Chap014

Chapter

Entry Strategy and Strategic Alliances

14

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Case: Diebold

Began to sell ATM machines in foreign markets in 1980’s

1980’s Distribution agreement with Philips 1990 Diebold establishes joint venture with IBM 1997 foreign sales 20% of Diebold’s total

revenues Diebold decides to go it alone with local

manufacturing presence for local customization Through acquisitions joint ventures

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Basic foreign expansion entry decisions

A firm contemplating foreign expansion must make three decisions

Which markets to enter When to enter these markets What is the scale of entry

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Which foreign markets

Favorable Politically stable developed and developing

nations Free market systems No dramatic upsurge in inflation or private-

sector debt Unfavorable

Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing

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Timing of entry

Advantages in early market entry: First-mover advantage. Build sales volume. Move down experience curve and achieve cost

advantage. Create switching costs.

Tie customers to your product.

Disadvantages: First mover disadvantage - pioneering costs. Changes in government policy.

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Scale of entry

Large scale entry Strategic Commitments - a decision that has a long-term

impact and is difficult to reverse. May cause rivals to rethink market entry. May lead to indigenous competitive response

Jollibee Example

? Good or Bad? . Small scale entry:

Time to learn about market. Reduces exposure risk.

Lack of Commitment problems

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Entry modes

Exporting Turnkey Projects Licensing Franchising Joint Ventures Wholly Owned Subsidiaries

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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

Local Agent Problems

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Turnkey projects

Advantages: Can earn a return on knowledge asset

Earn $ on Know How

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

Contractor agreesto handle everydetail of projectfor foreign client

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Licensing: 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.

Agreement wherelicensor grants rights to

intangible property to another entity for a specified period

of time in returnfor royalties.

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Franchising

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

Franchiser sellsintangible propertyand insists on rules

for operating business

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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

Subsidiaries could be Greenfield investments or acquisitions

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

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Selecting an entry mode

Technological Know-How

Management 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

Franchising, subsidiaries (wholly owned or joint venture)

Pressure for Cost Reduction

Combination of exporting and wholly owned subsidiary

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Acquisition and Green-field- pros & cons

Pro: Quick to execute Preempt competitors Possibly less risky

Con:

Disappointing results

Overpay for firm

optimism about value creation (hubris)

Culture clash.

Problems with proposed synergies

Pro: Can build subsidiary it

wants Easy to establish

operating routines Con:

Slow to establish Risky Preemption by

aggressive competitors

Acquisition Greenfield

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Acquisition or Green-field?

Well-established,incumbent firms.

Competitors interested in

entry.

embedded skills,routines, culture.

No competitors

Acquisition

Green-field

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Strategic Alliances

Cooperative agreements between potential or actual competitors.

Advantages: Facilitate entry into market Share fixed costs Bring together skills and assets that neither company has

or can develop Establish industry technology standards

Disadvantages: Competitors get low cost route to technology and

markets

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Alliances are popular

High cost of technology development Company may not have skill, money or

people to go it alone Good way to learn Good way to secure access to foreign markets Host country may require some local

ownership

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Global Alliances, however, are different

Firms join to attain world leadership Each partner has significant strength to bring

to the alliance A true global vision When competing in markets not part of

alliance, they retain their own identity

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Partner selection

Get as much information as possible on the potential partner

Collect data from informed third parties Former partners Investment bankers Former employees

Get to know the potential partner before committing

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Structuring the alliance to reduce opportunism

Fig 14.1

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Characteristics of a strategic alliance

Independence ofParticipants

SharedBenefits

Ongoing Contributions

MarketsCooperation

Benefits

Control Products

Technology

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Managing the alliance

Build trust Relational capital

Learning from partners Diffusion of knowledge