Entry Strategy Chapter 12. 14 - 2 McGraw-Hill/Irwin International Business, 6/e & 7e Portions ©...
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Transcript of Entry Strategy Chapter 12. 14 - 2 McGraw-Hill/Irwin International Business, 6/e & 7e Portions ©...
14 - 2
McGraw-Hill/IrwinInternational Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
14 - 3
McGraw-Hill/IrwinInternational Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
Key issues of entry strategy
• Any firm contemplating foreign expansion must struggle with several decisions
- Which foreign market(s) to enter• choose based on long-run profit potential
- Market size- Growth rate- Political stability - Competition
- When - On what scale- Which mode of entry
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McGraw-Hill/IrwinInternational Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
When to enter?
• Advantages associated with entering early are “first-mover advantages”
- Ability to preempt rivals, establishing a strong brand name quickly
- Ability to build sales volume- Ability of early entrants to create switching costs
• Disadvantages are “first-mover disadvantages” - Pioneering costs - costs only an early entrant has to bear- Possibility that regulations may change
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McGraw-Hill/IrwinInternational Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
Scale of Entry
• Large scale entry - Strategic Commitments - decisions that have long-term
impact and are difficult to reverse• Local distributors, partners will take you seriously
- May cause rivals to rethink market entry- But may lead local firms to attack aggressively
• Small scale entry- Time to learn about market- Reduces exposure risk- But fast-moving competitor may beat you
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Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
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McGraw-Hill/IrwinInternational Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
Entry Modes
• Firms can use six different methods to enter a market- Exporting- Wholly Owned Subsidiaries (the most common kind of
foreign direct investment)
- Licensing- Franchising- Joint Ventures- Turnkey Projects
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Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
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McGraw-Hill/IrwinInternational Business, 6/e & 7e
Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
Wholly Owned Subsidiary (i.e., Foreign Direct Investment)
• Advantages:- No risk of losing technical competence to a competitor- Tight control of operations- Realize learning curve and location economies
• Disadvantage:- Very expensive - Bear full cost and risk
• Subsidiaries could be greenfield investments or acquisitions
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Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
Exporting
• Advantages:- Avoids cost of establishing manufacturing operations- May help achieve experience curve and location
economies• Disadvantages:
- Possible high transportation costs- Tariff barriers- Possible lack of control over marketing reps
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Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
Licensing and franchising
• Licensing- Reduces development costs and risks- Works in unfamiliar or politically
volatile market- Overcomes investment barriers- Others can develop business applications of your know-how
• Franchising- Reduces costs and risk- May prohibit movement of profits from
one country to support operations in another- Quality control
Agreement wherelicensor grants rights to
intangible property to another entity for a specified period
of time in returnfor royalties.
Franchiser sellsintagible property
and insists on rules for operating business
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Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
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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Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
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
Contractor agreesto handle everydetail of projectfor foreign client
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Portions © 2007, 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved.
Core Competencies and Entry Mode
• Technological Know-How- Avoid licensing and joint-
venture arrangements - Probably use a wholly
owned subsidiary• Exception: If the
technological advantage is only transitory
• Management Know-How- The firm’s valuable assets
include a brand name- Either franchising or
wholly owned subsidiaries may work well
- Often times a joint venture is politically more acceptable
If what you are good at is…