C.8-ENTRY STRATEGY

Chapter 8: Entry Strategy and Strategic Alliances

8.1 Basic Entry Decision

• Firms seeking foreign expansion face key decisions:

  • Which markets to enter

  • When to enter those markets

  • Scale of entry

  • Selection of entry mode

8.2 Entry Modes

• Different modes of entry include:

  • Exporting

  • Licensing or franchising

  • Joint ventures

  • Wholly owned subsidiaries

  • Acquisitions

8.3 Influencing Factors for Entry Mode

• Several factors to consider when selecting an entry mode:

  • Transport costs

  • Trade barriers

  • Political and economic risks

  • Costs of entry

  • Firm’s strategy

• Optimal mode depends on situation: What works for one company might not be suitable for others.

8.4 Market Selection Criteria

• **Desirable Markets: **

  • Politically stable

  • Free market systems

  • Low inflation and debt levels

• Less Desirable Markets:

  • Politically unstable

  • Command economies with significant borrowing

• Attractive when products meet unmet needs in the market.

8.5 Timing of Market Entry

• Early Entry:

  • Establish presence before competitors (first mover advantages).

• Late Entry:

  • Enter after rivals, facing lower risks and learning from their experiences.

8.6 Advantages of Early Market Entry

• First Mover Advantages:

  • Strong brand establishment

  • Volume sales leading to cost advantages

  • Customer loyalty through switching costs.

8.7 Advantages of Late Market Entry

• First Mover Disadvantages:

  • High pioneering costs and risks associated with learning the new market.

  • Expenses related to marketing and establishing products.

8.8 Scale of Market Entry

• Significant Scale Entry:

  • A major strategic commitment, with long-term implications.

  • Hard to reverse decisions.

• Small Scale Entry:

  • Limits exposure while learning about the market.

8.9 No “Right” Way to Enter Markets

• There are varied decisions with associated risks and rewards—no uniformly correct approach.

8.10 Entry Strategies

• Methods of Entering Foreign Markets:

  • Exporting:

    • Common initial strategy for manufacturing firms; facilitates cost savings.

  • Turnkey Projects:

    • Complete managing operations; deliver operational plants to clients.

  • Licensing:

    • Grants rights to intangible properties; royalties received.

  • Franchising:

    • Similar to licensing, but involves stricter operational rules.

  • Joint Ventures:

    • Shared ownership with local partners, combining resources.

  • Wholly Owned Subsidiaries:

    • Full control of operations; higher investment and risk.

8.11 Considerations for Exporting

• Advantages:

  • Avoids costs of local manufacturing, leveraging location economies.

• Disadvantages:

  • Potentially high transport costs, tariffs, and suboptimal marketing outcomes.

8.12 Turnkey Project Considerations

• Attractive for:

  • Economical returns from know-how in complex technologies.

• Challenges:

  • No long-term interest or risk of creating a competitor by transferring technology.

8.13 Licensing Pros and Cons

• Advantages:

  • Low development costs and risks, potential market opportunity capture.

• Disadvantages:

  • Limited control over strategic coordination and technology risks.

8.14 Franchising Overview

• Pros:

  • Rapid global footprint; lower risk compared to establishing operations.

• Cons:

  • Challenges in maintaining quality and taking profits between markets.

8.15 Joint Venture Benefits and Risks

• Benefits:

  • Local knowledge, shared costs, and politically favorable.

• Risks:

  • Loss of technology control, potential conflict between partners.

8.16 Wholly Owned Subsidiary Benefits and Risks

• Benefits:

  • Full control and protection of core competencies, essential for strategic alignment.

• Risks:

  • Significant financial and operational risk.

8.17 Analysis of Entry Modes

• Entry Mode | Advantages | Disadvantages

  • Exporting | High location and experience curve economies | High transport costs, trade barriers

  • Turnkey | Immediate returns from technology | No long-term presence

  • Licensing | Low costs, quick market access | Limited control, risk of losing technology

  • Franchising | Quick growth, low costs | Quality control issues

  • Joint Ventures | Local insight, cost sharing | Control issues, conflicts

  • Wholly Owned | Control of operations | High risks and costs.

8.18 Core Competencies and Entry Mode

• Entry mode choice influenced by core competencies:

  • Proprietary technology: avoid licensing unless transitory advantage.

  • Management skills: lower risk of losing control with shared knowledge.

8.19 Cost Reductions Impact on Entry Mode

• High Cost Pressures:

  • Favor exporting or wholly owned subsidiaries to maintain control and economies.

8.20 Greenfield and Acquisition Considerations

• Greenfield Ventures:

  • Good for transferring organizational culture and competencies.

• Acquisition Strategy:

  • Quick execution, ideal in competitive conditions.

8.21 Reasons for Acquisition

• Advantages:

  • Fast entry, preempt competitors.

• Challenges:

  • Cost overruns, cultural clashes, integration difficulties.

8.22 Strategic Alliances Overview

• Definition:

  • Cooperative agreements between competitors—varying from joint ventures to contracts.

8.23 Advantages of Strategic Alliances

• Facilitate foreign entry, share costs and risks, combine strengths, establish standards.

8.24 Factors for Successful Alliances

• Partner selection, structuring for technology protection, effective management practices.

8.25 Review Questions

• 1. Pioneering costs refer to: (c) Pioneering costs.

• 2. Which is a common starting point for international expansion? (d) Exporting.

• 3. Main disadvantage of wholly owned subsidiaries: (b) Full cost and risk.

• 4. To pursue global coordination, firms should choose: (d) Wholly owned subsidiary.

• 5. Non-essential for strategic alliance success: (a) 50:50 relationship.