The Strategy of International Business Learning Objectives

LO 13-1 Explain the three basic decisions that firms

contemplating foreign expansion must make: which
markets to enter, when to enter those markets, and
on what scale.
LO 13-2 Compare and contrast the different modes that
firms use to enter foreign markets.

Credit: © Don Heupel/AP Images

LO 13-3 Identify the factors that influence a firm’s choice of
entry mode.
LO 13-4 Recognize the pros and cons of acquisitions versus
greenfield ventures as an entry strategy.
Chapter 13: Entering Foreign Markets

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Opening Case: Introduction

Cutco Corporation – Sharpening Your Market Entry
Firms can enter foreign markets through
 Largest manufacturer of high-quality kitchen cutlery
 Exporting
in the U.S. and Canada
 Licensing or franchising to host country firms
 Originally created as a product for Wear-Ever  A joint venture with a host country firm
Aluminum, a division of Alcoa  A wholly owned subsidiary in the host country
 Commitment to fine craftsmanship and Forever The advantages and disadvantages of each entry mode
Guarantee is determined by
 Formed following a management buyout that took  Transport costs and trade barriers
the company private – a leap of faith  Political and economic risks
 Sales force of mainly college students use “direct  Costs
selling”  Firm strategy
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Did You Know? Basic Entry Decisions 1 of 7

A firm expanding internationally must decide
Did you know • Which markets to enter
increasingly more • When to enter them
companies are born • Scale of entry
global?

Click to play video

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Basic Marketing – Chapter 6

Handout 6-1
 Basic Entry Decisions 2 of 7
Which Foreign Markets?
 Firms need to assess the long run profit potential of each
market
 The most favorable markets are politically stable developed and
developing nations with free market systems, low inflation, and
low private sector debt
 The less desirable markets are politically unstable developing
nations with mixed or command economies, or developing nations
where speculative financial bubbles have led to excess borrowing
 The value an international business can create in a foreign market
depends on the suitability of its product offering to that market
and the nature of indigenous competition
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Basic Entry Decisions 4 of 7
Timing of Entry continued
 Firms entering a market early can gain first mover
advantages
 The ability to pre-empt rivals and capture demand by establishing
a strong brand name
 The ability to build up sales volume in that country and ride down
the experience curve ahead of rivals and gain a cost advantage
over later entrants
 The ability to create switching costs that tie customers into their
products or services making it difficult for later entrants to win
business
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Basic Entry Decisions 5 of 7
Timing of Entry continued
 First mover disadvantages: the disadvantages associated
with entering a foreign market before other international
businesses
 These may result in pioneering costs (costs that an early
entrant has to bear that a later entrant can avoid) such as:
 The costs of business failure if the firm, due to its ignorance of the
foreign environment, makes some major mistakes
 The costs of promoting and establishing a product offering,
including the cost of educating the customers
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Basic Marketing – Chapter 6
Handout 6-2
Basic Entry Decisions 3 of 7
Timing of Entry
 After a firm identifies which market to enter, it must
determine the timing of entry
 Entry is early when a firm enters a foreign market before other
foreign firms
 Entry is late when a firm enters after other firms have already
established themselves in the market
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Is First-Mover Advantage Always a Good Thing?
Timing of entry into a foreign market is one of the most critical aspects of
going international. Popularized by Marvin Lieberman and David Montgomery
in 1988, first-mover advantage was an idea that resonated with every
company. But, 10 years later, in 1998, Lieberman and Montgomery actually
backed off their own idea that taking advantage of being the first mover was
always a good strategy. At this time, it was too late: Venture capitalists,
companies, people, and many scholars had already latched on to the positive
things about being first in a new foreign market and stressed this approach
over any other timing of entry. Now we are some 15 years into the twenty-
first century, and the realization is that first-mover advantages also come with
pioneering costs. If you had a choice of being the first-mover into a new
emerging foreign market (e.g., Turkey) and being the fifth company entering
that market with your product, what would you choose and why?
Sources: M. B. Lieberman and D. B. Montgomery, “First-Mover Advantages,” Strategic Management Journal, 9 (1988), pp. 41–58;
M. B. Lieberman and D. B. Montgomery, “First-Mover (Dis)Advantages: Retrospective and Link with the Resource-Based View,”
Strategic Management Journal, 19 (1998), pp. 1111–25.
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Basic Entry Decisions 6 of 7
Scale of Entry and Strategic Commitments
 Firms that enter foreign markets on a significant scale
make a major strategic commitment that changes the
competitive playing field
 Involves decisions that have a long-term impact and are difficult to
reverse
 Small-scale entry can be attractive because it allows the
firm to learn about a foreign market, but at the same time
it limits the firm’s exposure to that market
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 Basic Entry Decisions 7 of 7 Entry Modes 1 of 11
Market Entry Summary Modes to enter foreign markets
 There are no “right” decisions with foreign market entry, 1. Exporting
just decisions that are associated with different levels of 2. Turnkey projects
risk and reward 3. Licensing
 Firms in developing countries can learn from the 4. Franchising
experiences of firms in developed countries 5. Joint ventures
6. Wholly owned subsidiaries

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Entry Modes 2 of 11 Entry Modes 3 of 11

Exporting Turnkey projects
 Often the first method firms use to enter foreign market • Involve a contractor that agrees to handle every detail of
 Advantages the project for a foreign client, including the training of
 It is relatively low cost operating personnel
 Firms may achieve experience curve economies • At completion of the contract, the foreign client is
 Disadvantages handed the "key" to a plant that is ready for full
 Lower-cost manufacturing locations exist operation
 Transport costs can be high
 Tariff barriers can make it uneconomical
 Foreign agents fail to act in the exporter’s best interest

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Entry Modes 4 of 11 Entry Modes 5 of 11

Turnkey Projects continued
 Advantages
 Allow firms to earn great economic returns from the know-how
required to assemble and run a technologically complex process
 Less risky in countries where the political and economic
environment is such that a longer-term investment might expose
the firm to unacceptable political and/or economic risk
 Disadvantages
 The firm has no long-term interest in the country
 The firm can create a competitor
 The firm's process technology is a source of competitive advantage
Licensing
 An arrangement whereby a licensor grants the rights to
intangible property to another entity for a specified time
period, and in return, receives a royalty fee
 Intellectual property includes patents, inventions,
formulas, processes, designs, copyrights, and trademarks
 Advantages
 The firm does not have to bear the development costs and risks
associated with opening a foreign market
 The firm avoids barriers to investment
 It allows a firm with intangible property that might have business
applications, but which doesn’t want to develop those applications
itself, to capitalize on market opportunities

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Basic Marketing – Chapter 6

Handout 6-3
 Entry Modes 6 of 11
Licensing continued
 Disadvantages
 The firm doesn’t have the tight control over manufacturing,
marketing, and strategy necessary to realize experience curve and
location economies
 The firm’s ability to coordinate strategic moves across countries by
using profits earned in one country to support competitive attacks
in another is compromised
 There is the potential for loss of proprietary (or intangible)
technology or property
 To reduce this risk, firms can use cross-licensing agreements or link
the agreement with the decision to form a joint venture
Exporting or Licensing?
In Chapter 13, we discuss as series of advantages and disadvantages of
exporting and licensing (as well as turnkey projects, franchising, joint
ventures, and wholly owned subsidiaries as other entry mode choices).
Exporting refers to the sale of products produced in one country to residents
of another country. Licensing refers to an arrangement in which a licensor
grants the rights to intangible property to the licensee for a specified period
and receives a royalty fee in return. Both of these modes of entry into a
foreign market have unique advantages and disadvantages. Oftentimes,
selecting exporting or licensing depends on myriad factors—one being the
global mindset of the business owner. Assume you have a choice to enter
three emerging markets—Bolivia, Chile, and Peru, neighboring countries in
South America. You have a great product, with lots of technological
innovation and a lightweight packaging. Would you opt for exporting or
licensing, and why?

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Entry Modes 7 of 11 So, You Think You Want to Own a Franchise?

Franchising
 A form of licensing in which the franchisor sells intangible
property and requires the franchisee agree to abide by
strict rules as to how it does business
 Advantages
 It can avoid costs and risks of opening up a foreign market
 Disadvantages
 It may inhibit the firm's ability to take profits out of one country to
support competitive attacks in another
 The geographic distance of the firm from its foreign franchisees
can make poor quality difficult for the franchisor to detect
Franchising is a specialized form of licensing in which the franchiser not only
sells intangible property to the franchisee but also insists that the franchisee
agree to abide by strict rules as to how it does business. Some of the
advantages of franchising include branding, advertising, reputation, and
headquarters/ company support for development of the infrastructure
needed to operate the franchise business. Some of the disadvantages of
franchising include restrictions on territory and pricing, not being completely
independent, franchise fee and ongoing royalty payments, and dependence
on other franchise owners for nurturing the brand. Well-known worldwide
franchise systems include Subway, 7-Eleven, Pizza Hut, and McDonald’s.
Assume you are interested in being an international entrepreneur. Would
franchising be your choice of starting a business?
Source: T. Hult, D. Closs, and D. Frayer, Global Supply Chain Management: Leveraging Processes, Measurements, and Tools for
Strategic Corporate Advantage (New York: McGraw-Hill Education, 2014).

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Entry Modes 8 of 11 Entry Modes 9 of 11

Joint ventures Joint Ventures continued
The establishment of a firm that is jointly owned by two or  Disadvantages
more otherwise independent firms  The firm risks giving control of its technology to its partner
 Advantages  The firm may not have the tight control over subsidiaries that it
 A firm can benefit from a local partner's knowledge of the host might need to realize experience curve or location economies
country's competitive conditions, culture, language, political
 Shared ownership can lead to conflicts and battles for control if
systems, and business systems goals and objectives differ or change over time
 The costs and risks of opening a foreign market are shared with
the partner
 They can help firms avoid the risk of nationalization or other
adverse government interference

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Basic Marketing – Chapter 6

Handout 6-4
 Entry Modes 10 of 11 Entry Modes 11 of 11
Wholly Owned Subsidiaries Wholly Owned Subsidiaries continued
 100% ownership of the subsidiary  Advantages
 Set up a new operation in that country  They reduce the risk of losing control over core competencies
 Acquire an established firm  They allow for the tight control over operations in different
countries that is necessary for engaging in global strategic
coordination
 They may be required if a firm is trying to realize location and
experience curve economies
 Disadvantages
 Firms bear the full costs and risks of setting up overseas
operations

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Selecting an Entry Mode 1 of 3 Selecting an Entry Mode 2 of 3

Core Competencies and Entry Mode
 Technological Know-How
 When competitive advantage is based on proprietary technological
know-how, firms should avoid licensing and joint venture
arrangements in order to minimize the risk of losing control over
the technology
 If a technological advantage is only transitory, or the firm can
establish its technology as the dominant design in the industry,
then licensing may be attractive
Core Competencies and Entry Mode continued
 Management Know-How
 The competitive advantage of many service firms is based upon
management know-how
 International trademark laws are generally effective for
protecting trademarks
 Since the risk of losing control over management skills to
franchisees or joint venture partners is not high, the benefits
from getting greater use of brand names is significant

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Selecting an Entry Mode 3 of 3 Greenfield or Acquisition? 1 of 5

Pressures for Cost Reductions and Entry Mode Pros and Cons of Acquisitions
 Firms facing strong pressures for cost reductions are likely  Are quick to execute
to pursue some combination of exporting and wholly  Enable firms to preempt their competitors
owned subsidiaries
 Can be less risky than greenfield ventures
 Allows the firm to achieve location and scale economies as well as
retain some degree of control over worldwide product  However, many acquisitions are not successful
manufacturing and distribution
 Firms pursuing global standardization or transnational strategies
tend to prefer establishing wholly owned subsidiaries

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Basic Marketing – Chapter 6

Handout 6-5
 Greenfield or Acquisition? 2 of 5 Greenfield or Acquisition? 3 of 5
Pros and Cons of Acquisitions continued Pros and Cons of Acquisitions continued
Why Do Acquisitions Fail? • Reducing the Risks of Failure
• The firm overpays for the assets of the acquired firm • Through careful screening of the firm to be acquired
• There is a clash between the cultures of the acquiring and • By moving rapidly once the firm is acquired to implement an
acquired firm integration plan
• Attempts to realize synergies by integrating the operations of the
acquired and acquiring entities run into roadblocks and take much
longer than forecast
• There is inadequate pre-acquisition screening

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Greenfield or Acquisition? 4 of 5 Greenfield or Acquisition? 5 of 5

Pros and Cons of Greenfield Ventures Which Choice?
 Greenfield ventures are attractive because they allow the  Dependent on circumstances confronting the firm
firm to build the kind of subsidiary company that it wants  Well-established incumbents might be best for an
 Are slower to establish
acquisition as greenfield too slow
 Are risky because they have no proven track record
 Can be problematic if a competitor enters via acquisition and  If no incumbents, then greenfield might be best
quickly builds market share

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How Risky Would Indonesia Be for a New Greenfield Investment? Summary

Business is all about risk, the right risks. Choosing which risks to accept and
which to avoid is at the heart of international business. These risks increase In this chapter we have
and become more interesting with entry into foreign markets. David Conklin
discusses the idea of managing risk through planned uncertainty. By “planned  Explained the three basic decisions that firms
uncertainty,” he means an awareness of contingencies, with possible what-if contemplating foreign expansion must make: which
scenarios developed in advance. The key idea here is that through an ongoing markets to enter, when to enter those markets, and on
monitoring of the various risk areas, decision makers can have much of the what scale.
data they may need to address a number of possible outcomes. Of course, we
have to know what uncertainty to plan for, and we don’t know what we don’t  Compared and contrasted the different modes that firms
know. Planning for everything is impossible, but what Conklin suggests is that use to enter foreign markets.
planned uncertainty is a way of thinking. Given that we don’t know the
future, this way of thinking may be helpful in career development and other  Identified the factors that influence a firm’s choice of entry
parts of our lives. Who ever said business wasn’t like surfing? So, as just one mode.
country example, how big do you think the risk is by entering Indonesia
with a new greenfield investment?  Recognized the pros and cons of acquisitions versus
Sources: D. Conklin, “Analyzing and Managing Country Risks,” Ivey Business Journal: Improving the Practice of Management, greenfield ventures as an entry strategy.
January/February 1992. Also, see “Indices” for countries on globalEDGE.msu.edu.

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Basic Marketing – Chapter 6

Handout 6-6