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MPM 735 International

Business Management
Topic 7
Strategy for International Business

Hill, Ch. 13 The Strategy of International Business
Hill, Ch. 15 Entry Strategy and Strategic Alliances
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Learning Objectives
Explain the concept of strategy
Recognise how firms can profit by expanding globally
Understand how pressures for cost reduction and for local
responsiveness influence strategic choices
Identify the different strategies for competing globally and
understand the pros and cons of each
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Strategic Management
for International Business
Topics 1-6 have looked at the broad international
environment in which firms operate. We now turn to what
individual firms can do when facing this environment
Strategic management for an international business is
the comprehensive and on-going management planning
process to formulate and implement strategies that enable
a firm to compete effectively and long-term in selected
international markets
Strategic management is the responsibility of top
management at corporate headquarters and senior
management in all international subsidiaries or affiliates
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Strategy is defined as:
The actions that managers take to attain the goals of
the firm
Maximise a firms value through profitability and profit growth
A number of different models of strategy:
Chandlers (1962) strategy-structure model
Andrews (1971) design school
Ansoffs (1985) planning school model
Mintzbergs model of intended/emergent strategy
Porters (1990) competitive strategy model
Strategy aims to maximise profitability and profit growth

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Value creation
The way to increase the profitability (rate of return that
the firm makes on its invested capital) of a firm is to
create more value:
the value created is the difference between the costs of
production and the value that consumers perceive in the products
Michael Porter says there are two basic strategies for
creating value and attaining a competitive advantage in
an industry:
low-cost strategy suggests that a firm has high profits when it
creates more value for its customers and does so at a lower cost
differentiation strategy suggests that a firm has high profits
when it focuses primarily on increasing the attractiveness of a
product

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Strategic positioning
Porter says to maximise long-run return on capital, firms:
Choose a level of value in its products and a level of
cost such that there is enough demand for that value
level (this is called the efficiency frontier, p. 420)
Configure internal operations to support that position
(manufacturing, logistics, marketing, HRM, etc)
Have the right organisation structure in place to
execute the strategy
These three key charateristics (strategy, operations,
organisation) must be consistent and mutually
supportive
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Levels of
international strategy
International strategy should align with other levels
of strategy adopted by an international business
Corporate Strategy
deals with the domain in which a corporation operates and
the level of diversification
Business Strategy
deals with the strategic choices of individual business units
Functional strategy
deals with the management of functional aspects of the
business, for example finance or human resource
management

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Levels of strategy
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Corporate Strategy (1)
Defines the areas of businesses in which the firm intends
to operate: three broad options:
Single business, relying on one business or one product
or one market, concentrating all resources on that one;
allows high level of focus, but very vulnerable to
competition or environmental change
Related diversification, with several related
businesses, products or markets; allows economies of
scale, less vulnerable, better use of resources, but
increased need for resources, and control problems
Unrelated diversification or conglomerate structure,
operating in several unrelated businesses, products or
markets
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Business
and Functional Strategies
Business Strategy focuses on specific businesses or
units within the MNC, and has three basic forms:
differentiation strategy, which seeks perception of
fundamentally different products
cost leadership strategy, seeking lowest costs and prices
focus strategy, which seeks closest match of product
features to consumer wants
Functional Strategy relates to major functions such as
finance, marketing, operations, etc, which must be
consistent with corporate and business strategies
See later topics

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Development of strategy
Analyse the target country (a potential foreign market),
including the industry you are in and who would be your
major competitors
Assess your own strengths and weaknesses as they
relate to each foreign market
Evaluate the opportunities and benefits, threats and
risks, and disadvantages of alternative entry modes in the
target country
Co-operate with other organisations to gain maximum
benefit at all stages of the process
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Competitor Analysis
Company Analysis
Who are our competitors?
What threats do they pose?
What is the profile of our competitors?
What are the objectives of our competitors?
What strategies are our competitors pursuing and how successful
are these strategies?
What are the strengths and weaknesses of our competitors?
How are our competitors likely to respond to any changes to the
way we do business?
Porters Five Forces Industry Analysis
Power of buyers, suppliers, degree of rivalry, threat of substitute
products, threat of new entrants = overall industry attractiveness
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Strategic Alternatives (1)
Five fundamental questions for managers:
what products will the company sell?
where and how will it make or deliver them?
where and how will it sell them?
where and how will it acquire the necessary resources?
how will it outperform its competitors?
These are similar to the basic questions for a domestic
strategy, but the resolution of all of them is more
complex in the international environment
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Strategic alternatives (2)
There are four sources of competitive advantage that are
not available to domestic businesses:
global efficiencies, through expanding the market by
selling products in more countries
location economies by placing value-adding activities at the
most effective and efficient location anywhere
cost economies from the experience effect based on the
global market
worldwide learning, earning a greater return by
leveraging valuable skills from all markets
In practice, it is difficult to exploit all of these advantages
at the same time
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Global Efficiencies -
Expanding the market
A firm can increase its growth rate by taking goods or
services developed at home and selling them
internationally:
returns from such a strategy will be greater if host-nation
competitors do not have comparable products
(differentiation strategy)
Thus expand market by selling more of the same items
Success of multinational firms also rest upon the core
competencies that underlie the development,
production, and marketing of goods or services
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Location economies
When firms base each value creation activity at that
location where value is maximised or where the costs of
value creation are minimised they realise location
economies
By achieving location economies, firms can:
lower the costs of value creation and achieve a low cost
position
differentiate their product offering
This can create a global web of value creation activities
Transport and tariff costs complicate this, as do a number
of political and social factors


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Cost Economies
Experience Curves
The experience curve is the systematic reduction in
production costs that occurs over the life of a product
Learning effects are cost savings that come from
learning by doing many times
Economies of scale refer to the reductions in unit cost
achieved by producing a larger volume of a product
spreading fixed costs over a large volume
utilising production facilities more intensively
increasing bargaining power with suppliers
All these save money for the MNE
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The Experience Curve
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Worldwide Learning -
leveraging subsidiary skills
Leveraging the skills created within subsidiaries and
applying them to other operations may create value
Presents some challenges for managers:
Managers need to recognise that valuable skills can arise
anywhere within the firms global network not just in
head office
Incentive system needs to encourage employees to acquire
new skills
Needs a process for identifying when valuable new skills
have been created in a subsidiary
Need to act as facilitators, helping to transfer valuable skills
within the firm
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Cost and
local responsiveness
Firms that compete in
the global marketplace
typically face two types
of competitive pressure:
pressures for cost
reductions
pressures to be
locally responsive
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Hill, Fig. 13.6
Pressures for cost reductions
Pressures for cost reductions are greatest:
in industries producing commodity-type products that fill
universal needs and for which price is important
when competitors are based in low cost locations
where persistent excess capacity exists
where consumers are powerful and face low switching
costs


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Pressures
for local responsiveness
Pressures for local responsiveness arise from:
differences in consumer tastes and preferences
differences in traditional practices and
infrastructure
differences in distribution channels a firm's
marketing strategies needs to be responsive to
differences in distribution channels between countries
host government demands economic and political
demands imposed by host country governments may
force a degree of local responsiveness
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Choosing a strategy
There are four basic strategies to compete in the
international environment:
Global strategy, treats whole world as a single market
Multidomestic strategy, with national subsidiaries being
reasonably independent
International strategy, which repeats domestic strategy
worldwide
Transnational strategy, combines global scale with local
responsiveness
The appropriateness of each strategy usually depends on
the pressures for cost reduction and local
responsiveness in the industry
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Four basic strategies

Hill, Fig. 13.7
Global standardisation
strategy (Global)
The global standardisation strategy focuses on
increasing profitability and profit growth by reaping the
cost reductions that come from economies of scale,
learning effects, and location economies
The strategic goal is to pursue a low-cost strategy on a
global scale by having a standard product worldwide
The global standardisation strategy makes sense when:
there are strong pressures for cost reductions
demands for local responsiveness are minimal
examples include General Motors, BP, Coca-Cola

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Localisation strategy
(Multidomestic strategy)
The localisation strategy focuses on increasing
profitability by customising the firms goods or
services so that they provide a good match to tastes and
preferences in different national markets
The localisation strategy makes sense when:
there are differences in consumer tastes and preferences
cost pressures are not too intense
examples include McDonalds, Ikea
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Transnational strategy
The transnational strategy tries to simultaneously:
achieve low costs through location economies, economies of
scale, and learning effects
differentiate the product offering across geographic markets
to account for local differences
foster a multidirectional flow of skills between different
subsidiaries in the firms global network of operations
The transnational strategy makes sense when:
cost pressures are intense
pressures for local responsiveness are strong
examples include Philips, Caterpillar
This strategy is very hard to implement
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International strategy
(Home replication)
The international strategy involves taking products
first produced for the domestic market and then selling
them internationally with only minimal local customisation
The international strategy makes sense when:
there are low cost pressures
low pressures for local responsiveness
examples include Mercedes Benz, Toys R Us
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The evolution of strategy
An international strategy may not be viable in the
long term
To survive, firms may need to shift to a global
standardisation strategy or a transnational
strategy in advance of competitors
Similarly, localisation may give a firm a competitive
edge, but if the firm is simultaneously facing
aggressive competitors, it will also have to reduce its
cost structures, and the only way to do that may be
to shift toward a transnational strategy

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Changes in strategy over time
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Hill, Fig. 13.8 MPM 735 T1 2014
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Developing
International Strategies
Two stages to developing an international strategy:
strategy formulation (next slide)
strategy implementation
Strategy Implementation is the task of putting into
standard operation throughout the business:
the tactical goals and plans for achieving the strategic
goals (more later)
the strategic control framework
Implementation is often difficult as lots of detailed work is
needed, and often overlooked because of the pressure of
immediate tasks and deadlines
More about control frameworks in later Topics

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Strategy formulation
Six steps in Strategy Formulation
Statement of values, purposes and directions
(mission statement)
Environmental scanning, or systematic analysis of
internal, external, domestic and international
environments, leading to a
SWOT (Strengths, Weaknesses, Opportunities, Threats)
analysis
Strategic goals or objectives to exploit strengths and
opportunities and to minimise threats and weaknesses
Tactical goals and plans to link strategic goals to daily
activities
Strategic control framework of systems and
procedures

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SWOT analysis
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Strengths: internal features that give the firm an
advantage over competitors in a given market
Weaknesses: internal features that put the firm at a
disadvantage with other firms in that market
Opportunities: environmental features that could be
used to advantage
Threats: environmental features that could harm the
firm or its profitability
Use SWOT to plan market entry and other strategies,
using strengths and opportunities and minimising
weaknesses and threats
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Components
of an international strategy
Four basic components of a strategy:
Distinctive competence: what a firm does particularly
well compared with competitors, giving a sustainable
competitive advantage in one or all markets
Scope of operations, in geographic, market or product
terms
Resource deployment, also in geographic, market or
product terms
Synergy, between different elements of a business,
perhaps involving economies of scope or scale, technology,
learning
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Developing international strategy
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Analysing and entering foreign
markets Introduction
Firms expanding internationally must consider three
fundamental questions:
which markets to enter
when to enter them and on what scale
which entry mode to use
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Which foreign markets?
Location-specific attributes of particular markets:
The choice of foreign markets will depend on their long-term
profit potential
Most companies would regard favourable markets as
politically stable, developed and developing nations
with free market systems and relatively low inflation rates and
private sector debt
Less desirable markets are politically unstable, developing
nations with mixed or command economies, or developing
nations with excessive levels of debt
More attractive when the product in question is not widely
available and satisfies an unmet need

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Foreign market analysis
Foreign market analysis is a three stage process:
assess alternative markets
evaluate costs, benefits and risks
select those that hold most potential, or possibly reject all
as not having large enough chances of success
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Assess alternative markets
For each potential new market, assess:
Current and potential size, involving many factors both now
and projected some years into the future, such as GDP per
capita, infra-structure, potential for firms products
Levels of competition, now and future
Legal, political, social, economic and financial environment,
including political stability, host countrys policies and likely
changes, in particular relating to ownership and taxation
Technology, level within the country, access, protection
Financial institutions, general sophistication, availability of
capital
Workforce, levels of education and training, knowledge of
relevant technologies, adaptability
Socio-cultural influences on business operations


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Evaluate
costs, benefits and risks
Costs are the direct costs of foreign market entry, or
opportunity costs as entrance to one market may prevent
entrance to another, potentially more profitable, market
because of limited resources
Benefits include increased sales, higher profits, lower
acquisition or manufacturing costs, or access to better
technology or more opportunities
Risks include normal commercial risks, added complexity,
exchange rate risk, political risks and cultural risk
Many of the costs, benefits and risks can be very hard to
quantify

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Timing of Entry (1)
Once attractive markets are identified, the firm must
consider the timing of entry
Early entry - when the firm enters a foreign market
before any (or many) other foreign firms first mover
Late entry - when the firm enters the market after other
foreign firms have established themselves in the market
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Timing of Entry (2)
First mover advantages include
pre-empting rivals and establishing a strong brand name
build up sales volume and ride down the experience curve and
gain a cost advantage over later entrants
create switching costs by tying customers into products or
services making it difficult for later entrants to win business
First mover disadvantages include
pioneering costs or the time, effort and expense needed to
learn the new rules (particularly if new system is very different
from home market)
the costs of promoting and establishing a product offering,
including the cost of educating customers
the costs of business failure if the firm, due to its ignorance of
the foreign environment, makes some major mistakes

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Strategic commitments
Decide on the scale of market entry
Firms that enter a market on a significant scale make a
strategic commitment to the market (the decision has
a long term impact and is difficult to reverse)
Small-scale entry has the advantage of allowing a firm to
learn about a foreign market while simultaneously
limiting the firms exposure to that market
There are no right decisions when deciding which
markets to enter, and the timing, scale and mode of
entry; just decisions that are associated with different
levels of risk and reward
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Scale of entry
Large scale entry:
Commitment of significant resources
Easier to attract customers (will remain in market)
May cause rivals to rethink market entry
Fewer resources to commit elsewhere
May lead to indigenous competitive response
Small scale entry:
Time to learn about the market
Limits company exposure
May be difficult to build market share
Difficult to capture first-mover advantages
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Entry modes
Several factors affect the choice of entry mode including:
transport costs, trade barriers
political risks, economic risks
costs, firm strategy
The optimal mode varies by situationwhat makes sense for
one firm might not make sense for another
Without ownership (ie, no FDI):
Exporting, Licensing, Franchising
Contract manufacturing, Management contract, Turnkey project
With ownership (ie, with FDI):
Greenfields, Acquisition
Merger, Joint Venture

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Exporting (1)
Exporting - sending goods or services from one country
to another - is often the first step in international
expansion
Later, many firms switch modes to serve the foreign market
Exporting is attractive because it:
avoids the capital costs of establishing local production
helps the firm gradually achieve experience curve and
location economies
is usually easy and low cost to withdraw if unsuccessful
Exporting is unattractive because:
there may be lower-cost locations for production
transport costs and tariffs can make it uneconomical
foreign agents may not act in exporters best interest
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Exporting (2)
Several forms of exporting including:
Indirect exporting sales to another party such as a trading
company or an export management company who exports them
Direct exporting sales to a customer outside home country
Intracorporate transfers - sales to affiliated companies in other
countries (eg, sourcing components of motor car)
Critical factors to consider when using export as entry
mode include:
Government policies, in both home and host countries
Market issues
Logistics issues
Distribution issues

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International licensing (1)
Licensor sells or leases the right to use intellectual
property technology, work methods, patents,
copyrights, brand names or trademarks to another firm
called licensee through a licensing contract
Basic issues
set clear boundaries for the contract
be very clear about all forms of compensation
agree on all rights, privileges and constraints
specify a procedure for resolving any disputes
specify the duration of the agreement
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International licensing (2)
Advantages
lower financial risk for both licensor and licensee
licensor learns more about business without significant
investment
licensee avoids R & D costs
licensee acquires established products
Disadvantages
limitation on marketing opportunities for both parties
high likelihood of problems and misunderstandings
long-term strategic implications of creating potential
competitors


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Franchising
Franchising is a form of licensing in which the franchisor
sells, under strict rules, to the franchisee the right to
operate a business using the name of the franchisor
Advantages
international expansion at low cost
access to local information
established business with proven product
Disadvantages
profits are shared
agreements and operating systems are more difficult once
franchisor goes international
maintenance of quality and reputation more difficult
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Specialised entry modes
Contract manufacturing
outsource most or all production to other companies, to
concentrate on aspects of value chain that earn best profits
Management contract
one firm provides managerial assistance, technical
expertise, specialised services to a second for an agreed
time and fee
Turnkey project
a firm contracts to fully design, construct and equip a
facility and then turn over to purchaser
large construction contracts, particularly for developing
nations
Variations include BOOT projects (Build, Own, Operate,
Transfer)


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Entry modes with FDI
All forms of FDI rely on the investment and operations in
home country as a base for international expansion
Advantages: subsidiaries are generally more effective
and successful than licensees, franchisees, or agents, and
you get a bigger share of profits
Disadvantages: greater commercial and economic risk,
more complexity and greater political risk
Four major methods: greenfields, acquisition, merger,
joint venture
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FDI:
wholly owned subsidiaries
In a wholly owned subsidiary:
home-country firm owns 100% of the host-country firm
the subsidiary is 100% internalised into the firm
A wholly owned subsidiary is established by greenfield
or acquisition
Wholly owned subsidiaries are attractive because they:
give a firm tight control over operations
may be needed to get location and experience curve
economies
Wholly owned subsidiaries are unattractive because:
firm bears full cost and risk of overseas operations
they may be prohibited by host country laws
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FDI:
greenfields
Greenfield strategy is to start a completely new
operation
Advantages
allows firm to choose location
no inherited corporate culture
easier to become an insider in the host company culture
acclimatise to the local culture at its own pace
Disadvantages
takes time to implement
expensive and higher risk than some strategies
may be hard to comply with local laws and standards
workforce may need extensive training
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FDI:
acquisitions
Acquisition strategy is to buy an existing operation in
the host country
Advantages
allows purchaser to obtain quick control and market
presence through the acquired firms existing position,
factory, employees, brandnames and distribution networks
Disadvantages
burden of assuming cultural, financial, managerial and other
liabilities of the acquired firm cultures may clash
consumer resentment at foreign takeover
poor pre-purchase screening may result in too high a price
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FDI:
greenfield or acquisition?
The choice between a greenfield investment and an
acquisition depends on the situation confronting the firm
Acquisition may be better when the market already has
well-established competitors or when global competitors
are interested in building a market presence
Greenfield venture may be better when the firm needs to
transfer strong organisationally-embedded competencies,
skills, routines and culture
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FDI:
mergers
Merger strategy is to combine with one or more other
businesses to create one new business, with parent firms
ceasing to exist
Advantages
pool resources including knowledge of different markets
more to invest in technology and R & D
economies of scale
better defences against competitors often attractive in
highly competitive industries
Disadvantages
all existing liabilities have to be accepted
different company cultures may be hard to merge
often very hard to gain all the expected benefits
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FDI:
joint ventures
A joint venture is a new firm jointly owned by two or
more independent firms, usually one local and one foreign
Many joint ventures are 50:50 partnerships
Joint ventures are attractive because:
local partners knowledge lowers risks of market entry
the costs and risks of opening a new market are shared
politics may make it the only feasible entry mode
Joint ventures are unattractive because:
the firm risks giving control of its technology to its partner
the firm may not have enough control over subsidiaries
shared ownership can lead to conflicts and battles
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Core
competencies and entry mode
Best entry mode depends in part on the firms core
competencies
If these are proprietary technology, avoid licensing and
joint ventures
If these are management skills, less risk of losing
control, so greater use of brand names licensing,
franchising
When pressure for cost reductions is high, firms are more
likely to pursue some combination of exporting and
wholly owned subsidiaries
Firms pursuing global standardisation or transnational
strategies prefer wholly owned subsidiaries

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Strategic alliances
Strategic alliances are co-operative agreements
between firms (who may be potential or actual
competitors) to work closely together for mutual benefit
Strategic alliances range from formal joint ventures to
short-term contractual agreements
Number of strategic alliances has increased
Useful form for smaller, resources-constrained firms and
for R&D
Common for, but not limited to, small firms
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