INTERNATIONAL

BUSINESS STRATEGY
702056

Presented by
Mcomm. Nguyen Thi Hong Hanh
Department of International Business
 Learning Outcomes
1. Explain the 3 basic decisions that firms contemplating foreign
expansion must make: which markets to enter, when to enter, and on
what scale.
2. Compare and contrast different entry modes that firms use to enter
foreign markets.
3. Identify factors that influence firms’ choice of entry mode.
4. Recognize the pros and cons of acquisition versus greenfield
ventures as an entry strategy.
5. Evaluate the pros and cons of entering strategic alliances.
10/17/19 702056: Foreign Market Entry Strategy Part 1 Page 2
 Session outline

– Timing of entry
– Different entry strategy modes
– Export
– Licensing
– Franchising
– Joint venture
– Wholly owned subsidiaries (Greenfield and M&As)

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 Timing of entry
Waterfall Strategy
Entry
Waterfall8Strategy
Waterfall Strategy
! Company can gain experience in one market and can
Country A
learn from these mistakes
Country B ! Continuous improvements can be made with every new
Country C
Country D market entry
Country E ! Previous market entries can co-finance entry into
Years
later markets
! Extends the product life cycle
! Less demanding strategy in terms of resources
Entry Sprinkler Strategy " Danger of cutting down internationalization efforts due to
Sprinkler Strategy unsatisfactory results in the first foreign market
" Competitors can enter a market faster and build market
entry
Country A Country B Country C Country8D8Country
Country8A8Country8B8Country8C8Country8D8Country E E barriers
Years
Years Sprinkler Strategy
! Quicker
Entry
Entry Combined
Combined Strategy
Strategy
! Cash flows can be generated in all entered markets and
Country
this
Country A
Country B
B
Country C
could lead to faster amortization time
Country C
Country D
Country D88
! First-mover advantages may appear
Country
Country E
E
Country
" Requires extensive resources (i.e. capital, HR)
Country F
F
ears
" Risk potential of major commitments without proper
Y
Years country
knowledge or research
" No knowledge transfer

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 Timing of entry

! First-mover advantages:
1. Ability to preempt rivals and capture demands by establishing a
strong brand
2. Build sales volume and achieve cost advantage as over a late
entrant
3. Create switching costs that tie customers into their products

First-mover disadvantages:
1. Pioneering costs: cost of business failure, cost of promoting and
establishing
2. Regulations changes

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 Scale of entry & Strategic commitment

• Strategic commitment: long-term impact and

is difficult to reverse.
• Large-scale entry = significant strategic
commitment= higher risk but capture first-
mover advantages.
• Smaller-scale entry= able to gather
information about a foreign market before
deciding the scale of enter and how to best
enter.
• Smaller-scale entry = lower risk=limited
potential losses but miss the chance to
capture early-mover advantages.

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 Exporting

Direct Exporting Direct contact with companies located in the foreign market

Exporter Foreign distributors Customer

or foreign retailers
Exporter Customer

Country A Boarder Country B

Intermediary firms provide knowledge and

Indirect Exporting
contacts necessary to selloverseas

Exporter Foreign distributors Customer

Intermediary or foreign retailers
firms
Exporter Customer

Country A Boarder Country B

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 Global exports by product

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https://en.wikipedia.org/wiki/List_of_countries_by_exports1
 When is exporting the “best”
entry strategy?
– Standardized products – export is common in commodities
such as textiles
– Low resource commitment
– Not so expensive
– Benefit from economies of scale
– Foreign demand is an extension of domestic demand.
– Direct export may work if the export volume is small, but it is
not optimal when the firm has a large number of foreign
buyers.
– Indirect export, exporting through domestically based export
intermediaries, is relative “worry free” but dependence on
intermediaries (information asymmetry).
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 Common problems when doing export

• Internal
– Difficult to find reliable distributors
– Lack of negotiating power
– Little understanding of target market and its challenges
– Poor organization of exports department
– Inability to access information
– Short international experience
– Lack of capital and resources
• External
– Lack of proper trade institutions
– Lack of incentives and protection from the government
– Political instability
– Legal and political problems
– Demand insufficiency
Source: Paula et al. (2017) Exporting challenges of SMEs: A review and future research agenda. Journal of World business
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 Advantages and disadvantages
of exporting

Advantages Disadvantages

! Economies of scale in existing

! High transportation costs
facilities
! Trade barriers and
Exporting ! Location economies
protectionism (tariff barrier)
! Experience curve ! Lack of control over
! Speedy market entrance distribution channels (lack
of control oversees)
! Low resource commitment ! Limited opportunities to learn
! Inexpensive

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 Evaluate exports as entry strategy use “low”, “high”,
“fast” and “early”

Licensing/
Expor t Franchising Joint Venture Greenfield M&A
Costs
Costs%of setup Low
Transportation costs High
Economies%of scale High
Tariff%and%trade barriers High
Competitive Consequences
Knowledge%transfer%tocompetitors Low
Gain%market know<how Low
Build%permanent%market position Low
Management challenges
Control High
Human%Resource Commitment Low
Cultural%and%political problems Low
Other risks and other benefits
Entry speed Fast
Cost recovery Early
Commitment%to%the market Low

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 Licensing

! Arrangement whereby one firm (licensor) permits another (the licensee) to use
its intellectual property for a specified period of time
! In return the licensor receives a royalty fee from the licensee
Licensing
! Forms: Trademark and copyright licensing, know-how licensing

Licensor provides a combination of:

1. Intellectual property (patent, trademark, design,
copyright, or know-how)
2. Supporting products (parts, components, raw
materials,
etc.)

Licensor Licensee
Licensing “giver” Licensing “taker”

Licensee compensates the licensor through

a combination of:
1. Payments
2. Know-How
3. Cross-licensing

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 When is licensing the “best”
entry strategy?
– Strong technology, brand or trademark
– Licensing can extend a corporate brand into new categories, areas of a
store, or into new stores overall.
– Licensing can extend a technology that is not at the core of a firm.
– By licensing to a firm already there, the licensee may avoid entry costs.
– Good market entry strategy when country restricts import or FDI
– For example, 90 percent of the U$160 million sales per year at Calvin Klein
Inc. stems from licensing the designer's name to makers of perfume, jeans,
cloths, underwear, etc. The only merchandise the New York-based company
makes itself is the women's apparel line
(https://www.entrepreneur.com/encyclopedia/licensing)
– It's a way to move a technology or brand into new businesses without a
major investment in new manufacturing processes, machinery or facilities.

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 Franchising
! Franchising is the practice of the right to use a firm's business model
and brand for a prescribed
period of time. It is basically a specialized form of licensing.
! Franchisor sells intangible property (normally trademark) to another,
Franchising independent entity (the
franchisee).
! Franchisee agrees to abide strict rules.
! Franchisor receives royalty payment.

Country A Boarder Country B

Contract
Franchisor Master-Franchisor

Contract Contract Contract

Franchisee 1 Franchisee 2 Franchisee 3

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 World TOP 10 Franchises

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 Franchising

– Franchising dates back to the Middle Ages when the

Catholic church made franchise-like agreements with
tax collectors. These people received a percentage of
the collected money and turned the rest to the church.
– With minor adjustments for the local market, it can
result in a highly profitable international business
– Many countries have laws that explicitly regulate
franchising
– Widely used in the fast-food and hotel/motel industries

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 Franchising vs Licensing?

Compared to licensing, franchising agreements tends to

be longer and the franchisor offers a broader package
of resources and rights which includes: equipment,
managerial systems, operation manual, initial trainings,
site approval and all the support necessary for the
franchisee to run its business in the same way it is done
by the franchisor.

Compared to licensing, franchising is limited to operating

know-how to do the business. Licensing involves things
such as knowledge, intellectual property or trade secrets.

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 Pros and cons of licensing / franchising

Advantages Disadvantages
! Speedy and easy entry ! Little control over
! Overcomes investment technology or quality
barriers ! Provides only small
Licensing / ! Low risk and development experimental knowledge
franchising in foreign markets
costs
! Allows high return on ! Could damage the firm’s
investment reputation

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 Evaluate licensing/franchising as entry strategy use
“low”, “high”, “fast” and “early”

Expor t Licensing/
Franchising Joint Venture Greenfield M&A
Costs
Costs%of setup Low Low
Transportation costs High Low
Economies%of scale High Low
Tariff%and%trade barriers High Low
Competitive Consequences
Knowledge%transfer%tocompetitors Low Medium
Gain%market know<how Low Low
Build%permanent%market position Low Low
Management challenges
Control High Low
Human%Resource Commitment Low Low
Cultural%and%political problems Low Low
Other risks and other benefits
Entry speed Fast Fast
Cost recovery Early Early
Commitment%to%the market Low Low

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 Joint venture

! A “corporate child” owned by two or more parent companies

Joint venture (JV) ! Each party contributes assets, has some equity and shares risk
! 3 types of Joint Ventures: Minority JV (focal firm holds
<50%), 50/50 JV and majority JV (focal firm holds >50%)

Example
Boarder
Company 1 Company 2
Country A Country B

Boarder
i.e. 50% i.e. 50%

Company 3 (50/50 Joint venture)

Country C

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 Joint venture: Some examples

Company Country Partner Country Comment

Market entry was only possible

Germany China through joint ventures
(governmental requirement)

Access to large market, and

partner's widespread sales
Germany China
network; Sinotruk willbenefit
from technicalknow-how

Partner knows localeconomy,

Germany Investor Group Namibia
culture and politicalsystem

Combine technologicalleadership
Japan Sweden
and reduce costs

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 Evaluate joint venture as entry strategy use “low”,
“high” and “medium”

Licensing/
Expor t Franchising Joint venture Greenfield M&A
Costs
Costs%of setup Low Low Medium
Transportation costs High Low Low
Economies%of scale High Low Medium
Tariff%and%trade barriers High Low Low
Competitive Consequences
Knowledge%transfer%tocompetitors Low Medium High
Gain%market know<how Low Low High
Build%permanent%market position Low Low Medium
Management challenges
Control High Low Medium
Human%Resource Commitment Low Low Medium
Cultural%and%political problems Low Low High
Other risks and other benefits
Entry speed Fast Fast Medium
Cost recovery Early Early Medium
Commitment%to%the market Low Low Medium

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 Pros and Cons of joint ventures

Advantages Disadvantages

! Different interests and

! High learning potential
asymmetric
! Shared costs and risks information of the partners
! Risk of giving technology to
Joint ventures ! Knowledge exchange partner
! Difficult to coordinate globally
! Reduced political risk
! Managerial issues a challenge

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 Discussion

The American firm Coca Cola (one of the global leader in

soft drinks) and the French firm Sanofi (the European number
three globally in pharmaceuticals) want to develop and
commercialize a new line of beauty drinks. “Beautific” would
provide combined health and beauty benefits to consumers.

What form of collaboration would make most sense?

Franchising? Joint venture? or M&A?

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 Wholly owned subsidiaries

Wholly owned
Firm owns 100 percent of the stock
subsidiaries

Establishment of a new operation ina foreign country

Greenfield operation
“from scratch”

Acquisition Buying control of a corporation either hostile or friendly

The process of M&A management

Planning Integration
Transaction
(Pre-Deal) (Post-Deal)
Includes: Includes: Includes:
! Screening ! Due Diligences ! Post-closing-integration-
! Exploratory talks ! Pre-Closing-Integration- plan
! Structure Plan ! Organizational / legal
! Simulation ! Evaluation integration
! Evaluation ! Internal decisions ! Human Resources
! Feasibility ! Negotiations integration
! Contact ! Anti-trust ! Cultural objectives
! Closing ! Reaching of objectives
Source: Lucks/Meckl: Internationale Mergers & Acquisitions, 2002, p.59

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 Evaluate Greenfield and M&A as entry strategy use
“low”, “high”, “medium”, “slow”’ “late”

Export/ Licensing/
Turnkey Franchising Joint Venture Greenfield M&A
Costs
Costs%of setup Low Low Medium High
Transportation costs High Low Low Low
Economies%of scale High Low Medium Medium
Tariff%and%trade barriers High Low Low Low
Competitive Consequences
Knowledge%transfer%tocompetitors Low Medium High Low
Gain%market know<how Low Low High Medium
Build%permanent%market position Low Low Medium High
Management challenges
Control High Low Medium High
Human%Resource Commitment Low Low Medium High
Cultural%and%political problems Low Low High Medium
Other risks and other benefits
Entry speed Fast Fast Medium Slow
Cost recovery Early Early Medium Late
Commitment%to%the market Low Low Medium High

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 Evaluate M&A as entry strategy use
“low”, “high”, “medium” and “slow”’
Expor t Licensing/
Franchising Joint Venture Greenfield M&A
Costs
Costs%of setup Low Low Medium High High
Transportation costs High Low Low Low Low
Economies%of scale High Low Medium Medium Medium
Tariff%and%trade barriers High Low Low Low Low
Competitive Consequences
Knowledge%transfer%tocompetitors Low Medium High Low Low
Gain%market know<how Low Low High Medium Medium/High
Build%permanent%market position Low Low Medium High High
Management challenges
Control High Low Medium High High
Human%Resource Commitment Low Low Medium High High
Cultural%and%political problems Low Low High Medium High
Other risks and other benefits
Entry speed Fast Fast Medium Slow Slow
Cost recovery Early Early Medium Late Medium
Commitment%to%the market Low Low Medium High High

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 Pros and cons of wholly owned subsidiaries

Advantages Disadvantages

! Build subsidiary company ! Slow entry speed

Greenfield wants to own ! Cultural and political problems
operations ! High development costs and capital
! Easy to establish efficient commitment
(Wholly owned routines ! Could not rely on pre-
subsidiaries) ! Protection of know-how existing relationships
! Tight control of operations
! Fast entry speed ! Cultural and political problems
! Protection / acquisition of know-how ! Realization of synergies
Acquisitions ! Tight control of operations
(Wholly owned
! Overpay for firm
! Quick and direct market feedback ! High capital commitment
subsidiaries)
! Could rely on pre-existing ! Too optimistic about value creation
relationships

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 Entry strategies: Control in relation to capital demand

Note: Most companies have more than one entry strategy. They choose entry
strategies depending upon the necessary goal requirements. *

Wholly
Control Joint owned
(overseas) ventures subsidiaries
Franchi-
sing

Licensing

Other forms of
cooperation non
equity
Export

Capital demand abroad

Source: Kreikebaum/Gilbert/Reinhardt: Organisationsmanagement internationaler Unternehmen, 2002, p.13

*Turnkey projects are excluded because they are very specific and less common
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 Entry strategies: Market attractiveness in relation to
competitiveness

! Joint Venture ! Wholly.owned.. ! Wholly.owned..

high subsidiary subsidiary
! Joint Venture

! Export ! Selective Strategy ! Wholly owned..

Market- subsidiary
! Joint Venture
attractiveness

! Export ! Licensing ! Export

! Franchising
low

low Competitiveness high

Source According to Müller/Kornmeier: Strategisches Internationales Management, 2002, p.568

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 Group Homework

Case study research:

1. Amazon enters Vietnam’s E-commerce
2. TTI invests $650 million plant in Vietnam
3. Central Group enters Vietnam’s retail market
4. Internationalisation of Vinamilk: how Vinamilk enter
Cambodia’s diary market

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