Comsats university, Islamabad

Assignment # 4
GBM
Submitted by: Abdul Moiz
Reg #: SP20-BAF-004
Dated: 25-12-2021
Q:01 Discuss how the need for control over foreign operations varies with firms' strategies and
core competencies. What are the implications for the choice of entry mode?
The nature of a company's primary skills determines the optimum entrance mode. Firms with a
core competency in technological know-how can be separated from those with a core
competency in managerial know-how. When a firm's competitive advantage (core competence)
is built on control over proprietary technological know-how, licensing and joint-venture
arrangements should be avoided whenever possible to limit the danger of losing control over that
technology. As a result, if a high-tech firm wishes to capitalize on a core expertise in
technological know-how, it will almost probably do so through a wholly owned subsidiary. This
ruling, however, should not be regarded as definitive. It is sometimes possible to structure a
licensing or joint-venture agreement in such a way that the risk of licensees or joint-venture
partners absorbing technological know-how is minimized. Another example is when a
corporation believes its technological edge is just temporary and expects competitors to copy its
core technology fast. In such cases, the company may wish to license its technology to
multinational corporations as quickly as possible so that it can get global acceptance before it is
duplicated. This method provides a few advantages. The corporation may be able to deter
competitors from creating their own, perhaps superior solutions by licensing its technology to
them.
McDonald for example, have a competitive advantage based on management know-how. For
such organizations, the risk of losing control of management skills to franchisees or joint-venture
partners is small. These businesses' most valuable asset is their brand name, which is frequently
well-protected under international trademark laws. As a result, many of the worries that occur in
the context of technological expertise are alleviated. As a result, many service firms prefer to use
a combination of franchising and subsidiaries to manage franchises in certain nations or regions.

The implications for choice of entry modes are as following:

Licensing: The firm does not have to bear the development costs and risks associated with
entering a foreign market, which is a significant advantage of licensing. Licensing is especially
enticing to businesses who lack the financial capacity to develop worldwide. Furthermore,
licensing can be desirable when a corporation does not want to devote large financial resources
to a new or politically dangerous overseas market. Licensing is typically employed when a
corporation wishes to join a foreign market but is unable to do so owing to investment
constraints. Finally, licensing is commonly employed when a company owns some intangible
property with potential business uses but does not want to develop those applications.
Exporting: There are two significant benefits to exporting. To begin with, it avoids the often
excessively high costs associated with establishing manufacturing facilities in the host country.
Second, exporting can help a firm achieve experience curve and location economies. There are
certain drawbacks to exporting. First, if lower-cost manufacturing facilities for the product can
be located elsewhere, exporting from the firm's home base may not be appropriate (i.e., if the
firm can realize location economies by moving production elsewhere). As a result, for businesses
pursuing global or transnational strategies, it may be profitable to manufacture where the
combination of factor conditions is most favorable from a value creation viewpoint and to export
from that location to the rest of the globe. The second drawback of exporting is that high
transportation costs can make it unprofitable, especially for bulk products. Another downside of
tariffs is that they may make exporting unprofitable. Similarly, the possibility of tariff barriers
implemented by the host nation's government might make it exceedingly dangerous.
Joint venture: The appeal of joint venture is that it allows the foreign partner access to the
knowledge of the local partner. Another advantage of joint venture is that the parties share
development expenses and risks. Finally, the benefit of joint venture is that it is politically
acceptable. The downside is that it lacks technological control. It is also unable to participate in
global strategic coordination, and it is unable to achieve location and experience economies.
Fully owned subsidiaries: There are various apparent advantages to fully owned subsidiaries.
To begin, when a company's competitive advantage is based on technological competence, a
completely owned subsidiary is typically the preferred entry method since it reduces the risk of
losing control over that competence. Second, a completely owned subsidiary allows a company
complete control over activities in several nations. Third, in order to gain location and experience
curve economies, a corporation may need to form a wholly owned subsidiary. Firms that do this
must bear the whole capital outlay and risk of establishing overseas operations. While
establishing a wholly owned subsidiary, the firm must shoulder the entire expense and risk.
Turnkey project: A turnkey approach is also less risky than traditional FDI. Long-term
investment in a dynamic political and economic environment may expose the firm to
unacceptable political and/or economic risks. The capacity to build and run a technologically
complex process, such as refining petroleum or steel, is a valuable asset. Turnkey projects are an
excellent way to optimize the economic returns on an asset. The drawback of a turnkey project is
that the firm that enters into it has no long-term investment in the other nation. The consequence
of this is that if that country subsequently proves to be an important market for the process's
exported output. One alternative is to purchase a minority equity investment in the company.
Second, a firm that enters into a turnkey project with a foreign company may inadvertently create
competition. Third, if the firm's process technology gives it a competitive advantage, providing it
as a turnkey project gives it a competitive advantage over future and/or current competitors.
Franchising: The advantages of franchising as a mode of entry are similar to those of licensing.
Many of the costs and risks of entering a foreign market on your own are avoided. Instead, the
franchisee is frequently liable for these costs and risks. This gives a significant incentive for the
franchisee to start a profitable business as quickly as possible. As a result, by using a franchising
model, a service business may quickly build a worldwide presence at a low cost and risk. Service
firms typically use franchising; there is no reason to ignore the need for manufacturing
coordination in order to achieve experience curve and location economies. Franchises, on the
other hand, may limit the firm's ability to shift money from one jurisdiction to finance
competitive attacks in another. A more major disadvantage of franchising is the lack of quality
control. The firm's brand name conveys to consumers a message about the quality of the firm's
goods, which is the foundation of franchising agreements. Simply said, it lacks quality control
since geographical distance from franchisees makes it impossible to notice low quality, resulting
in a negative image. It also lacks the potential to participate in global strategic coordination.