Foreign Entrpreneurship LECT--9

8/4/2019 Foreign Entrpreneurship LECT--9

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Entry Strategy and StrategicAlliances



Basic Foreign Entry Decisions

Which foreign markets to enter?

When to enter them?

What scale?

Which entry mode?

There are no “right” decisions….just decisions that are

associated with different levels of risk and reward





When to enter them?

What scale?

Which entry mode?



Which Foreign Markets

With over 200 nations in the world….

and they do not all hold the same profit potential

The decision to enter which market will be based on the

assessment of the nation’s long-run profit potential

The firm needs to consider the benefits, costs and risks

of doing business in that country

But be careful of this generalization…..a firm may

enter a market due to multi-point competition and

may not be seeking profits in this specific market




Long-run economic benefits of doing business in a

country are a function of:

size of the market

purchasing power of consumers future wealth of consumers

future economic growth rates

suitability of the product for the market indigenous competition

political stability




Favorable 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 orcommand economy

Where speculative financial bubbles have led to excess

borrowing





When to enter them?

What scale?

Which entry mode?



Timing of Entry

First-Mover Advantage

Preempt rivals and capture demand by establishing

a strong brand

Build sales volume and move down experience curve

before rivals and achieve cost advantage

Create switching costs that tie customers to your

products or services and creates an entry barrier for

later entrants into the market



Timing of Entry

First-Mover Disadvantages

Pioneering costs that a later entrant can avoid

starting at the bottom of the experience curve withthe risk of failure due to operating in uncertainty

promoting and establishing a new business mode or

product and educating the consumer

changes in government policy and regulations afterentry into the market





When to enter them?

What scale?

Which entry mode?



Strategic Commitments

When entering in a rapid and significant scale, thislevel of strategic commitment might:

have a long-term impact on the firm

be difficult to reverse

influence the nature of competition in the market

result in a strategic response by a local competitor



Large-Scale Entry

Advantages Easier to attract customers and distributors

May cause rivals to rethink market entry

Might allow you to capture first-mover advantagesover a small-scale entrant

Disadvantages

Higher risks associate with large investment Fewer resources to commit elsewhere

May lead to indigenous competitive response



Small-Scale Entry

Advantages

Limits business risks by allowing the firm to learn

about the market

Allows firm to gain market knowledge before makingstrategic decisions and large-scale investment

Disadvantages May be difficult to build market share

Difficult to capture first-mover advantages





When to enter them?

What scale?

Which entry mode?



Entry Modes

Exporting

Turnkey Projects

Licensing

Franchising

Joint Ventures



Determinants of Which Entry Mode

The optimal mode varies for each market situation

depending on the: transportation costs

trade barriers

political risks economic risks

business risks

costs and required investment

firm’s strategy

Different firms may enter the same market with

different entry modes



Exporting

Advantages Avoids cost of establishing manufacturing operations

May help achieve experience curve and locationeconomies

Disadvantages

May compete with low-cost location manufacturers

Possible high transportation costs Tariff and non-tariff barriers

Possible lack of control over marketing and sales bydelegating to agents



Turnkey Project Allows a firm to export process technology

Contractor agrees to handle every detail of project forforeign client• design• construction• training• consultation and technical support

At completion of contract, the foreign client is handedthe “key” to the project

Most common in process technology industries• chemical• pharmaceutical• petroleum refining• metal refining



Turnkey Projects

Advantages A means of exporting process technologies

Can earn a return on valuable knowledge assets

Can overcome FDI restrictions

Less risky than conventional FDI

Disadvantages

No long-term interest in the foreign country May create a competitor

Selling process technology may be selling the firm’score competency and competitive advantage



Licensing

Agreement where licensor grants rights to intangible

property to another entity (licensee) for a specified

period, in return for a royalty fee

Intangible property may be: patents,

inventions

formulas

processes designs,

copyrights

trademarks



Advantages of Licensing

Reduces development costs and risks of opening a

foreign market

Attractive for firms that:

lack capital are unwilling to take financial risk in an

unfamiliar or politically volatile foreign market

must overcome restrictive investment barriers does not want to develop the business applications

of an intangible property



Disadvantages of Licensing

Limits the firm’s control over production, marketingand strategy to required to realize experience curve

and location economies

Limits the firm’s ability to coordinate strategic moves

across countries (cross-subsidization)

Loss of technology and the creation of a potential

competitor



Reducing the Risk of Licensing

Cross-Licensing

An agreement in which a company licenses valuable

intangible property to a foreign partner and also receives

a license for the partner’s valuable knowledge

allows firms to hold each other hostage

Joint Venture

License technology through a joint venture where the

licensor and licensee have important equity stakes and

aligns the interests of both firms



Franchising

A specialized form of licensing in which the franchisersells intangible property to the franchisee and insists

on rules for operating the business

Tends to involve longer term commitments thanlicensing

Franchisor often assists the franchisee to run the

business on an ongoing basis

Primarily in the service sector



Franchising

Advantages Reduces costs and risk of opening foreign market

Allows a firm to rapidly and inexpensively build a

global presence

Disadvantages

May inhibit taking profits from one country to

support competitive attacks in another country

Quality control and protecting brand equity



Joint Venture

Establishing a firm that is jointly ownedby two or more otherwise independent firms

Typical ownership is 50/50…but not always

Having 50% or more does not necessarily mean that

you have “control” of the joint venture



Joint Ventures

Advantages

Benefit from local partner’s knowledge of market Share costs and risks with partner

Reduce political risk

Overcome investment barriers

Disadvantages

Risk giving control of technology to partner

May not have the necessary control to realize

experience curve or location economies Limits ability to engage in coordinated global strategy

Shared ownership can lead to conflict over goals andcontrol



Wholly Owned Subsidiary

The firm owns 100 percent of the stock and establishes

their presence via a greenfield venture or an

acquisition of an existing firm



Wholly Owned Subsidiary

Advantages

No risk of losing control of core competency ortechnology to a competitor

Tight control over operations in different countries

Helps realize learning curve and location economies

Disadvantages

Bear full cost and risk of foreign market entry

Lack of local knowledge

culture and consumer

competition and consumers

politics and laws



Selecting an Entry Mode



Selecting an Entry Mode

All entry modes have advantages and disadvantages

When determining which entry mode the firm must

consider the trade-offs between each entry mode

There are no “right” decisions….just decisions that are

associated with different levels of risk and reward



Core Competencies and Entry Mode

Optimal entry mode partly depends on the nature of

the firm’s core competency

Technological Know-How

licensing and joint venture should be avoided to reduce

risk of losing technology

wholly owned subsidiaries overcomes this risk

exceptions to this rule exist

Management Know-How franchising and subsidiaries (joint ventures) with control

over the operations to protect brand equity



Cost Pressures and Entry Mode

The greater the pressures for cost reductions, themore likely a firm will pursue a combination of

exporting and wholly owned subsidiaries

Wholly owned subsidiaries are generally preferred by

firms that are pursuing global standardization or

transnational strategies



Greenfield Venture or Acquisition?



Acquisitions

Advantages

Quick to execute Preempt competitors

Possibly less risky than greenfield ventures becausethe firm is buying assets that are producing revenue

and local knowledge

Disadvantages

Often produce poor results due to

overpayment for acquired firm’s assets overestimate of the potential for value creation (hubris)

culture clash between firms

problems with proposed operational synergies

inadequate pre-acquisition screening



Reducing the Risk of Acquisition Failure

Carefully screen the targeted foreign firm and audit

operations and true value of technology and/brand

financial and market position

management culture

Reduce local management attrition from acquired firm

Quickly implement an integration plan



Greenfield Venture

Advantages Can build subsidiary it designs--not acquires

Easier to establish own operating routines

Avoids the “unknown surprises” with an acquisition

Disadvantages

Slow to establish

Uncertainty and risky Preemption by aggressive competitor via acquisition

Adds new capacity to industry



Acquisition or Green-Field Venture?

Well-established,

incumbent firms

Competitors also

interested in entry

Embedded skills,

routines, culture

No competitors

Acquisition

Green-FieldVenture



Strategic Alliances

Cooperative agreements between

potential or actual competitors

Includes the range from joint ventures to short-term

contractual agreements on specific tasks

Contentious debate if they

create any value

only overcome short-term weaknesses

competitively weaken a firm in the long term



Strategic Alliances

Advantages

Facilitate entry and gain access into market

Overcome local ownership regulations Learn about the market or technology

Share fixed costs and risks (especially in R & D)

Bring together complimentary skills and assets thatneither firm has or can develop

Establish industry technological standards



Strategic Alliances

Disadvantages

Provides potential competitors a low-cost route to

technology and markets

Limits strategic “degrees of freedom”

Often is difficult and ends in “divorce”



The Right Partner

A good partner:

helps the firm achieve its strategic goals

has skills that the firm lacks and values

shares the firm’s vision for the alliance

will not opportunistically exploit the alliance



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



Partner Selection Criteria

Complimentary technical skills and resources

Moderate level of mutual dependency (needs)

Adequate financial resources to grow venture

Comparable size and sophistication

Similar values and goals

Compatible operating procedures

Consider potential communication barriers

Compatible management teams

Mutual understanding, trust, and commitment



Alliance Structure

Overcoming Opportunism by Partner

Design alliance to avoid unwanted technology transfer

Establish contractual safeguards

Swap valuable skills and technologies (cross-license)

Seek credible commitments



Managing the Alliance

Acknowledge that the alliance is dynamic

Build trust and personal relationships

(relational capital)

Learn from alliance partner and apply the knowledgewithin the parent firm

Maintain balance of partner participation

Foreign Entrpreneurship LECT--9

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