Entry Strategy and

Strategic Alliances

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Basic foreign expansion entry decisions

A firm contemplating foreign expansion must make

three decisions
! Which markets to enter
! When to enter these markets
! What is the scale of entry

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 Which foreign markets

! 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 or
command economy or where speculative financial
bubbles have led to excess borrowing

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 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.

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 Scale of entry

! Large scale entry

! Strategic Commitments - a decision that has a long-term
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.

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 Entry modes

! Exporting
! Turnkey Projects
! Licensing
! Franchising
! Joint Ventures
! Wholly Owned Subsidiaries

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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

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 Turnkey projects
! Advantages:
! Can earn a return on knowledge asset
! Less risky than conventional FDI Contractor agrees
to handle every
! Disadvantages: detail of project
! No long-term interest in the foreign country
for foreign client

! May create a competitor

! Selling process technology may be selling competitive
advantage as well

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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. Agreement where
! Others can develop business licensor grants rights to
intangible property to another
applications of intangible entity for a specified period
of time in return
property. for royalties.

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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 sells
intangible property
and insists on rules
for operating business

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 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

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 Wholly owned subsidiary

! Subsidiaries could be Greenfield investments or

acquisitions
! 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

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 Acquisition and Green-field- pros & cons

! Pro: Acquisition ! Pro: Greenfield

! Quick to execute ! Can build subsidiary it
! Preempt competitors wants
! Possibly less risky ! Easy to establish operating
routines
! Con:
! Con:
Disappointing results
! Slow to establish
Overpay for firm
! Risky
optimism about value
! Preemption by aggressive
creation (hubris)
competitors
Culture clash.
Problems with proposed
synergies

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 Acquisition or Green-field?

Well-established,
incumbent firms.
Acquisition
Competitors
interested in
entry.

embedded skills,
routines, culture.
Green-field

No competitors

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Advantages and disadvantages of entry modes

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 Core Competencies and Entry Mode
! Technological Know-How
! Licensing and joint-venture
arrangements should be
avoided if possible
! Should probably use a wholly
owned subsidiary
! Exceptions include
! An arrangement can be structured to
reduce the risk of licensees
! If the technological advantage is only
transitory
! Management Know-How
! The firms valuable asset is
normally a brand name
! The result is that franchising
and subsidiaries are very
attractive
! Often times a joint venture is
politically more acceptable
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 Selecting an entry mode

Technological Know- Wholly owned subsidiary, except:

1. Venture is structured to reduce
How
risk of loss of technology.
2. Technology advantage is
transitory.
Then licensing or joint venture
Management Know- Franchising, subsidiaries
OK
How (wholly owned or joint
venture)
Pressure for Cost Combination of exporting and
Reduction wholly owned subsidiary

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 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
! Disadvantages:
! Competitors get low cost route to technology and markets

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