ENTRY MODES

ADVANTAGES AND DISADVANTAGES

 ENTRY MODES
 Exports: Direct or indirect
 Licensing
 Franchising
 Turnkey operations (FDI)
 Foreign Direct Investments like:
Joint-ventures
Mergers/Acquisitions
Wholly Owned Subsidiaries or
Green Field Operations
 Licensing

Licensing, Franchising, Turnkey Contracts

-Licensing is granting permission to use something (software, brand,

formula, design) and the company will charges a fee and/or royalty

for the use of it.

-Franchising type of license where the franchiser provides branding,

concepts, expertise, and in fact most facets that are needed to operate

in an overseas market, to the franchisee. Management tends to be

 Under a licensing model, a company sells licenses to
other (typically smaller) companies to use intellectual
property (IP), brand, design or business programs.
These licenses are usually non-exclusive, which
means they can be sold to multiple competing
companies serving the same market. In this
arrangement, the licensing company may exercise
control over how its IP is used but does not control
the business operations of the licensee.

 EXAMPLES:
 MICKEY MOUSE
 MICROSOFT OFFICE
 GOOGLE
 In a franchising model, the franchisee uses another
firm's successful business model and brand name to
operate what is effectively an independent branch of
the company. The franchiser maintains a
considerable degree of control over the
operations and processes used by the franchisee, but
also helps with things like branding and marketing
support that aid the franchise. The franchiser also
typically ensures that branches do not cannibalize
each other's revenues.
 Foreign Direct Investment
 Joint Ventures (JV)

Joint Ventures tend to be equity-based. Two or more firms joint together to

create a new business. Either by buying a majority, 50% or the majority of the

equity of another enterprise. A new company is set up with parties owning a

proportion of the new business. There are many reasons why companies set up

Joint Ventures:

-Access to technology, core competences or management skills. For

example, Honda’s relationship with Rover in the 1980‘s

 Nissan Motor Co. of Japan and Germany's Daimler AG
have started a joint manufacturing venture in Mexico that
could produce small, upmarket cars for their respective
Infiniti and Mercedes-Benz brands, according to people
familiar with the plan.
 Nestle-Colgate: Develop a new product
 IBM-Lenovo: Improve it´s technology
 Starbucks-China´s Coffee: Enhance corporate growth
 Walmart-Cifra: Access to market, distribution, know-how…
 Aeroméxico-Delta: air routes
 LG-Hitachi: technology
 Renault-Nissan: share production plant
 Sony-Ericcson: research and development
 Office-Depot: share stores
 Foreign Direct Investment
 They can also be wholly owned and they
have different forms: Greenfield / Acquisition
/Merger
 Acquisitions: One company buys a local
company.
 Merger: Two companies merge into one

 Greenfield operations starts from cero,

establishment of a new production plant
 Joint ventures and
acquisitions in México
 Banks Acquisitions since 2000: BBV-Bancomer, Citibank-
Banamex, HSBC-Bital, Scotiabank-Inverlat, Santander-
Serfin,
 Beverages: Coca Cola-Femsa joint venture has 12 plants in
México. It is the biggest bottler in Latin America. It has
bought many “refresqueras” around the country. The
products they sell are: Coca Cola, Coca Cola Light, Sprite,
Fresca, Diet Sprite, Fanta, Agua Ciel, Sidral Mundet, Beat,
Senzao, Delaware Punch, Manzana Lift, Extra Poma,
Etiqueta Azul, Power Ade, Te Nestea, Adventures, Ciel, y
Ciel Mineral.
 ATT BUYS Unefon y Iusasell in order to compete in
telecommunications 2015.
 FDI
 RETAIL COMPANIES: Walmart-Cifra
(Aurrera, Superama, Suburbia, Vips, Club
Aurrera became Sams Club) joint venture
1991, today 2900 stores
 Soriana-Gigante first acquisition then
Soriana-Comercial Mexicana today 800
stores
 BEER Companies: Anheuser Busch InBev
acquires Grupo Modelo 2013
 FDI in car industry
 Nissan-Renault and Daimler in
Aguascalientes to produce Infiniti and
Mercedes Benz.
 Fiat-Chrysler
 Audi in Puebla and Chiapas
 KIA in Nuevo León
 Nissan, VW, and hundreds of suppliers, soon
Mazda, Honda in Querétaro Hub
 Auto-supplier Cluster in Guanajuato
 Automotive Industry
 México produces: 3.4 million units/year, sells
50 million USD/year, 7th car producer
worldwide, 5th auto parts supplier.
 Why? Geographic location, economic
stability within Mexico, high technology and
investment, skilled-educated engineers, big
number of high quality auto-parts- suppliers,
government support, high competition, and
sophisticated international consumer
demands.
Porter’s Diamond
 Guanajuato Cluster
 Toyota will produce 200,000 more vehicles Corolla this next year;
General Motors assembles in Silao 360,000 trucks, Volkswagen
produces 330,000 motors of high-technology.
 General Motors has been there 20 year and has three plants in
Silao, they have invested 549 million USD from 2012-2014
 Volkswagen, has invested 550 millon Usd in 2013 en Silao and
this year it has invested 118 million in order to increase its
production to 500 thousand motors.
 Ford, invested since 2012 in an auto-parts plant in Irapuato and
just made an alliance with Getrag.
 Honda y Mazda, have invested 2,000 million Usd in the state.
Honda in Celaya making motors, and Mazda making cars in
Salamanca.
 Hino Motors (Toyotas subsidiary), makes since 2009 light trucks in
Silao.
 Entry Modes
Learning Objective 15-2 Compare the different modes firms use to enter foreign markets.

Exporting
• Advantages
• Avoids the often substantial costs of establishing manufacturing
operations in host country
• May help firm achieve experience curve and location economies
• Disadvantages
• May not be appropriate if lower-cost locations for manufacturing
the product can be found abroad
• High transport costs can make exporting uneconomical,
particularly for bulk products
• Tariff barriers can make exporting uneconomical

©McGraw-Hill Education.
 Entry Modes
Turnkey Projects
• Advantages
• Can earn great economic returns
• Can be less risky than conventional FDI
• Disadvantages
• The firm that enters into a turnkey deal will have no long-term
interest in the foreign country.
• May inadvertently create a competitor
• Selling a technology through a turnkey project is also selling
competitive advantage to potential and/or actual competitors.

©McGraw-Hill Education.
 Entry Modes
Licensing
• Intangible property
• Patents, inventions, formulas, processes, designs, copyrights, and
trademarks
• Advantages
• No development costs and risks associated with opening a foreign
market
• Used when a firm wishes to participate in a foreign market but is
prohibited from doing so by barriers to investment
• Disadvantages
• Does not give a firm the tight control over manufacturing, marketing, and
strategy that is required for realizing experience curve and location
economies
• Limits a firm’s ability to coordinate strategic moves across countries by
using profits earned in one country to support competitive attacks in
another
• A firm can lose control over its technology by licensing it
©McGraw-Hill Education.
 Entry Modes
Franchising
• Employed primarily by service firms
• Advantages
• Firm experiences lower costs and risks than opening a foreign
market on its own
• Helps build a global presence quickly
• Disadvantages
• May inhibit the firm’s ability to take profits out of one country to
support competitive attacks in another
• Quality control
• Set up subsidiaries

©McGraw-Hill Education.
 Entry Modes
Joint Ventures
• 50-50 ventures are most common
• Advantages
• Local partner’s knowledge of the host country’s competitive
conditions, culture, language, political systems, and business
• Shared costs and risks
• Political considerations (government interference, nationalism,
etc.)
• Disadvantages
• Loss of technology control
• Lack of control over subsidiaries that it might need to realize
experience curve or location economies
• Can lead to conflicts and battles for control between the investing
firms if their goals and objectives change or if they take different
views as to what the strategy should be
©McGraw-Hill Education.
 Entry Modes
Wholly Owned Subsidiaries
• Greenfield venture - set up a new operation in host country
• Acquisition - acquire an established firm in a host nation
• Advantages
• Reduces the risk of losing control over technology
• Can tightly control operations in different countries
• Location and experience curve economies
• 100 percent share of profits
• Disadvantages
• Bear full cost and risk of establishing new market
• Can be problems associated with acquisitions
• Cultural issues, lack of knowledge of the market

©McGraw-Hill Education.
 Greenfield Venture or Acquisition? 1 of 5
Learning Objective 15-4 Recognize the pros and cons of acquisitions versus greenfield ventures
as an international market entry strategy.

Pros and Cons of Acquisitions

• Quick to execute
• May help preempt competitors
• May be less risky than greenfield ventures
• Acquisitions often produce disappointing results.

©McGraw-Hill Education.
 Greenfield Venture or Acquisition? 2 of 5
Pros and Cons of Acquisitions continued
• Why Do Acquisitions Fail?
• Overpaying
• Hubris hypothesis of why acquisitions fail
• Culture clash
• Integrating the operations of the acquired and acquiring entities
often run into roadblocks and take much longer than forecast
• Inadequate preacquisition screening

©McGraw-Hill Education.
 Greenfield Venture or Acquisition? 4 of 5
Pros and Cons of Greenfield Ventures
• Gives the firm a much greater ability to build the kind of
subsidiary company that it wants
• Slower to establish
• Risky, but less risky than acquisitions
• Preemption by global competitors

©McGraw-Hill Education.
 Greenfield, Joint Venture, Merge or Acquisition?
Which Choice?
• Acquisition when:
• The firm is seeking to enter a market where there are already
well-established incumbent enterprises
• Global competitors are also interested in establishing a presence
• Greenfield when:
• There are no incumbent competitors to be acquired
• The competitive advantage of the firm is based on the transfer of
organizationally embedded competencies, skills, routines, and
culture

©McGraw-Hill Education.
 Strategic Alliances 1 of 5
Learning Objective 15-5 Evaluate the pros and cons of entering into strategic alliances when
going international.

Advantages of Strategic Alliances

• May facilitate entry into a foreign market
• Allow firms to share the fixed costs (and associated
risks) of developing new products or processes
• Brings together complementary skills and assets that
neither company could easily develop on its own
• May help the firm establish technological standards for
the industry that will benefit the firm
Disadvantages of Strategic Alliances
• May give competitors a low-cost route to new
technology and markets
©McGraw-Hill Education.
 Strategic Alliances 3 of 5
Making Alliances Work
• Partner selection
• A good partner:
• Helps the firm achieve its strategic goals
• Has capabilities the firms lacks
• Is unlikely to try to opportunistically exploit its partner
• Choosing a partner:
• Collect as much pertinent, publicly available information on
potential allies as possible
• Gather data from informed third parties
• Get to know the potential partner as well as possible before
committing to an alliance

©McGraw-Hill Education.
 Strategic Alliances 4 of 5
Making Alliances Work continued
• Alliance Structure
• Reduce the risk of giving away too much to the partner.
• Use contractual safeguards to guard against the risk of
opportunism by a partner.
• Agree in advance to swap skills and technologies that the other
covets, thereby ensuring a chance for equitable gain.
• Cross-licensing agreements
• Extract a significant credible commitment from the partner in
advance.

©McGraw-Hill Education.
 Strategic Alliances 5 of 5
Making Alliances Work continued
• Managing the Alliance
• Be sensitive to cultural differences.
• Build trust.
• Build relational capital.
• Learn from the alliance partner and apply the knowledge within
one’s own organization.

©McGraw-Hill Education.
 Table 15.1 Advantages and Disadvantages of Entry Modes 1 of 3

Entry Mode Advantages Disadvantages

Exporting Ability to realize location
and experience curve
economiesIncreased
speed and flexibility of
engaging target markets
High transport costsTrade
barriersProblems with
local marketing agents

Turnkey contracts Ability to earn returns Creation of efficient

from process technology competitorsLack of long-
skills in countries where term market presence
FDI is restricted

©McGraw-Hill Education.
 Table 15.1 Advantages and Disadvantages of Entry Modes 2 of 3

Entry Mode Advantages Disadvantages

Licensing Low development costs Lack of control over
and risksModerate technologyInability to
involvement and realize location and
commitment experience curve
economiesInability to
engage in global strategic
coordination

Franchising Low development costs Lack of control over

and risksPossible qualityInability to engage
circumvention of import in global strategic
barriers Strong sales coordination
potential

©McGraw-Hill Education.
 Table 15.1 Advantages and Disadvantages of Entry Modes 3 of 3
Entry Mode Advantages
Joint ventures Access to local partner’s
knowledgeShared
development costs and risks
Politically acceptable Typically
no ownership restrictions
Wholly owned Protection of technology
subsidiaries Ability to engage in global
strategic coordinationAbility to
realize location and
experience economies
©McGraw-Hill Education.
Disadvantages
Lack of control over
technologyInability to
engage in global strategic
coordinationInability to
realize location and
experience economies
High costs and risksNeed
for more human and
nonhuman resources;
interaction and
integration with local
employees