CHAPTER 14

Entry Strategy and Strategic

Alliances
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Learning Objectives
 Which foreign markets to enter?
 Early or Late Entry?
 Large scale or small scale entry?

 Evaluation the modes of entry

 Exporting
 Licensing
 Turnkey Projects
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Learning Objectives
 Evaluation the modes of entry
 Franchising
 Joint Ventures
 Wholly Owned Subsidiary

 Application to selected products

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Chapter Focus
 Examine:
 The decision on which foreign markets to
enter, when to enter them, and on what
scale.
 The choice of entry mode.
 The role of strategic alliances.

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Which Foreign Markets

Favorable benefit-cost-risk trade-off

No dramatic upsurge
Politically stable nations. in inflation or
private sector debt.

Free market systems

Politically unstable
developing nations.

Speculative financial
Mixed or command
bubbles have led to
economies.
excess borrowing.
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Timing of Entry
 First-mover advantage.
 Preempt rivals and capture demand.
 Build sales volume.
 Move down experience curve before rivals and
achieve cost advantage.
 Create switching costs. Costs early entrant
bears that later
 Disadvantages: entrant can avoid.

 First mover disadvantage - pioneering costs.

 Changes in government policy.
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Scale of Entry and Strategic

Commitments
 Strategic Commitments - a decision that has a long-
term impact and is difficult to reverse.
 Large scale entry:
Plus
 Commitment of significant resources.
 Easier to attract customers (will remain in market).
 May cause rivals to rethink market entry.
Minus

 Fewer resources to commit elsewhere.

 May lead to indigenous competitive response.
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Scale of Entry and Strategic

Commitments
 Small Scale Entry:
Plus

 Time to learn about the market.

 Limits company exposure.
Minus

 May be difficult to build market share.

 Difficult to capture first-mover advantages.

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Entry Modes

Joint
Exporting Ventures
Licensing

Turnkey
Projects
Wholly Owned
Subsidiaries
Franchising

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Exporting
 Advantages:
 Avoids cost of establishing manufacturing
operations.
 May help achieve experience curve and location
economies.
 Disadvantages:
 May compete with low-cost location manufacturers.
 Possible high transportation costs.
 Tariff barriers.
 Possible lack of control over marketing reps.

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Contractor agrees
to handle every
Turnkey Projects detail of project
for foreign client.

 Advantages:
 Can earn a return on knowledge asset.
 Less risky than conventional FDI.
 Disadvantages:
 No long-term interest in the foreign country.
 May create a competitor.
 Selling process technology may be selling
competitive advantage as well.
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Agreement where
licensor grants rights to
intangible property to another
Licensing entity for a specified period
of time in return
for royalties.
 Advantages:
 Reduces development costs and risks of establishing foreign

enterprise.
 Lack capital for venture.

 Unfamiliar or politically volatile market.

 Overcomes restrictive investment barriers.

 Others can develop business applications of intangible

property.
 Disadvantages: Risk Reduction
 Lack of control.
 Cross-licensing
 Cross-border licensing may be difficult. Joint venture
 Creating a competitor.

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Franchiser sells
intangible property
and insists on rules
Franchising
for operating business.

 Advantages:
 Reduces costs and risk of establishing
enterprise.
 Disadvantages:
 May prohibit movement of profits from
one country to support operations in
another country.
 Quality control.
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Joint Ventures
 Advantages:
 Benefit from local partner’s knowledge.

 Shared costs/risks with partner.

 Reduced political risk.

 Disadvantages:
 Risk giving control of technology to partner.

 May not realize experience curve or location

economies.
 Shared ownership can lead to conflict.

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Wholly Owned Subsidiary

Greenfield
Acquisition
 Advantages:
 No risk of losing technical competence to a

competitor.
 Tight control of operations.

 Realize learning curve and location economies.

 Disadvantage:
 Bear full cost and risk.

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Advantages and Disadvantages of

Entry Modes

Entry Mode Advantage Disadvantage

Exporting Ability to realize location and
experience curve economies
Turnkey Ability to earn returns from
contracts process technology skills in
countries where FDI is
restricted
High transport costs
Trade barriers
Problems with local marketing
agents
Creating efficient competitors
Lack of long-term market
presence

Licensing Low development costs and Lack of control over technology

risks Inability to realize location and
experience curve economies
Inability to engage in
global strategic
coordination
Table 14.1a
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Advantages and Disadvantages of

Entry Modes
Entry Mode Advantage Disadvantage
Franchising Low development costs Lack of control over quality
and risks Inability to engage in global strategic
coordination

Joint Access to local partner’s Lack of control over technology

ventures knowledge Inability to engage in global strategic
Sharing development costs coordination
and risks Inability to realize location and
Politically acceptable experience economies

Wholly Protection of technology High costs and risks

owned Ability to engage in global
subsidiaries strategic coordination
Ability to realize location and
Table 14.1b
experience economies
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Selecting an Entry Mode

Technological Know-How Wholly owned subsidiary, except:
1. Venture is structured to reduce
risk of loss of technology.
2. Technology advantage is
transitory.
Then licensing or joint venture OK.

Management Know-How Franchising, subsidiaries

(wholly owned or joint
venture).

Pressure for Cost Combination of exporting and

Reduction wholly owned subsidiary.
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