International strategy 1

International Strategy

Entry Modes

Pressures for Global Integration and National Differentiation

see C. Bartlett (1986)

GlobalOrganization

MultinationalOrganization

Forces for Global

Integration

Forces for National

Differentiation

Lo

Lo

High

High

TransnationalOrganization

InternationalOrganization

Advantages and Disadvantages

Strategy Advantages DisadvantagesInternational transfer distinct competencies lack local

responsiveness lack location economies can’t exploit exp. curve

Multi-domestic customize offerings & lack location ecy’s(multi-national) marketing can’t exploit exp. curve

cant’ transfer distinct competencies

Global exploit experience curve lack local responsiveness exploit location economies

Transnational exploit exp. Curve & location implementation- org’nl

economies, customize, global problems learning benefits

Basic Entry Decisions

Which markets to enter?When to enter the markets?What scale of entry?

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Which Foreign Markets?

Favorable benefit-cost-risk-trade-off:Politically stable developed and developing nations.Free market systemsNo dramatic upsurge in inflation or private-sector debt.

UnfavorablePolitically 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.

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

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Scale of Entry

Large scale entryStrategic 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.

Small scale entry:Time to learn about market.Reduces exposure risk.

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Entry Modes

ExportingTurnkey ProjectsLicensingFranchisingJoint VenturesWholly 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.

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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.

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Licensing

Advantages:Reduces costs and risks of establishing enterprise.Overcomes restrictive investment barriers.Others can develop business applications of intangible property.

Disadvantages:Lack of control.Cross-border licensing may be difficult.Creating a competitor

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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.

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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 economiesShared ownership can lead to conflict.

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Wholly Owned Subsidiary

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 andexperience curve economies

High transport costsTrade barriersProblems with local marketing agents

Turnkeycontracts

Ability to earn returns fromprocess technology skills incountries where FDI isrestricted

Creating efficient competitorsLack of long-term market presence

Licensing Low development costs andrisks

Lack of control over technologyInability to realize location and

experience curve economiesInability to engage in global strategic coordination

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Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Disadvantage

FranchisingLow development costs andrisks

Lack of control over qualityInability to engage in global strategic

coordination

Jointventures

Access to local partner’sknowledge

Sharing development costs and risks

Politically acceptable

Lack of control over technologyInability to engage in global strategic

coordinationInability to realize location andexperience economies

Whollyownedsubsidiaries

Protection of technologyAbility to engage in global

strategic coordinationAbility to realize location andexperience economies

High costs and risks

Table 14.1b14-15

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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Entry Mode and Competitive Advantage

Advantage Based on Technological Know-How

Exporting, Licensing, or Wholly-owned subsidiariesExamples: Honda, Intel

Advantage Based on Management Know-How

Franchising, Joint Ventures, or subsidiariesExamples: McDonalds, Marriott

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.

Disadvantage:Competitors get low cost route to technology and markets.

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Alliances Are Popular

High cost of technology developmentCompany may not have skill, money or people to go it aloneGood way to learnGood way to secure access to foreign marketsHost country may require some local ownership 14-18

Global Alliances, however, are different

Companies join to attain world leadershipEach partner has significant strength to bring to the allianceA true global visionRelationship is horizontal not verticalWhen 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 partnerCollect data from informed third parties

former partnersinvestment bankersformer employees

Get to know the potential partner before committing

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Structuring the Alliance to Reduce Opportunism

Opportunism by partnerreduced by:

Seeking crediblecommitments

Agreeing to swapvaluable skills

and technologies

Establishingcontractual safeguards

Walling offcritical technology

Figure 14.1

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Characteristics of a Global Alliance

Players are independent prior to the creating of the alliancePlayers share

benefits of the alliancecontrol over operations

Players continue to contributetechnologyproducts

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Characteristics of a Strategic Alliance

Independence ofParticipants

SharedBenefits

Ongoing Contributions

MarketsCooperation

Benefits

Control Products

Technology

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Problems with Strategic Alliances

Have to give up some authority/controlCould be strengthening a future competitor

Technology transferManagement practicesOperating procedures

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