduction

Question: How can firms enter foreign markets?

 Firms can enter foreign markets through
exporting
licensing or franchising to host country firms
a joint venture with a host country firm
a wholly owned subsidiary in the host country to serve
that market
 The advantages and disadvantages of each entry mode
are determined by
transport costs and trade barriers
political and economic risks
firm strategy

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 Basic Entry Decisions

Question: What are the basic entry decisions for firms

expanding internationally?

Answer:
 A firm expanding internationally must decide
which markets to enter
when to enter them and on what scale
how to enter them (the choice of entry mode)

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 Which Foreign Markets?

 Firms need to assess the long run profit potential of each

market
 The most favorable markets are politically stable
developed and developing nations with free market
systems, low inflation, and low private sector debt
 The less desirable markets are politically unstable
developing nations with mixed or command economies,
or developing nations where speculative financial
bubbles have led to excess borrowing
 Successful firms usually offer products that have not
been widely available in the market and that satisfy an
unmet need

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 Timing of Entry

 After a firm identifies which market to enter, it must

determine the timing of entry
 Entry is early when an international business enters a
foreign market before other foreign firms
 Entry is late when a firm enters after other international
businesses have already established themselves in the
market

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 Timing of Entry

 Firms entering a market early can gain first mover

advantages including
the ability to pre-empt rivals and capture demand by
establishing a strong brand name
the ability to build up sales volume in that country 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 their products or services making it difficult for
later entrants to win business

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 Timing of Entry

 First mover disadvantages - the disadvantages

associated with entering a foreign market before other
international businesses
 These may result in pioneering costs (costs that an early
entrant has to bear that a later entrant can avoid) such
as
the costs of business failure if the firm, due to its
ignorance of the foreign environment, makes some
major mistakes
the costs of promoting and establishing a product
offering, including the cost of educating the customers

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 Scale of Entry

 Firms that enter foreign markets on a significant scale

make a major strategic commitment that changes the
competitive playing field
involves decisions that have a long term impact and
are difficult to reverse
 Small-scale entry can be attractive because it allows the
firm to learn about a foreign market, but at the same time
it limits the firm’s exposure to that market

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 Summary

 There are no “right” decisions with foreign market entry,

just decisions that are associated with different levels of
risk and reward
 Firms in developing countries can learn from the
experiences of firms in developed countries

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 Entry Modes

Question: What is the best way to enter a foreign market?

Answer:
 Firms can enter foreign market through
1. Exporting
2. Turnkey projects
3. Licensing
4. Franchising
5. Joint ventures
6. Wholly owned subsidiaries
 Each mode has advantages and disadvantages

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 Exporting

1. Exporting is often the first method firms use to enter

foreign market
 Exporting is attractive because(Advantages)
it is relatively low cost
firms may achieve experience curve economies
 Exporting is not attractive when (Disadvantages)
lower-cost manufacturing locations exist
transport costs are high
tariff barriers are high
foreign agents fail to in the exporter’s best interest

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 Turnkey Projects

2. Turnkey projects involve a contractor that agrees to

handle every detail of the project for a foreign client,
including the training of operating personnel
at completion of the contract, the foreign client is
handed the "key" to a plant that is ready for full
operation

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 Turnkey Projects

 Turnkey projects are attractive because

they allow firms to earn great economic returns from the
know-how required to assemble and run a technologically
complex process
they are less risky in countries where the political and
economic environment is such that a longer-term
investment might expose the firm to unacceptable
political and/or economic risk
 Turnkey projects are not attractive when
the firm's process technology is a source of competitive
advantage
No long term interest in the foreign market
Creating competitor and competing themselves in the
world market.
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 Licensing
3. Licensing - 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
intangible property includes patents, inventions,
formulas, processes, designs, copyrights, and
trademarks
 Licensing is attractive when
the firm does not have to bear the development costs
and risks associated with opening a foreign market
the firm avoids barriers to investment
it allows a firm with intangible property that might
have business applications, but which doesn’t want to
develop those applications itself, to capitalize on
market opportunities
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 Licensing

 Licensing is unattractive when

the firm doesn’t have the tight control over
manufacturing, marketing, and strategy necessary to
realize experience curve and location economies
the firm’s ability to coordinate strategic moves across
countries by using profits earned in one country to
support competitive attacks in another is
compromised
 There is the potential for loss of proprietary (or
intangible) technology or property
to reduce this risk, firms can use cross-licensing
agreements or link the agreement with the decision to
form a joint venture
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 Franchising
4. Franchising - a form of licensing in which the franchisor
sells intangible property and requires the franchisee
agree to abide by strict rules as to how it does business
 Franchising is attractive because
can avoid costs and risks of opening up a foreign
market
 Franchising is unattractive because
it may inhibit 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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 Joint Ventures
5. Joint ventures involve the establishment of a firm that is
jointly owned by two or more otherwise independent
firms
 Joint ventures are attractive because
a firm can 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
they can help firms avoid the risk of nationalization or
other adverse government interference

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 Joint Ventures

 Joint ventures can be unattractive because

the firm risks giving control of its technology to its
partner
the firm may not have the tight control over
subsidiaries that it might 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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 Wholly Owned Subsidiaries

6. Wholly owned subsidiaries involve 100 percent

ownership of the stock of the subsidiary
 Firms establishing a wholly owned subsidiary can
set up a new operation in that country
acquire an established firm

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 Wholly Owned Subsidiaries

 Wholly owned subsidiaries are attractive because

they reduce the risk of losing control over core
competencies
they gives the firm the tight control over operations in
different countries that is necessary for engaging in
global strategic coordination
they may be required if a firm is trying to realize
location and experience curve economies
 Wholly owned subsidiaries are unattractive because
firms bear the full costs and risks of setting up overseas
operations

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 Selecting an Entry Mode
Table 12.1: Advantages and Disadvantages of
Entry Modes

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 Selecting an Entry Mode

Question: How should a firm choose a specific entry

mode?

Answer:
 All entry modes have advantages and disadvantages
 The optimal choice of entry mode involves trade-offs

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 Core Competencies and Entry Mode

 The optimal entry mode depends to some degree on

the nature of a firm’s core competencies
 Core competencies can involve
1. technological know-how
2. management know-how

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 Core Competencies and Entry Mode

1. Technological Know-How
 When competitive advantage is based on proprietary
technological know-how, firms should avoid licensing
and joint venture arrangements in order to minimize
the risk of losing control over the technology
 However, if a technological advantage is only transitory
(Impermanent), or the firm can establish its technology
as the dominant design in the industry, then licensing
may be attractive

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 Core Competencies and Entry Mode

2. Management Know-How
 The competitive advantage of many service firms is
based upon management know-how
 international trademark laws are generally effective
for protecting trademarks
 Since the risk of losing control over management skills
to franchisees or joint venture partners is not high, the
benefits from getting greater use of brand names is
significant

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 Pressures for Cost Reductions

 Firms facing strong pressures for cost reductions are

likely to pursue some combination of exporting and
wholly owned subsidiaries
this will allow the firms to achieve location and scale
economies as well as retain some degree of control
over worldwide product manufacturing and distribution

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 Greenfield or Acquisition?

Question: Should a firm establish a wholly owned

subsidiary in a country by building a subsidiary from the
ground up (greenfield strategy), or by acquiring an
established enterprise in the target market (acquisition
strategy)?

Answer:
 The number of cross border acquisitions are increasing
 Over the last decade, 40-80 percent of all FDI inflows
have been mergers and acquisitions

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 Pros and Cons of Acquisitions

 Acquisitions
are quick to execute
enable firms to preempt their competitors
can be less risky than green-field ventures
 However, many acquisitions are not successful

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 Pros and Cons of Acquisitions

Question: Why do acquisitions fail?

Answer:
 Acquisitions fail when
the firm overpays for the assets of the acquired firm
there is a clash between the cultures of the acquiring
and acquired firm
attempts to realize synergies by integrating the
operations of the acquired and acquiring entities run
into roadblocks and take much longer than forecast
there is inadequate pre-acquisition screening

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 Pros and Cons of Acquisitions

Question: How can firms reduce the problems associated

with acquisitions?

Answer:
 Firms can reduce the problems associated with
acquisitions
through careful screening of the firm to be acquired
by moving rapidly once the firm is acquired to
implement an integration plan

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 Pros and Cons of Greenfield Ventures

Question: Why are greenfield ventures attractive?

Answer:
 Greenfield ventures are attractive because they allow the
firm to build the kind of subsidiary company that it wants
 However, greenfield ventures
are slower to establish
are risky because they have no proven track record
can be problematic if a competitor enters via
acquisition and quickly builds market share

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