Chapter

14

Entry Strategy and Strategic Alliances

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Case: Diebold

Began to sell ATM machines in foreign markets in 1980s 1980s Distribution agreement with Philips 1990 Diebold establishes joint venture with IBM 1997 foreign sales 20% of Diebolds total revenues Diebold decides to go it alone with local manufacturing presence for local customization

Through acquisitions joint ventures

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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 privatesector debt
Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing
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Unfavorable

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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.

Tie customers to your product.

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

Jollibee Example

? Good or Bad? .

Small scale entry:

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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
May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers Possible lack of control over marketing reps

Disadvantages:

Local Agent Problems

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Turnkey projects

Advantages:

Can earn a return on knowledge asset

Earn $ on Know How

Less risky than conventional FDI

Disadvantages:

Contractor agrees to handle every detail of project for foreign client

No long-term interest in the foreign country 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 Agreement where investment barriers. licensor grants rights to intangible property to another Others can develop business entity for a specified period of time in return applications of intangible for royalties. property.

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Franchising

Advantages:

Reduces costs and risk of establishing enterprise

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

Disadvantages:

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Joint Ventures

Advantages:

Benefit from local partners knowledge. Shared costs/risks with partner. Reduced political risk.
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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Disadvantages:

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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. Bear full cost and risk
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Disadvantage:

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Advantages and disadvantages of entry modes

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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

Franchising, subsidiaries (wholly owned or joint venture)

Pressure for Cost Reduction

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Combination of exporting and wholly owned subsidiary

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Acquisition and Green-field- pros & cons

Acquisition

Greenfield

Pro: Quick to execute Preempt competitors Possibly less risky Con: Disappointing results Overpay for firm optimism about value creation (hubris) Culture clash. Problems with proposed synergies

Pro: Can build subsidiary it wants Easy to establish operating routines Con: Slow to establish Risky Preemption by aggressive competitors

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Acquisition or Green-field?
Well-established, incumbent firms. Competitors interested in entry. embedded skills, routines, culture.

Acquisition

Green-field
No competitors

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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 Competitors get low cost route to technology and markets
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Disadvantages:

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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
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Global Alliances, however, are different

Firms join to attain world leadership Each partner has significant strength to bring to the alliance A true global vision When competing in markets not part of alliance, they retain their own identity

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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

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Structuring the alliance to reduce opportunism

Fig 14.1

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Characteristics of a strategic alliance

Benefits Control

Independence of Participants

Technology Products

Shared Benefits

Ongoing Contributions

Markets
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Managing the alliance

Build trust

Relational capital Diffusion of knowledge

Learning from partners

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