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Global Strategy And

Emerging Markets
Week 4
Entry Mode Strategies, M&As and Strategic Alliances
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Outline
• Deepen understanding of how to plan an entry decision
– strategically thought out with a focus on long term
growth and proft potential
• Appreciation for advantages and disadvantages of
various modes of entry
• Mergers & Acquisitions – risks and rewards
• Strategic alliances – what are the motives for entering a
strategic alliance
• Why companies may engage in diferent entry modes
for diferent markets
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Why invest internationally?

• Seeking greater operational
efficiency
• Communication with:
• Operations, customers, suppliers,
competitors or R&D
• But signifcant risks
involved
We do what markets want even
thought they are increasingly distant

Market Characteristics
from our strengths

(What markets want)

Market Centric Path
• Proximity to:

what the markets demand

• Operations, customers, suppliers,

increasingly distant from

We do what we do even

Firm Centric Path

though they are
competitors or R&D

Zone of
• Seeking new markets death
We do what we can’t do for

• Proactive vs reactive people who don’t want what

we can’t do

• Direct vs indirect Business Characteristics

(What firms do)
• Seeking new resources
• Physical vs intangible
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Basic Entry Considerations and Decisions:

Which Foreign Market?
• There are 196 countries and 60 territories in the world
• Identify potential markets for internationalization by looking at long term potential for
profts
• Factors such as
• Size (demographics)
• Present wealth (purchasing power) of consumers
• Likely future wealth of consumers depends on economic growth rates
• The top 6 countries with more than 200 millions people
• China, India, USA, Brazil, Indonesia and Pakistan
• China and India are relatively poor but growing rapidly
• Pakistan is politically unstable and considered riskier
• Costs and risk associated with doing business in another country are normally lower in a
more politically stable, developed economy – but lower potential opportunity for growth
compared to an emerging market
• Is the frm meeting an unmet need with a product previously unavailable?
• Must rank countries in attractiveness
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Timing of entry: When to Enter

• Considered early when an international business enters a foreign
market before other foreign frms, and late when it enters after
international businesses have established themselves
• First-mover advantages
• Pre-empt rivals and capture market
• Establish brand and customer satisfaction
• Build sales volume – cost advantage
• Create switching costs making it difcult for later rivals to win business
• First-move disadvantages
• Pioneering costs that frst entrant has to bear learning the rules
• Educating the market
• Later entrant has advantage of ‘following’
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Scale of Entry
• Large scale involves signifcant costs and resources
• Small scale allows frm time to learn but lack of
commitment may make it difcult to capture market
and other frst-mover advantages
• Risk versus Rewards: There are no "right" decisions
here, just decisions that are associated with diferent
levels
• of risk and reward
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Mode of entry choices

Contractual
Non-equity MNE ‘buys’ a stake in
agreement with Equity
the organizaton
entty or supplier

Exportin Licensing/
Turnkey project Strategic Joint venture Wholly owned
g Franchising alliance subsidiary
(i.e. R&D
agreement)

Greenfeld Brownfeld/
acquisition
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Exporting
Advantages Disadvantages
Avoids substantve costs of establishing operatons in Exportng can be inappropriate in case a MNE
the host country exports to lower cost locatons

Achieves inital learning curve and locaton economies Transportaton costs can make it uneconomical
efects
Low fnancial risk Tarif barriers are in place
Countries initate theses barriers to protect the
domestc economic (i.e. Chinese steel imports in
the US and EU)
Countries initate these barriers to increase FDI
(ie., setng up a WOS might mitgate these
barriers)
Often used as a toe-dipping strategy
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Types of export: Direct and indirect

Direct exporting: From manufacturer to end user (or other
business unit in the same department)

Firm End-user

Indirect: From manufacturer to a principal agent to end user

Firm Agent End-user
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Licensing
Arrangement whereby a licensor IBM – Samsung Electronics
grants the rights to intangible
property to another entity (the 2011- Established broad,
licensee) long-term cross-licensing
• for a specifed period, deal that will cover their
• and in return, receives a royalty existing patents as well as
fee
those fled over the next 10
years.
A frm possesses some intangible
property that might have a
commercial application but they do
not want to develop these
applications themselves
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Advantages and disadvantages of

licensing
Advantages Disadvantages
Licensee is responsible for capital injectons No tght control over the manufacturing, marketng,
(licensee bears fnancial risks (i.e. development costs and strategy of licensee
for buildings)

Focus on core competence (licensor) Limits a frm to compete in a global marketplace

(shifting of profts – transfer pricing from one country
to support investments in the other)

Risk of losing know-how to licensee

(BUT: frm can limit this risk)
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Example of Licensing – Fuji Xerox and Microsoft

• Fuji Xerox Co. Ltd. (Fuji Xerox) and Microsoft Corp. announced a broad patent
agreement for the purpose of allowing access to each company’s respective patent
portfolios and to accelerate research and development.
• Fuji Xerox will obtain access to Microsoft patents for Fuji Xerox’s existing
and future product lines, including products that incorporate proprietary source
and open source software, such as Linux. Likewise, Microsoft will gain access to
Fuji Xerox patents for Microsoft’s existing and future proprietary product
lines, including Microsoft® Office. The agreement contains monetary and
nonmonetary provisions that allow both companies to receive compensation from
their patent portfolios. As with most commercial transactions, the terms of the
agreement are not being disclosed at this time.
• “We are pleased to be able to reach a mutually benefcial broad patent agreement with
Microsoft that respects for each company’s patent portfolio, encourages greater
interoperability and provides valuable protection for the customers of each company’s
products and services,” said Kiyoshi Saito, senior vice president of Fuji Xerox Co. Ltd.
• “Both Fuji Xerox and Microsoft have a strong commitment to innovation, and the broad
patent agreement will give us both the freedom to continue developing and building
technologies that will ultimately work better together,” said Brad Smith, senior vice president,
general counsel and corporate secretary of Microsoft. “This agreement is an example of our
desire to share our innovations with other companies and build a stronger IT
ecosystem through access to intellectual property.”

https://news.microsoft.com/200007/003//21//fuji-xerox-and-microsoft-announce-broad-patent-agreement/
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Franchising
Franchiser not only sells intangible property
(trademark); but also insist that the franchisee
agree to abide by strict rules as to how it does
business.

Diferences with licensing

• Franchising is run on an ongoing basis, with licensing often a
contractual duration is specifed.
• Licensing - manufacturing industry; franchising -
service & food industry (Dunning and McQueen, 1981)
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Advantages and disadvantages of franchising

Advantages Disadvantages
Franchisor is relieved of costs and risks of opening a Inhibits transfer pricing (shifting profts from locaton
foreign market A to B)

Building up a global presence quickly (Because: Integrity of the brand name when things go wrong.
franchisee often carries same brand name)

Part of the inputs can be made by the brand owner

(soft drinks)

Example of Franchising –
McDonald’s
• McDonald’s franchisees must make
an initial investment of between $1
million and $2.2 million.
• McDonald’s charges a $45,000
franchisee fee and an ongoing
monthly service fee equal to 4% of
gross sales.
• Franchisees must also pay rent to
the company, which is a
percentage of monthly sales.
• Owning a McDonald's franchise can
be a lucrative business, but it
requires a lot of cash.
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• The average McDonald's restaurant generates
nearly $2.7 million in annual sales, making
it the fourth-highest-grossing chain in the US
by sales per unit behind Chick-fl-A,
Whataburger, and Panera Bread, according
to QSR magazine.
• But to open a single restaurant, the company
requires that potential franchisees have
liquid assets of at least $500,000.
• Startup costs, which include construction and
equipment expenses, average between $1
million and $2.2 million, according
to McDonald’s. The total is determined by the
geography and size of the restaurant, as well
as by the selection of kitchen equipment,
signage, style of decor, and landscaping, the
company says.
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Turnkey project
• In some industries it is common to have frms that
specialize in the design, construction and start-up of
TURNKEY PLANTS
• E.g. water treatment plants, oil refnery

• Contractor handles every detail of project for a foreign

Advantages Disadvantages
clientQuick
– including the training of operating personnel
means of gaining signifcant return May inadvertently create compettor
from a valuable asset when handing over turnkey project
Less risk involved than traditonal FDI
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Joint Ventures
• Establishing a frm that is jointly owned by two or more
otherwise independent frms
• E.g. Fuji Xerox, Volvo and Uber
• Most typically 50-50 venture
• Limited life or ongoing
• Joint Ventures may sometimes convert to a WOFA
• China required multinationals to take interests in joint
ventures to enter the market
• As it prepared to enter WTO many joint ventures converted to
WOFA
• Enhanced performance with ownership conversion is
https://www.ft.com/content/73/6b1/f1/c-653/4-1/1/e6-83/1/00-ecf00bddad227
associated with increased sales and increased intangible and

Advantages and Disadvantages of JV
Advantages
Benefts from local partner’s knowledge of country’s
compettve conditons, culture, language, politcal
systems and business – e.g. US frms provide
technological know-how in return for marketng
expertse and local knowledge
Share costs and risks with a local partner
Some politcal systems make JV the only feasible entry
mode (local partner may have infuence on host-
government policy)
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Disadvantages
Risks losing control of technology to local partner but
JV agreements can be constructed to minimize this
risk
JV does not give a frm tght control over the
subsidiaries – many JVs have a large degree of
autonomy making HQ control difcult
Can lead to conficts between investng frms if their
goals and objectves change or if their strategic views
difer. Conficts tend to be greater when the cultural
distance is greater.
As foreign frm develops knowledge it’s dependence
on the local frm shifts
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Wholly owned subsidiaries

• The frm owns 100% of the stock
• Greenfeld – setting up new • Reduce risks and costs associated
venture with technology transfer in a
OR developing economy where creating
competitive advantage requires
• Acquisition – buy established frm
knowledge and marketing
to promote products
Advantages Disadvantages capabilities
Reduces risk of losing control over Costly to establish • Transfer of intangibles such as
core competences
technology or brand
Tight control over operatons Risks of learning to do business in
a new culture • Greater proprietary control of
technology and knowledge
GVC – need tght degree of control Risks may be mitgated by
over operatons of each afliate acquiring established operaton, • Easier to safeguard IP
but then have to deal with a
diferent corporate culture
1/0000% of profts
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Build or Buy? The Key Entry Mode

Question
Ownership Strategy

Wholly Owned Joint Venture

Subsidiary
(WOS)

GFV Greenfeld Venture 1/. Greenfeld 2. Greenfeld

Wholly Owned Joint Venture

Establishment
Mode T.O. Takeover/Acquisiton 3/. Wholly 4. Joint Foreign
(M&A) Owned Acquisiton
Takeover

Adapted from Brouthers and Hennart (2007: 399)


Greenfeld vs. Acquisitions
Greenfeld
• Pros
• Cheaper (Margin)
• No inherited problems
• Governments welcome
• Choice of location
• Most modern technologies
• No suitable takeover victim
• Cons
• Resource outlay
• Managerial commitment
• Speed
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Acquisition/Takeover
• Pros
• Rapid market entry
• Avoid start-up problems
• Buying packaged assets -
brands, R&D, customer base,
management, distribution
network
• Don’t disturb competitive
structure
• Cons
• Evaluation problems
• Problems of integration
• Search costs
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Advantages and Disadvantages of entry modes

Entry mode Advantages Disadvantages
Exportng Ability to realize locaton and experience curve High transport costs
economies Trade barriers
Increased speed and fexibility of engaging target Problems with local marketng agents
markets
Licensing Low development costs and risks Lack of control over technology
Moderate involvement and commitment Inability to realize locaton and experience curve
economies
Inability to engage in global strategic coordinaton
Franchising Low development costs and risks Lack of control over quality
Possible circumventon of import barriers Inability to engage in global strategic coordinaton
Strong sales potental
Turnkey contracts Ability to earn returns from process technology skills Creaton of efcient compettors
in countries where FDI is restricted Lack of long-term market presence
Joint ventures Access to local partner’s knowledge Lack of control over technology
Shared development costs and risks In ability to engage in global strategic coordinaton
Politcally acceptable In ability to realize locaton and experience economies
Typically no ownership restrictons

Wholly owned Protecton of technology High costs and risks

subsidiaries Ability to engage in global strategic coordinaton Need for more human and non-human resources;
Ability to realize locaton and experience economies interacton and integraton with local employees
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Entry Modes and performance

Foreign wholly owned subsidiaries perform better than
foreign-owned joint ventures in industries with a higher level
of intangible assets
(Chang et al., 2013; Konwar et al, 2017)
• Why is this the case?

• Decision making speed: transfer of technology, know-how and

proprietary resources
• Better control over know-how (leakage)
• Reduce the risks and costs associated with technology transfer
• Wholly Owned Subsidiaries are more efective for developing
products that have advanced intellectual property embedded in them
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Cross border M&As and

strategic alliances
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Mergers and Acquisitions

• Contemporary topic
• Often in the news (i.e. Microsoft’s acquisition of Linkedin; Marriott International’s Group
acquisition of Starwood group)
• Involves large amounts of investment
• Regulatory approvals often needed (i.e. monopolies)
• M&A occurs around every 20 minutes
• Often involves job losses, career changes, relocations etc.
• Organizational justice
• Acquisition
• One frm takes equity ownership share of another: (and therefore control)
• Friendly (agreed upon by both parties)
• Hostile (acquirer has the support of shareholders but not management)
• Merger
• Combination of two previously separate companies (e.g. Glaxo Welcomme-Smithkline
Beecham)
• Can occur in both proft and non-proft companies
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M&As
• High failure rates
• International M&As success rate is just above 50%
• 70% of target frm executives leave within fve years

• Traditionally dominated by American/European frms

• Both research and practice
• More recently, growth of Chinese and Indian M&As
• i.e. Lenovo buying IBM’s PC business

• Highly afected by the external environment

• Global M&A value $824 billion in 2007 vs $317.5 billion in 2009
• Exceeds the GDP of several larger countries

• Current trend: from few large M&A to more smaller ones

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Why M&A?
• Market power

• Efciency

• Resource Deployment

• Resource dependence

• Uncertainty and regulaton

• Firm (acquisiton experience)

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Why M&As? Managerial self-interest

• Bandwagon efect
• Cyclicality of M&As
• Fear of missed opportunities
• Short-term targets
• Principal-agent problem
• i.e. managers vs shareholders (pay-for-performance policies)
• Self-confdence & ego
• Overestimations in ability to evaluate targets (i.e. cognitive bias)

• Compensation
• Higher CEO compensation strongly linked to M&As
• Increased stock options
• Discretion and power (formal and informal)
• In general, irrespective of M&A performance
• Most often, these are (not surprisingly) value-reducing efects
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POST-stage: M&A integration

• Challenging due to organizational ft
• Critical part of M&A success
• Especially so in IB
• Cultural, linguistic, temporal,
geographic diferences
• Incompatible fnancial or IT systems (+
learning curve)
• Degree of interdependence
• Tight integration needed if the purpose is
to transfer capabilities (i.e. technologies)
or resources (i.e. distribution channels)
• Less need in unrelated diversifcation

• Some M&As will not be fully integrated

• Potential for divesture (i.e. in case of
minimum ft)
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POST-stage: M&A integration

• Financial integration
• Reporting systems (accounting,
reports, benchmarks etc.)
• Organizational integration
• Minimize disturbance to
management structure
• Business process integration
• Transfer of superior processes
and best practices (e.g. supply
chain management)
• Market integration
• Standardization and scale where
available Critical drivers of success –
Kumar, 200009 HBR: How Emerging Giants are rewritng the rules of M&A
https://youtu.be/0cMQMuN2G7c
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Strategic
Positve infuence complementarity Positve infuence

M&A
success

Degree of
Cultural ft
integraton

Bauer and Mazler, 2014, Strategic Management Journal

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International Strategic
Alliances
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Strategic Alliances and Case of Fiat

• Founded 1899
• Brands include Alfa Romeo, Maserati, Ferrari (2016
spinof)
• One of Italy’s largest MNEs
• Revenues of over €84 billion (2012)
• Employs 215.000 people
• Underperforming frm in late 1990s
• Three CEO’s over 2001-2004
• Operating loss of €585 million In 2004
• Better
Case source: profts
Frynas & Mellahi, (€3Strategic
2001/1/, Global billion) in 2008
Management
https://www.youtube.com/watch?vv:U3/WfglcbXzz4
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Strategic Alliances and Case of Fiat

• Traditionally Fiat held a good position in Europe
• Increasing pressure towards USA and Asia
• Quick growth trough Strategic Alliances
• Previous experience
• Strategic Alliance with GM quite successful (2000)
• Joint purchasing and manufacturing (scale), €200 million savings
• GM had an option to buy Fiat but declined in 2005
• Chrysler
• Declared bankruptcy in 2009 – Strategic Alliance with Fiat was part of the rescue
plan with Fiat taking 20% of Chrysler’s shares
• Gave Fiat access to US
• Complementarities in strategic goals
• Fiat’s access to markets and access to fuel-efcient cars and engines by Chrysler
• Incremental increase in shares

Strategic Alliances and Case of Fiat
• In 2011 it became a takeover when Fiat
acquired 58.5% of Chrysler shares
• By 2014 Fiat had acquired all
Chrysler shares
• Fiat also expanded into emerging
markets
• INDIA - Tata Motors in 2007 –
complementarities
• Fiat – sales, cars, engines,
transmissions
• Tata - access to new tech and
exports
• CHINA - Nanjing Automotive
corporation (2007)
• CHINA - Guangzhou Automobile
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• Strategic Alliances are a critical part of
Fiat’s global strategy
• Tangible benefts via savings and profts
• Expansion from regional to truly global
company
Talks about a merger with Renault have
recently been aborted due to demands from
the French government who own 15% of
Renault
https://www.cnbc.com/2019/05/27/fat-chrysler
-submits-proposal-for-a-merger-with-renault.h
tml
https://europe.autonews.com/automakers/renau
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FCA Top 10 markets 2018

ttps://fatgroupworld.com/2019/02/24/fca-global-sales-2018-jeep-usa-drive-growth/
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Strategic Alliances

• Sharing of resources and capabilities to pursue strategy, while

remaining independent organizations

• Companies remain distinct

• Average (large) corporation has around 30 alliances

• Popular method of conducting business
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Strategic Alliances
• Success involves collaboration as well as
competition – “coopetition”
e.g. Sony and Samsung in LCD-TVs
• Types of strategic alliances
• Horizontal, vertical, intersectional
• Equity vs Non-equity (i.e. franchising,
patents, brands)
• Technology, operations and logistics,
marketing, sales and services, multiple
activity
• Need to consider collective interest in addition to
frm’s self-interest
• Collective strategy
• “Collaborative advantage”
• Managing alliance networks better than
competitors
https://news.microsoft.com/2001/9/005/1/6/sony-and-microsoft-to-explore-strategic-partnership/
https://www.sony.net/SonyInfo/News/Press/2001/1/1/2/1/1/-1/56E/
•
https://www.wsj.com/artcles/SB1/1/3/625623/81/923/61/22
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Motivations for Strategic Alliances

• Access
• Capabilities and knowledge
• i.e. western companies need knowledge of local distributors in
emerging economies (i.e. “liability of foreigness” or “outsidership”)
• Local distributor can be reliant on “western company” in turn for
i.e. high technology products not available locally
• Shared risk
• Shared fnancial commitment (i.e. R&D expenditures)
• i.e. avoiding over-commitment
• Complementary strengths and weaknesses
• Fiat-Chrysler
• Access to local marketing knowledge and suppliers vs technology
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Issues in Strategic Alliances

• Unlike in M&As, diferences cannot be solved through
authority
• Demands for managerial processes
• Role of trust
• Lack of control
• Vulnerability to self-serving interests
• Especially tricky for SAs between government-owned
corporations and public frms (i.e. profts vs political
agendas)
• Creation of competitors
• Learning races
• Learning best practices and capabilities
•
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Key success criteria for Strategic Alliances

• Time

• Understanding

• Personal connections and frequency of interactions between

alliance partners

• Compatibility and goals

https://www.youtube.com/watch?v=quro-XmK-n0&t=41s
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Apple and IBM

• The partnership leverages IBM’s big data analytics and more than
100,000 industry sales consultants and software developers, to help
Apple penetrate the global corporate enterprise market.
• Apple and IBM frst partnered on the MobileFirst enterprise initiative
in 2014. Under terms of the agreement, IBM handles hardware
leasing, device management, security, analytics, mobile integration
and on-site repairs, while Apple aids in software development and
customer support through AppleCare.
• In 2018 Apple and IBM announced an expansion to their existing
partnership that will allow customers to roll out advanced in-app
machine learning capabilities through Apple's Core ML and IBM's
Watson technology.

https://www.ibm.com/mobile/apple-partnership
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Google and Luxottica

• The partnership will result in attractive Google glasses that could
be purchased based on looks alone, and the cutting edge
technology can give Luxottica brands a reason for purchase that
justifes a premium price.
• Luxottica’s glasses are increasingly being undercut on price by retailers such
as Costco, TJ Maxx and Warby Parker.
• The two Corporations will establish a team of experts devoted to
working on the design, development, tooling and engineering of
Glass products that straddle the line between high-fashion, lifestyle
and innovative technology.
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Spotify and Uber

• The ability to enter a hired car
welcomed by your favorite playlist
provides added value, meaningful
competitive advantage and exclusivity
for Uber cars. For Spotify, it provides
an incentive for users to upgrade to the
premium level and a unique point of
diference that Pandora, iTunes or
YouTube don’t have.
• Uber users can sync their Spotify
accounts when hailing an Uber, select a
playlist (either their own, or Spotify will
have city-specifc playlists to choose
from) and have the music already
playing when they open the car door.

https://smallbiztrends.com/2001/4/1/1//uber-and-spotfy-music-playlist.html
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Apple Pay & Mastercard

• MasterCard worked with
Apple to deliver a
seamless and secure
payment experience. For
consumers and merchants
alike, that means that
every purchase made with
a MasterCard using iPhone
6, iPhone 6 Plus and Apple
Watch will ofer the
security, benefts and
https://www.mastercard.co.uk/en-gb/consumers/features-benefts/mobile-payments/apple-pay.html

guarantees of any
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T-Mobile and Nokia

• Nokia will help build T-
Mobile’s 5G network
• Will allow T-Mobile’s
customers to access
highspeed 5G network
• Nokia will supply T-Mobile
with its AirScale radio
access platform along
with cloud-connected
hardware, software and
acceleration services
https://www.tmonews.com/2001/8/007/t-mobile-nokia-3/-5-billion-deal-5g-network/
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Microsoft and Walmart

• Walmart and Microsoft are both
giants, but both compete with
Amazon
• Walmart is Amazon’s biggest retail
competitor, and Microsoft is
Amazon’s largest cloud services rival.
• The fve-year agreement will see
Walmart use Azure and Microsoft
365 across the company,
alongside new projects focused
on machine learning, artifcial
intelligence, and data platforms.

https://www.theverge.com/2001/8/7/1/7/1/75800744/microsoft-walmart-azure-partnership-amazon-rival
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SAs and M&As: concluding remarks

• Both have high failure rates and signifcant risk
• Alliance often a better option in uncertain situations
• Shared risk
• i.e. shared fnancial loss in case of failure
• Alliances can be turned into M&As, especially if such
option was negotiated initially
• However, also acquisitions can be sold (even if at a lower
price)
• Both easier to evaluate when desired capabilities are tangible
• Manufacturing capacity and plants
• Vs. “soft” capabilities such as people, brand, skills, or
knowledge
• Acquisitions usually more efective when time is constrained
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SAs and M&As: concluding

remarks
• Strategic ft is key

• Organizational ft also important Strategic

• Difcult to evaluate beforehand complement
Positve infuence arity Positve infuence
• Problems in organizational ft
easier to manage in M&As due to
authority
M&A
success
• Importance of integration Degree of
Cultural
• Experts, consultants, special teams integratio
ft
• Especially difcult in cross-border n
SAs and M&As