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chapter 14Entry strategy and Strategic Alliances

Case1GE joint venture

Opening case • Case implications- evolution

1. Started in acquisition and Greenfield approach- why? for full control.

2. Shift since Year 2000 to joint ventures- example, GE Money with Hyundai to offer auto loans.

3. Acquisitions have been bid so high to discover later on hidden problems in the acquired firm.

4. Economic, political, and cultural considerations make Joint venture less risky than Greenfield approach. So the local partner may take care of these issues.

5. Some countries like china for example prohibit other entry modes.

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GE’s Joint Ventures

6. Joint ventures now GE’s preferred entry strategy.

7. And this is a very important point- GE has no problem in finding international partners. Why?

8. Partners like GE Management competencies.

9. So it is a win-win situation- mgt Vs local market knowledge.

Different forms of partner ownership.

Minority partner – veto power.

Majority partner

50/50

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Case2Tesco’s international growth

strategy page 472Tesco is the largest grocery store in the UK similar to Carrefour.

Tesco competencies: marketing, store site, logistics and inventory mgt, private label product offerings.

Competencies lead to cash flow- lead to strategy of overseas expansion.

To decide, would you go to established markets or to emerging markets?

--they went to eastern Europe and Asia with few competitors and underlying growth trends.

--huge investments in joint ventures and acquisitions in these countries and in china.

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Case2Tesco’s international growth

strategy• 2007 Tesco had over 800 stores outside its homeland, with 7.6

billion Euros and 1,900 stores generating 30 billion Euros.

• Success factors for Tesco:

1- knowledge transfer internationally, transferring its core capabilities in retailing.

2- hiring local managers and supporting them with Tesco Method.

3- teaming up with good companies- value added approach. Or synergy. We got the retailing know how and financial strength and you got the deep understanding of your local market. Joint venture rules for success.

4-seeking markets with good growth potential but lack strong indigenous (local) competitors.

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Case2Tesco’s international growth

strategy pageIn March 2006 entered US. (contradiction, right?).

No.

Used Tesco Express Concept After its success in five countries. Differentiate before you enter.

1- smaller stores

2-high quality prepared health food

3- unique idea in the US.

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Case2Tesco’s international growth

strategy page 472

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Case 3The Jollibee

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Case 3The Jollibee

• Jollibee is A Philippine Multinational store began 1975 as an ice cream store.

• Copy Mc by benchmarking

• Look for weaknesses while benchmarking

• Tailoring its menu to local taste with secret spices.

• It outperformed Mc in Philippine.

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Case 3The Jollibee

• 1n 1980 strong confidence to expand internationally.

• Follow countries with Pilipino people.

• In the US saturated but did well.

• The store started to receive Filipinos and ended up having more non- Filipinos than Filipinos in the US.

Taco Bell has the same story.

• Now over 100 stores in china and in its way to India

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Case 4 Cisco and Fujitsu

• 2004 Cisco and Fujitsu joint venture

• Purpose to develop high speed internet routers in Japan and to have better presence in Japan.

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Case 4 Cisco and Fujitsu

Alliance goals:

1. Pool R&D efforts and share technology and develop products more quickly.

2. Producing more reliable products via Cisco’s proprietary leading edge router technology with Fujitsu’s production expertise .

3. Fujitsu will give Cisco a stronger sales presence in Japan. Connections and network

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Case 4 Cisco and Fujitsu

Alliance goals:

4- Fujitsu sells many telecommunication products but lacks a strong presence in routers, whereas Cisco is strong in routers, but lacks strong offerings elsewhere.

This alliance will offer Japan’s telecommunications companies end to end communication solutions- a complete solution not a fragmented one, because many companies like to purchase their equipment form a single provider. This should drive sales.

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Case 4 Cisco and Fujitsu

The consequences of this alliance:

1- development cost will be lower

2- Cisco will grow sales in Japan

3- Fujitsu can use cobranded routers to fill out its product line and sell more bundles of products to Japan’s telecommunication companies.

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JCB in India

• Very good closing case page 495

• Read this case with your partner.

• Answer any two questions

• check and confirm answers with your partner.

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Group home work

• Select a company of your own – make it a fun exercise

• Go global, step by step

• Make your own decision via chapter 14 in terms of

1- which foreign market to enter

2- time and scale

3- entry mode (why for example franchising, and then to joint ventures?).

4-and how did you make your alliances work (effective).

Elect one of you to tell us your success story.

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Chapter main elements

• Explain the three basic decisions that firms seeking foreign expansion must make: which markets to enter, when to enter those markets, and on what scale?

• List some of the advantages and disadvantages of the different modes that firms use to enter foreign markets.

• Identify the factors that influence a firm’s choice of entry mode.

• Evaluate the pros and cons of acquisitions versus Greenfield ventures as an entry strategy.

• Evaluate the pros and cons of entering into strategic alliances.

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Entry Strategy and Strategic Alliances

First check GE’s Joint ventures in the opening case page 468-469. why GE shifted to joint ventures?

1 Basic Entry Decisions

• First- which foreign market?

1- nation’s long run profit potential.

2- the value an international business can create in a foreign market.

3- sustainable competitive advantage- the case of Tesco case page 472-473.

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Basic Entry Decisions

• The second decision: Timing of entry. It all depends:

1- do you want to be first mover

Or

2- do you want to be late mover.

KFC was first to enter China but McDonalds has capitalized on the market on China.

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Basic Entry Decisions

• The third decision is:

the scale of entry and strategic commitment.

ING into the US insurance market in 1999 spending several billion dollars to acquire its US operations----strategic commitment

But it affects the firm’s strategic flexibility

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Basic Entry Decisions

• Large scale entry Vs Small scale entry.

Small scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market. Wait and see. Less risky.

Miss the chance for first mover advantage

Benchmarking for late movers. Look at the Jollibee case page 477.

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1- which foreign market?

2- timing?

3- scale?

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2 Entry Modes

• Exporting

• Trunkey Projects

• Licensing

• Franchising

• Joint ventures

• Wholly owned subsidiaries see table 14.1

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Selecting an Entry Mode

• Core competencies and entry mode.

1- technological know how- avoid joint ventures and licensing in such cases- why? So it is better to go through wholly owned subsidiary.

2- Mgmt Know how – is less risky in services.

• Pressure for cost reductions and entry mode

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http://news.sky.com/story/956296/londons-tallest-building-officially-unveiled

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3 Greenfield Venture or acquisition

Pros and cons of acquisitions:

1- quick to execute, the case of DaimlerChrysler.

2- competing over global presence, the case of Vodafone in the USA 60 billion dollars acquisition of Air Touch communication in 1998.

Zain and Fastlink Zain Vs STC

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Greenfield Venture or acquisition

• 3- managers believe acquisitions to be less risky than Greenfield ventures. Studies show declining value after acquisitions by more than 30 to 40 percent.

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Why do acquisitions fail?

1. Overpay for the acquired firm’s assets.

2. Over estimate ability to create value and revenues.

3. Too optimistic top mgmt- the case of DaimlerChrysler.

4. Culture clash between the two cultures

5. Different mgmt philosophies

6. Premature decisions with inadequate pre-acquisition screening.

So reversing the above will reduce the risks of failure

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Pros and Cons of Greenfield Ventures

• Start from scratch the culture, the company, the system, the policies, the operating procedures that you want. The case of Lincoln Electric in Europe failed in acquisition and turned to Greenfield. You may build a culture but you may not convert it or change it easily.

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Pros and Cons of Greenfield Ventures

• But, they are slower to establish

• Risky.

• The possibility of being blocked or interrupted by competitors who enter via acquisitions and build a big market presence that limits the market potential for the Greenfield venture

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Greenfield or Acquisition?

• It all depends on the circumstances but if there is a global competition, acquisition might be better.

• Greenfield is good with no competitors to be acquired

• So competitive advantage is important

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4 Strategic Alliances

• SA refers to cooperative agreements between potential or actual competitors.

• Joint ventures – Fuji Xerox

• Short term contractual agreements – such as developing a new product.

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The advantages of Strategic Alliances

• You need a local partner in China to facilitate your entry. NYiT and JUST.

• SA allow firms to share the fixed costs and risk.

• A way to bring together complementary skills and assets that neither company could easily develop on its own. Sharing now-how and skill.

• To establish technological standards for the industry.

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The Disadvantages of Strategic Alliances

• Steal the Know-How or technology and use as a leverage for one firm at the expense of the other.

• Alliance must be built around shared and mutual gain and benefits that can not be obtained otherwise for both partners.

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Strategic Alliances

• To avoid the disadvantages you need to learn:

how to make it work

1.partner selection

2. alliance structure

3.managing the alliance.

End of chapter

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• Next are just extra slides to enhance your knowledge of strategic alliances

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Strategic Alliances

• Cooperation between international firms can take different forms.

• A strategic alliance is a business arrangement whereby two or more firms choose to cooperate for their mutual benefit.

• They may choose to pool R&D, marketing..etc.

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Joint Venture

• A joint venture (JV) is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents.

• A joint venture can be managed in one of three ways.

• The founding firms share management by appointing personnel who report to the parent company.

• One company assuming prime responsibility.

• Independent management team.

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Figure 13.1 Benefits of Strategic Alliances

Potential Benefitsof Strategic Alliances

Ease ofMarketEntry

SharedRisk

Shared Knowledge

andExpertise

Synergyand

CompetitiveAdvantage

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Ease of market entry

• Elimination of obstacles such as government regulations and strong competition.

• For instance, some government may require foreign firms to have local partners.

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Shared Risk

•Much of the costs of some products are paid on research and development before even assessing the market potential.

•Shared risk is important when uncertainty and instability is high.

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expertise• Companies may lack knowledge

and expertise.

• For instance, foreign company may lack the knowledge of dealing with suppliers, or how to deal with government regulations.

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Synergy and Competitive advantage

• Such as creating brand image which might be time consuming and expensive.

• Pepsi cola and Lipton:Tea

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Scope of Strategic Alliances

• Scope of alliance could be comprehensive or functional or narrowly defined alliance.

• Degree of collaboration depends upon basic goals of each partner.

• In comprehensive the partners agree to perform together multiple stages such as design,production..etc.

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Scope of Strategic Alliances 2

• Functional alliances: It usually involves only a single area of the business.

• Production: A functional alliance in which companies manufacture products in a shared or common facility.

• Marketing alliance: Companies share marketing resources. For instance, one company introduces products into a market the other company has presence in. Or it may take the form of reciprocal marketing in which they market each other products.

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Figure 13.2 The Scope of Strategic Alliances 3

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Scope of Strategic Alliances 4• Financial alliance: For instance,

sharing equally the financial resources to the project or one partner may contribute the bulk of financing while the other partner provides special expertise.

• R & D: Agree to have joint research to develop new products.

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Types of Functional Alliances

Production alliances

Marketing alliances

Financial alliances

R&D alliances

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implementation of Strategic Alliances

1. Selection of the appropriate partner.

•The factors to consider in selection

• Compatibility: choosing partner that can be trusted. For

instance, if management style is inconsistent.

• Nature of the partner’s products. For instance, it is hard to cooperate with a firm in one market and competing with in another market.

• Safeness of the alliance based on success or failure of previous alliances made by the partner.

• Potential for learning from the alliance

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Implementation of SA 2

Partner Selection

Jointmanagement

Form ofownership

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Implementation of SA 3- Factors Affecting Partner Selection

Compatibilityseeking skills and resources

compatibility

Nature of partner services

Should not have competitive products in different area

Relative safenessGather as much info about

the potential partner

Learning potentialIn specific areas of ops

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Implementation of SA 4

2. Forms of Ownership

•Joint venture is more likely to take the form of corporation, usually incorporated in the country in which it will be doing business.

•The corporate form enables the partners to have its own identity apart from the partners.

•Public-private venture in which the government is involved and a privately owned firm. Common in oil industry.

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Implementation of SA 5 –Joint Management Considerations

•There are different approaches.

• Shared management agreement: each partner is involved. The managers pass the instructions to the alliance managers. In other words, the alliance managers have limited authority.

• Assigned management: One partner assumes primary responsibility.

• Delegated arrangement: delegate management control to the executives of the venture.

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Joint Management considerations

Shared management agreements

Delegated arrangements

Assigned arrangements

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Figure 13.3a Shared Management Agreement

Partner 1

Partner 2

Alliance

Both parties are active participants

• Alliance mgrs have limited authority and must refer to the parent firm for most decisions.• Requires high level of coordination and most prone to conflict.

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Figure 13.3b Assigned Arrangement

Partner 1

Partner 2

Alliance

One partner takes primary responsibility

Mgt of the alliance is greatly simplified because of dominant power of one partner

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Figure 13.3c Delegated Arrangement

Partner 1

Partner 2

Joint venture

Delegate mgt control to the executives of the JV.

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Figure 13.4 Pitfalls of Strategic Alliances

Pitfalls

Access toinformation

Distributionof earnings

Loss ofautonomy

Incompatibilityof partners

Changingcircumstances