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Entry Strategy and Strategic Alliances Chapter 14

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Operating in Japan for 35 years. First foreign securities firm in Japan. Only foreign securities firm listed on the Tokyo

Stock Exchange. Analysts provide research

on over 300 companies.

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Basic Entry Decisions

Which markets to enter? When to enter the markets? What scale of entry?

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Which Foreign Markets Favorable benefit-cost-risk-trade-off:

Politically stable developed and developing nations. Free market systems No dramatic upsurge in inflation or private-sector

debt. Unfavorable

Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing..

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Timing of Entry Advantages in early market entry:

First-mover advantage. Build sales volume. Move down experience curve and achieve cost

advantage. Create switching costs.

Disadvantages: First mover disadvantage - pioneering costs. Changes in government policy.

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Scale of Entry Large scale entry

Strategic Commitments - a decision that has a long-term impact and is difficult to reverse.

May cause rivals to rethink market entry. May lead to indigenous competitive response.

Small scale entry: Time to learn about market. Reduces exposure risk.

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Entry Modes Exporting Turnkey Projects Licensing Franchising Joint Ventures Wholly Owned Subsidiaries

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Exporting Advantages:

Avoids cost of establishing manufacturing operations. May help achieve experience curve and location

economies. Disadvantages:

May compete with low-cost location manufacturers. Possible high transportation costs. Tariff barriers. Possible lack of control over marketing reps.

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Turnkey Projects Advantages:

Can earn a return on knowledge asset. Less risky than conventional FDI.

Disadvantages: No long-term interest in the foreign country. May create a competitor. Selling process technology may be selling

competitive advantage as well.

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Licensing Advantages:

Reduces costs and risks of establishing enterprise. Overcomes restrictive investment barriers. Others can develop business applications of

intangible property. Disadvantages:

Lack of control. Cross-border licensing may be difficult. Creating a competitor

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Franchising

Advantages: Reduces costs and risk of establishing enterprise.

Disadvantages: May prohibit movement of profits from one

country to support operations in another country. Quality control.

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Joint Ventures Advantages:

Benefit from local partner’s knowledge. Shared costs/risks with partner. Reduced political risk.

Disadvantages: Risk giving control of technology to partner. May not realize experience curve or location

economies Shared ownership can lead to conflict.

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Wholly Owned Subsidiary

Advantages: No risk of losing technical competence to a

competitor. Tight control of operations. Realize learning curve and location economies.

Disadvantage: Bear full cost and risk.

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Advantages and Disadvantages of Entry Modes

Entry Mode Advantage DisadvantageExporting Ability to realize location and

experience curve economiesHigh transport costsTrade barriersProblems with local marketing agents

Turnkeycontracts

Ability to earn returns fromprocess technology skills incountries where FDI isrestricted

Creating efficient competitorsLack of long-term market presence

Licensing Low development costs andrisks

Lack of control over technologyInability to realize location and

experience curve economiesInability to engage in global strategic coordinationTable 14.1a

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Advantages and Disadvantages of Entry Modes

Entry Mode Advantage DisadvantageFranchisingLow development costs and

risksLack of control over qualityInability to engage in global strategic

coordination

Jointventures

Access to local partner’sknowledge

Sharing development costs and risks

Politically acceptable

Lack of control over technologyInability to engage in global strategic

coordinationInability to realize location andexperience economies

Whollyownedsubsidiaries

Protection of technologyAbility to engage in global

strategic coordinationAbility to realize location andexperience economies

High costs and risks

Table 14.1b14-15

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Selecting an Entry ModeTechnological Know-How

Management Know-How

Wholly owned subsidiary, except: 1. Venture is structured to reduce risk of loss of technology. 2. Technology advantage is transitory.Then licensing or joint venture OK. Franchising, subsidiaries (wholly owned or joint venture).

Pressure for Cost Reduction

Combination of exporting and wholly owned subsidiary.

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Strategic Alliances Cooperative agreements between potential or actual

competitors. Advantages:

Facilitate entry into market. Share fixed costs. Bring together skills and assets that neither company has or

can develop. Establish industry technology standards.

Disadvantage: Competitors get low cost route to technology and markets.

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Alliances Are Popular High cost of technology development Company may not have skill, money or

people to go it alone Good way to learn Good way to secure access to foreign

markets Host country may require some local

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Global Alliances, however, are different

Companies join to attain world leadership Each partner has significant strength to

bring to the alliance A true global vision Relationship is horizontal not vertical When competing in markets not part of

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Partner Selection Get as much information as possible on the

potential partner Collect data from informed third parties

former partners investment bankers former employees

Get to know the potential partner before committing

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Structuring the Alliance to Reduce Opportunism

Opportunism by partnerreduced by:

Seeking crediblecommitments

Agreeing to swapvaluable skills

and technologies

Establishingcontractual safeguards

Walling offcritical technology

Figure 14.1

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Characteristics of a Global Alliance Players are independent prior to the creating

of the alliance Players share

benefits of the alliance control over operations

Players continue to contribute technology products

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Characteristics of a Strategic Alliance

Independence ofParticipants

SharedBenefits

Ongoing Contributions

MarketsCooperation

Benefits

Control Products

Technology

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Problems with Strategic Alliances

Have to give up some authority/control Could be strengthening a future competitor

Technology transfer Management practices Operating procedures

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