Entry Strategy and Strategic Alliances

Chapter 14

McGraw Hill Companies,

 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.

McGraw Hill Companies,

14-1

Basic Entry Decisions

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

McGraw Hill Companies,

14-2

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..
McGraw Hill Companies,

14-3

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.
McGraw Hill Companies,

14-4

Scale of Entry
Large scale entry
Strategic Commitments - a decision that has a longterm 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.
McGraw Hill Companies,

14-5

 McGraw Hill Companies, Inc., 2000

14-6

Entry Modes

Exporting
Turnkey Projects
Licensing
Franchising
Joint Ventures
Wholly Owned Subsidiaries

McGraw Hill Companies,

14-7

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 Companies,

14-8

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.
McGraw Hill Companies,

14-9

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
McGraw Hill Companies,

14-10

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.

McGraw Hill Companies,

14-11

Joint Ventures
Advantages:
Benefit from local partners 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.
McGraw Hill Companies,

14-12

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.
McGraw Hill Companies,

14-13

Advantages and Disadvantages of

Entry Modes
Entry Mode

Advantage

Exporting

Ability to realize location and

experience curve economies

Turnkey
contracts

Ability to earn returns from

process technology skills in
countries where FDI is
restricted

Licensing

Low development costs and

risks

Table 14.1a

McGraw Hill Companies,

Disadvantage
High transport costs
Trade barriers
Problems with local marketing
agents
Creating efficient competitors
Lack of long-term market
presence
Lack of control over technology
Inability to realize location and
experience curve economies
Inability to engage in
global strategic
coordination

14-14

Advantages and Disadvantages of

Entry Modes
Entry Mode

Advantage

Disadvantage

Franchising Low development costs and Lack of control over quality

risks
Inability to engage in global strategic
coordination
Joint
ventures

Access to local partners

Lack of control over technology
knowledge
Inability to engage in global strategic
Sharing development costs
coordination
and risks
Inability to realize location and
Politically acceptable
experience economies

Wholly
Protection of technology
High costs and risks
owned
Ability to engage in global
subsidiaries strategic coordination
Ability to realize location and
experience economies
Table 14.1b

McGraw Hill Companies,

14-15

Selecting an Entry Mode

Technological 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.

Management Know-How

Pressure for Cost

Reduction
McGraw Hill Companies,

Franchising, subsidiaries
(wholly owned or joint
venture).
Combination of exporting and
wholly owned subsidiary.

14-16

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.
McGraw Hill Companies,

14-17

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
ownership
McGraw Hill Companies,

14-18

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
alliance, they retain their own identity
McGraw Hill Companies,

14-19

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
McGraw Hill Companies,

14-20

Structuring the Alliance to Reduce

Opportunism
Walling off
critical technology

Establishing
contractual
safeguards

Opportunism by partner
reduced by:

Figure 14.1
McGraw Hill Companies,

Agreeing to swap
valuable skills
and technologies

Seeking credible
commitments

14-21

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
McGraw Hill Companies,

14-22

Characteristics of a Strategic
Alliance

Benefits

Independence of
Participants

Technology
Products

Control

Shared
Benefits

Ongoing
Contributions

Markets
Cooperation
McGraw Hill Companies,

14-23

Problems with Strategic

Alliances
Have to give up some authority/control
Could be strengthening a future competitor
Technology transfer
Management practices
Operating procedures

McGraw Hill Companies,

14-24