Entry Strategy Chapter 12. 14 - 2 McGraw-Hill/Irwin International Business, 6/e & 7e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights.

Entry Strategy

Chapter 12

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Key issues of entry strategy

• Any firm contemplating foreign expansion must struggle with several decisions

- Which foreign market(s) to enter• choose based on long-run profit potential

- Market size- Growth rate- Political stability - Competition

- When - On what scale- Which mode of entry

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When to enter?

• Advantages associated with entering early are “first-mover advantages”

- Ability to preempt rivals, establishing a strong brand name quickly

- Ability to build sales volume- Ability of early entrants to create switching costs

• Disadvantages are “first-mover disadvantages” - Pioneering costs - costs only an early entrant has to bear- Possibility that regulations may change

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Scale of Entry

• Large scale entry - Strategic Commitments - decisions that have long-term

impact and are difficult to reverse• Local distributors, partners will take you seriously

- May cause rivals to rethink market entry- But may lead local firms to attack aggressively

• Small scale entry- Time to learn about market- Reduces exposure risk- But fast-moving competitor may beat you

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Entry Modes

• Firms can use six different methods to enter a market- Exporting- Wholly Owned Subsidiaries (the most common kind of

foreign direct investment)

- Licensing- Franchising- Joint Ventures- Turnkey Projects

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Wholly Owned Subsidiary (i.e., Foreign Direct Investment)

• Advantages:- No risk of losing technical competence to a competitor- Tight control of operations- Realize learning curve and location economies

• Disadvantage:- Very expensive - Bear full cost and risk

• Subsidiaries could be greenfield investments or acquisitions

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Exporting

• Advantages:- Avoids cost of establishing manufacturing operations- May help achieve experience curve and location

economies• Disadvantages:

- Possible high transportation costs- Tariff barriers- Possible lack of control over marketing reps

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Licensing and franchising

• Licensing- Reduces development costs and risks- Works in unfamiliar or politically

volatile market- Overcomes investment barriers- Others can develop business applications of your know-how

• Franchising- Reduces costs and risk- May prohibit movement of profits from

one country to support operations in another- Quality control

Agreement wherelicensor grants rights to

intangible property to another entity for a specified period

of time in returnfor royalties.

Franchiser sellsintagible property

and 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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Turnkey projects

• 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

Contractor agreesto handle everydetail of projectfor foreign client

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Core Competencies and Entry Mode

• Technological Know-How- Avoid licensing and joint-

venture arrangements - Probably use a wholly

owned subsidiary• Exception: If the

technological advantage is only transitory

• Management Know-How- The firm’s valuable assets

include a brand name- Either franchising or

wholly owned subsidiaries may work well

- Often times a joint venture is politically more acceptable

If what you are good at is…