Topic 12 - Entry Strategy and Strategic Alliances

What are the basic decisions firms must make when expadning globally

which markets to enter, when to enter and on wha scale, which entry mode

What are the factors that affect the choice of entry mode

transport costs, trade barriers, political risk, economic risk, costs, firm strategy

Which foregin markets to enter

long term profit potential (dependent on the business environment, political environment and geography), demographics, preent and future consumer’s wealth, suitability of its product offering and the nature of host-country competition

When to enter

early vs late entry

Benefits of first mover

preemption of rivals, build sales volume, buyer switching costs

Disadvnatages of first mover

pioneering costs, shift in tech or consumer needs, incumbent inertia

What scale of entry is dependent on

level of resources firms can commit

Scale of entry - large scale entry and first mover advantages risk

some decisions are difficult to reverse, some resources are location specific

Scale of entry - small scale

reduces risks of large scale entry, market learning, can be difficult to build market share

What are the three different entry modes

foreign trade, contractual entry modes, investment entry

Foeing trade

exporting

Contractual entry modes

licensing, franchising, management contracts, turnkey projects, contractual manufacturing

Investment entry modes

joint venture, wholy owned subsidiary

What should you do if you have low control and low amount of resources comitted

direct export

What should you do if you want lower middle control and low resources comited

licensing

What should you do if you want middle control and low resources

franchising

what should you do if you want lower middle control with middle amount of reources comitted

export through agent or distributor

What should do if you want middle control with midd resources committed

joint venture with local partner

What should you do if want high control and high resources comitted

wholly owned subsidiary

Exporting - attractive

avoids the cost of establishing local manufacturing operations, achive experience curves and location economies

Exporting - unattractive

there could be lower-cost manufacturing locations, high transport costs and tariffs, tariff barriers, agents in a foreign country may not act in the exporter’s best interest

Turnkey projects def

the contractor handles every detail of the project for a foreign client which included training personnel

Turnkey projects - attractive

earning economic returns from the know-how required to assemble and run a technologically complex process, less risky than conventional FDI

Turnkey projects - unattractive

no long term interest in the foreign country, may create competitiors, there is a potential that their comparative advantage can be sold to competitors

Licensing def

licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee

Licensing - Types

patents, inventions, formulas, processes, designs, copyrights, trademarks

Licensing - attractive

no development costs and risks, avoid barriers to invest, can capitalis on market opportunities wthout developing them yourself

Licensing - unattractive

no tight control, limited coordination for strategic moves, may lose intangible assets

Franchising - attractive

no costs and risk entering a foreign market, quickly build a global presence

Franchising - unattractive

inhibits firms ability to take profits out of one country, geographic distance makes it difficult to detect poor quality

What are the two types of other contractual arrangements

management and contract manufacture

Management contracts

supply of managerial expertise

Management contracts example

Hilton hotel and resot

Mangement contracts - effect

low investment risk, potential future competition

Contract manufacture def

contracted to do the production or product assembly

Contract manufacture effect

challenges of relaibility and capabilities of partner

Joint venture - attractive

benefit from local partner’s knowledge, costs and risks are shared, satisfy political consideration

Joint venture - unattractive

risk giving control of tech to partner, may not have tight control, shared ownership can led to conflicts if goals differ

What are the different types of whollly owned subsidaires

greenfield or merger and acqusiiton

Wholly owned subsidiary example

Sketchers

Wholy owned subsidiary - attractive

reduce the risk of losing control over core competencies, tight control, may be reuired to relaise location and experience curve economies

Wholly owned subsidiary - unattractive

full cost and risk

When should someone have a greenfield subsidiary

when the firm needs to transfer organisationally embedded competencies, skills, outlines and culture

When shoudl they do an acquistion

when there are well-established competitirs

Why have acusitions been more popular than greenfield

overpaying for assets, cultural clahes, integration probkems, inadequt pre-acqusition screening

Wha are the other factrs that infleunce entry mods

the firms competencies and if the pressure for cost reduction is high

Optimal entry depends on core competencies

if it is propertary technological know-how then avoid licensing and joint ventures unles the tech advantage is transistory, if management know-howthe risk of losing control over the mamangement skills is not high and the benefts from greater use of brand names is significant

Optimal entry depends on pressure for cost reductions is high

shoild pursue a combo of exporting and wholly owned subsidiaries

Optimal entry depends on pressure for cost reductions is high - effecs

achieve location and scale economies and some control over product manufacturing and distribution

Optimal entry for optimal entry if you are wanting to be globally standarised or transnational strategy

wholly owned subsidiaries

Strategic alliances example

Nissan and mitstibisi

Why do companies enter cross-border strategic alliances - new markets and existing product

to take existing products to foreign markets

Why do companies enter cross-border strategic alliances - exisitng market, exisitng product

to strengthen the exisitng business

Why do companies enter cross-border strategic alliances - new markets and new products

to diversify into a new business

Why do companies enter cross-border strategic alliances - exisitng market, new product

to bring foreign products to local markets

Strategic alliances - advantage

entry into a foreign market, share fixed costs and risk of r and d, combines complementary skills that neither could easuly develop on their own, technoligical standards

Strategic alliances - disadvantages

competitors have low cost routes to new tech and markets, give away more in strategic alliances than it recieves

What makes a strategic alliance successful

a good parnet, alliance structure, the manner in which the alliance is managed

A good partner

shares the same vision, will not exploi the alliance

Alliance structure

dificult to transfer tech, contractual safeguards, skills and tech swaps with equitable gain, minimise opportunism

The manner in which the alliance is managed

interpersonal relationships between manaers, learning from alliance partners

Problems with collaborative arrangements

divergent objectives, questions of control, cultural and corporate clashes