Fourth Edition International Business. CHAPTER 14 Entry Strategy and Strategic Alliances.
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Transcript of Fourth Edition International Business. CHAPTER 14 Entry Strategy and Strategic Alliances.
Fourth Edition
InternationalBusiness
CHAPTER 14
Entry Strategy and Strategic Alliances
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
14-3
Chapter Focus
Examine:The decision on which foreign markets to enter, when to enter them, and on what scale.The choice of entry mode.The role of strategic alliances.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Which Foreign Markets
Politically unstable developing nations.
Speculative financial bubbles have led to excess borrowing.
Favorable benefit-cost-risk trade-off
Politically stable nations.
Free market systems
No dramatic upsurge in inflation or
private sector debt.
Mixed or command economies.
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Timing of Entry
First-mover advantage.Preempt rivals and capture demand.Build sales volume.Move down experience curve before rivals and achieve cost advantage.Create switching costs.
Disadvantages:First mover disadvantage - pioneering costs.Changes in government policy.
Costs early entrant bears that later
entrant can avoid.
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Scale of Entry and Strategic Commitments
Strategic Commitments - a decision that has a long-term impact and is difficult to reverse.Large scale entry:
Commitment of significant resources.Easier to attract customers (will remain in market).
May cause rivals to rethink market entry.
Fewer resources to commit elsewhere.May lead to indigenous competitive response.
Plus
Minus
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Scale of Entry and Strategic Commitments
Small Scale Entry:
Time to learn about the market.Limits company exposure.
May be difficult to build market share.Difficult to capture first-mover advantages.
Plus
Minus
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Entry Modes
Exporting
TurnkeyProjects
Licensing
Franchising
JointVentures
Wholly OwnedSubsidiaries
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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.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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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.
Contractor agreesto handle everydetail of project
for foreign client.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Licensing
Advantages:Reduces development costs and risks of establishing foreign enterprise.
Lack capital for venture.Unfamiliar or politically volatile market.
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.
Agreement wherelicensor grants rights to
intangible property to another entity for a specified period
of time in returnfor royalties.
Risk Reduction Cross-licensing
Joint venture
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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.
Franchiser sellsintangible propertyand insists on rules
for operating business.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Joint VenturesAdvantages:
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.
Greenfield
Acquisition
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Advantages and Disadvantages of Entry Modes
Table 14.1a
ExportingAbility to realize location andexperience curve economies
High 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
LicensingLow development costs andrisks
Lack of control over technologyInability to realize location and
experience curve economiesInability to engage in global strategic coordination
DisadvantageAdvantageEntry Mode
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Advantages and Disadvantages of Entry Modes
Table 14.1b
FranchisingLow development costs and risks
Lack 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 and
experience economies
Whollyownedsubsidiaries
Protection of technologyAbility to engage in global
strategic coordinationAbility to realize location andexperience economies
High costs and risks
Entry Mode Disadvantage Advantage
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Selecting an Entry Mode
Technological 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.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
14-18
Pro:Quick to execute.Preempt competitors.Possibly less risky.
Con:Often produce disappointing results.
Overpay for firm.Too optimistic about value creation (hubris).Culture clash.Problems with proposed synergies.
1. Don’t pay too much.2. Avoid surprises.3. Pick
compatibleculture.
Establishing a Wholly Owned Subsidiary
Green-field or Acquisition?
Pro:Can build subsidiary it wants.Easy to establish operating routines.
Con:Slow to establish.Risky.Preemption by aggressive competitors.
Acquisition Green-field
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Acquisition or Green-field?
Well-established,incumbent firms.
Competitors interested in
entry.
Acquisition
No competitors.
Organizationallyembedded skills,
routines,culture.
Green-field
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Strategic Alliances
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.
Cooperative agreements between potential or actual competitors.
McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Making Alliances Work
Partner Selection
Alliance Structure
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Partner Selection
Get as much information as possible on the potential partnerCollect data from informed third parties
former partnersinvestment bankersformer 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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Managing the Alliance
BuildingTrust
Learningfrom
Partners
