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International business 7e chapter 14

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  • The answer is c.
  • Management Focus: International Expansion at ING Group Summary This feature describes ING Group’s rapid expansion into the United States. ING, the third largest bank in the Netherlands, primarily expands through acquisitions. The company is seeking to be one of the top 10 financial services firms in the world. Discussion of the feature can revolve around the following questions: Suggested Discussion Questions 1. What makes ING’s strategy in its quest to become one of the top 10 financial services firms in the world so successful? What does ING’s entry into the United States market mean for competitors? Discussion Points: Many students will probably suggest that ING’s strategy is so successful because rather than growing its business from the ground up, it acquires existing firms, leaves them largely intact so as to retain the existing employees and customers, but adds in the ING name and products in order to capitalize on a global brand name. For American companies, ING’s presence in the market is significant. In just a few years, the company has gone from having virtually no position in the market, to being one of the country’s top 10 financial services firms. As it continues to build its name, American competitors and foreign companies will probably find it more and more difficult to break into the market in a meaningful way. 2. How did ING approach the United States? How did the company signal its commitment to the market? What effect will this commitment have for ING? Discussion Points: ING followed the same strategy in the United States that had proved to be successful in other countries. The company identified companies that it could acquire, left the companies’ management and products in place, and then, added in ING products and names. Because the United States is the world’s largest financial market, ING recognized that to be a key player, it would need a significant market presence. To become one of the 10 largest companies in the industry, the company embarked on a series of acquisitions beginning with the Equitable Life Insurance Company of Iowa in 1997. Another Perspective: Explore ING’s international operations by going to the company’s homepage at { http://www.ing.com }, clicking on “Personal Finance” and then on the country of your choice.
  • 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 Small scale entry Time to learn about market Reduces exposure risk
  • Management Focus: The Jollibee Phenomenon—A Philippine Multinational Summary This feature describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but also managed to find the weaknesses in the larger company’s global strategy and capitalize on them. Jollibee, unlike McDonald’s, tailored its menu to the local market. The company was able to build on this localization strategy as it expanded into neighboring Asian countries and the Middle East. Today, Jollibee has even managed to find success in the United States where it is being hailed as a strong niche player. Suggested Discussion Questions 1. How would Christopher Bartlett and Sumantra Ghoshal view Jollibee’s performance to date? Discussion Points: Many students will probably suggest that Bartlett and Ghoshal would have a positive view of Jollibee’s performance so far. Jollibee has managed to survive McDonald’s push into the Philippines, learn from the company, and even capitalize on gaps in McDonald’s strategy of having an essentially standardized marketing approach. Now, Jollibee has successfully entered McDonald’s home market, and become a niche player in the fast food industry. 2. A key difference between McDonald’s global strategy and that of Jollibee is that McDonald’s sees its path to success as offering a fairly standardized menu everywhere whereas Jollibee views localization as its ticket to success. In your opinion, would Jollibee have achieved its current position in the market if the company had standardized its menu like McDonald’s? Discussion Points: Most students will probably argue that Jollibee’s competitive advantage is that it offers fast food tailored to local tastes, and that if the company pursued a standardized approach it would have failed. Students might note that McDonald’s global success with this strategy is due in part to the fact that it is a symbol of America, and as such offers an American experience in other markets. Because Jollibee does not have this type of global reputation, it must look for alternative ways to compete. Another Perspective: It is worth visiting Jollibee’s web page to see the American influence on the company. Go to { http://www.jollibee.com.ph/ } and click on “International” to explore some of the company’s foreign locations.
  • The answer is d.
  • The answer is b.
  • The answer is d.
  • The answer is b.
  • Management Focus: Cisco and Fujitsu Summary This feature examines Cisco Systems’ joint venture with Fujitsu. Cisco, the world’s largest manufacturer of Internet routers, entered the alliance in 2004 in an effort to jointly develop the next generation of high end routers for sales in Japan. Cisco believes that the Japanese market will be important, and wants to expand its presence there. Fujitsu wanted the routers so that it can offer end-to-end communications solutions to its customers. Discussion of the feature can begin with the following questions. Suggested Discussion Questions 1. What did Cisco hope to gain by forming an alliance with Fujitsu? What risks are involved for Cisco with this alliance? How can Cisco limit those risks? Discussion Points: Cisco hoped to achieve several goals through its alliance with Fujitsu. The company hoped that by sharing R&D, new product development would be quicker, that combining its technology expertise with Fujitsu’s production expertise would result in more reliable products, that it would gain a bigger sales presence in Japan, and that by bundling its routers together with Fujitsu’s telecommunications equipment, the alliance could offer end-to-end communications solutions to customers. Students will probably suggest that the biggest risk for Cisco is that by sharing its proprietary technology with Fujitsu, it could potentially create a competitor. To avoid this, Cisco will need to take steps to protect its technology by making sure that safeguards are written into alliance agreements, and ensure that it is getting an equitable gain from the agreement. 2. What did Fujitsu bring to the alliance? Why was it important for Cisco to have a Japanese presence? What were the advantages of the alliance for Fujitsu? Discussion Points: One of the key attractions of an alliance with Fujitsu’s was the company’s strong presence in the Japanese market. Japan is at the forefront of second generation high speed Internet based telecommunications networks, and Cisco wanted to be a part of that market. For Fujitsu, the alliance meant that it could fill the gap in its product line for routers, reduce product development costs and time, and produce more reliable products. 3. What does the alliance between Cisco and Fujitsu mean to other competitors in the router market? Discussion Points: For other competitors in the market, the alliance between Cisco and Fujitsu is significant. Together, the companies can offer one-stop shopping end-to-end communications solutions. Furthermore, because the two companies are pooling their resources, development costs are lower, which will put additional pressure on competitors. Another Perspective: To find out more about Cisco and Fujitsu, students can visit the company web sites at { http://www.cisco.com/ } and { http://www.fujitsu.com/global/ }. In addition, a new release about the Cisco- Fujitsu alliance is available at { http://newsroom.cisco.com/dlls/2004/prod_120604c.html }.
  • The answer is a.
  • Transcript

    • 1. InternationalBusiness 7eby Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    • 2. Chapter 14Entry Strategy andStrategic Alliances
    • 3. 14-3IntroductionFirms expanding internationally must decide:which markets to enterwhen to enter them and on what scalewhich entry mode to useEntry modes include:exportinglicensing or franchising to a company in the host nationestablishing a joint venture with a local companyestablishing a new wholly owned subsidiaryacquiring an established enterprise
    • 4. 14-4IntroductionSeveral factors affect the choice of entry mode including:transport coststrade barrierspolitical riskseconomic riskscostsfirm strategyThe optimal mode varies by situation – what makessense for one company might not make sense for another
    • 5. 14-5Basic Entry DecisionsFirms entering foreign markets make three basic decisions:1. which markets to enter2. when to enter those markets3. on what scale to enter those markets
    • 6. 14-6Which Foreign Markets?The choice of foreign markets will depend on their longrun profit potentialFavorable markets are politically stable developed anddeveloping nations with free market systems and relativelylow inflation rates and private sector debtLess desirable markets are politically unstable developingnations with mixed or command economies, or developingnations with excessive levels of borrowingMarkets are also more attractive when the product inquestion is not widely available and satisfies an unmetneed
    • 7. 14-7Timing Of EntryOnce attractive markets are identified, the firm mustconsider the timing of entryEntry is early when the firm enters a foreign marketbefore other foreign firmsEntry is late when the firm enters the market after firmshave already established themselves in the market
    • 8. 14-8Timing Of EntryFirst mover advantages are the advantages associatedwith entering a market earlyFirst mover advantages include:the ability to pre-empt rivals and capture demand byestablishing a strong brand namethe ability to build up sales volume in that country andride down the experience curve ahead of rivals and gain acost advantage over later entrantsthe ability to create switching costs that tie customers intoproducts or services making it difficult for later entrants towin business
    • 9. 14-9Timing Of EntryFirst mover disadvantages are disadvantages associated withentering a foreign market before other international businessesFirst mover disadvantages include:pioneering costs - arise when the foreign business system is sodifferent from that in a firm’s home market that the firm must devoteconsiderable time, effort and expense to learning the rules of the gamePioneering costs include:the costs of business failure if the firm, due to its ignorance of theforeign environment, makes some major mistakes the costs of promoting and establishing a product offering, includingthe cost of educating customers
    • 10. 14-10Classroom Performance System_______ refers to the time and effort spent learning therules of a new market.a) First mover advantagesb) Strategic commitmentsc) Pioneering costsd) Market entry costs
    • 11. 14-11Scale Of Entry And Strategic CommitmentsAfter choosing which market to enter and the timing ofentry, firms need to decide on the scale of market entryEntering a foreign market on a significant scale is a majorstrategic commitment that changes the competitive playingfieldFirms that enter a market on a significant scale make astrategic commitment to the market (the decision has along term impact and is difficult to reverse)Small-scale entry has the advantage of allowing a firm tolearn about a foreign market while simultaneously limitingthe firm’s exposure to that market
    • 12. 14-12SummaryThere are no “right” decisions when deciding whichmarkets to enter, and the timing and scale of entry, justdecisions that are associated with different levels of riskand reward
    • 13. 14-13Entry ModesThese are six different ways to enter a foreign market:1. exporting2. turnkey projects3. licensing4. franchising5. establishing joint ventures with a host country firm6. setting up a new wholly owned subsidiary in the hostcountryManagers need to consider the advantages anddisadvantages of each entry mode
    • 14. 14-14ExportingExporting is a common first step in the internationalexpansion process for many manufacturing firmsLater, many firms switch to another mode to serve theforeign market
    • 15. 14-15ExportingExporting is attractive because:it avoids the costs of establishing local manufacturingoperationsit helps the firm achieve experience curve and locationeconomiesExporting is unattractive because:there may be lower-cost manufacturing locationshigh transport costs and tariffs can make it uneconomicalagents in a foreign country may not act in exporter’s bestinterest
    • 16. 14-16Turnkey ProjectsIn a turnkey project, the contractor agrees to handleevery detail of the project for a foreign client, including thetraining of operating personnelAt completion of the contract, the foreign client is handedthe "key" to a plant that is ready for full operationTurnkey projects are common in the chemical,pharmaceutical, petroleum refining, and metal refiningindustries
    • 17. 14-17Turnkey ProjectsTurnkey projects are attractive because:they are a way of earning economic returns from the know-howrequired to assemble and run a technologically complex processthey can be less risky than conventional FDITurnkey projects are unattractive because:the firm that enters into a turnkey deal will have no long-term interestin the foreign countrythe firm that enters into a turnkey project may create a competitorif the firms process technology is a source of competitive advantage,then selling this technology through a turnkey project is also sellingcompetitive advantage to potential and/or actual competitors
    • 18. 14-18LicensingA licensing agreement is an arrangement whereby alicensor grants the rights to intangible property to anotherentity (the licensee) for a specified time period, and inreturn, the licensor receives a royalty fee from the licenseeIntangible property includes patents, inventions,formulas, processes, designs, copyrights, and trademarks
    • 19. 14-19LicensingLicensing is attractive because:the firm does not have to bear the development costsand risks associated with opening a foreign marketthe firm avoids barriers to investmentfirms with intangible property that might have businessapplications can capitalize on market opportunities withoutdeveloping those applications itself
    • 20. 14-20LicensingLicensing is unattractive because:the firm doesn’t have the tight control over manufacturing, marketing,and strategy required for realizing experience curve and locationeconomiesit limits a firm’s ability to coordinate strategic moves across countriesby using profits earned in one country to support competitive attacks inanotherproprietary (or intangible) assets could be lostOne way of reducing this risk is through the use of cross-licensingagreements where a firm might license intangible property to a foreignpartner, but requests that the foreign partner license some of itsvaluable know-how to the firm in addition to a royalty payment
    • 21. 14-21FranchisingFranchising is basically a specialized form of licensing inwhich the franchisor not only sells intangible property to thefranchisee, but also insists that the franchisee agree toabide by strict rules as to how it does businessFranchising is used primarily by service firms
    • 22. 14-22FranchisingFranchising is attractive because:Firms avoid many costs and risks of opening up a foreignmarketFirms can quickly build a global presenceFranchising is unattractive because:It may inhibit the firms ability to take profits out of onecountry to support competitive attacks in anotherthe geographic distance of the firm from its foreignfranchisees can make poor quality difficult for the franchisorto detect
    • 23. 14-23Joint VenturesA joint venture is the establishment of a firm that is jointlyowned by two or more otherwise independent firmsMost joint ventures are 50:50 partnerships
    • 24. 14-24Joint VenturesJoint ventures are attractive because:they allow the firm to benefit from a local partners knowledge of thehost countrys competitive conditions, culture, language, politicalsystems, and business systemsthe costs and risks of opening a foreign market are shared with thepartnerWhen political considerations make joint ventures the only feasibleentry modeJoint ventures are unattractive because:the firm risks giving control of its technology to its partnerthe firm may not have the tight control over subsidiaries need torealize experience curve or location economiesshared ownership can lead to conflicts and battles for control if goalsand objectives differ or change over time
    • 25. 14-25Wholly Owned SubsidiariesIn a wholly owned subsidiary, the firm owns 100 percentof the stockFirms can establish a wholly owned subsidiary in a foreignmarket: setting up a new operation in the host countryacquiring an established firm in the host country
    • 26. 14-26Wholly Owned SubsidiariesWholly owned subsidiaries are attractive because:they reduce the risk of losing control over corecompetenciesthey give a firm the tight control over operations indifferent countries that is necessary for engaging in globalstrategic coordinationthey may be required in order to realize location andexperience curve economiesWholly owned subsidiaries are unattractive because:the firm bears the full cost and risk of setting up overseasoperations
    • 27. 14-27Classroom Performance SystemHow do most firms begin their international expansion?a) with a joint ventureb) with a wholly owned subsidiaryc) with licensing or franchisingd) with exporting
    • 28. 14-28Classroom Performance SystemWhat is the main disadvantage of wholly ownedsubsidiaries?a) they make it difficult to realize location and experiencecurve economiesb) the firm bears the full cost and risk of setting upoverseas operationsc) they may inhibit the firms ability to take profits out of onecountry to support competitive attacks in anotherd) high transport costs and tariffs can make ituneconomical
    • 29. 14-29Selecting An Entry ModeAll entry modes have advantages and disadvantagesThe optimal choice of entry mode involves trade-offs
    • 30. 14-30Selecting An Entry ModeTable 14.1:
    • 31. 14-31Core Competencies And Entry ModeThe optimal entry mode depends to some degree on thenature of a firm’s core competenciesWhen a firm’s competitive advantage is based onproprietary technological know-how, the firm should avoidlicensing and joint venture arrangements unless it believesits technological advantage is only transitory, or that it canestablish its technology as the dominant design in theindustryWhen a firm’s competitive advantage is based onmanagement know-how, the risk of losing control over themanagement skills is not high, and the benefits from gettinggreater use of brand names is significant
    • 32. 14-32Pressures For CostReductions And Entry ModeWhen pressure for cost reductions is high, firms are morelikely to pursue some combination of exporting and whollyowned subsidiariesThis will allow the firm to achieve location and scaleeconomies as well as retain some degree of control over itsworldwide product manufacturing and distributionSo, firms pursuing global standardization or transnationalstrategies prefer wholly owned subsidiaries
    • 33. 14-33Classroom Performance SystemIf a firm wants the option of global strategic coordination,the firm should choosea) franchisingb) joint venturesc) licensingd) a wholly owned subsidiary
    • 34. 14-34Greenfield Ventures Or AcquisitionsFirms can establish a wholly owned subsidiary in a countryby:Using a greenfield strategy - building a subsidiary fromthe ground upUsing an acquisition strategy
    • 35. 14-35Pros And Cons Of AcquisitionAcquisitions are attractive because:they are quick to executethey enable firms to preempt their competitorsacquisitions may be less risky than greenfield ventures
    • 36. 14-36Pros And Cons Of AcquisitionAcquisitions can fail when:the acquiring firm overpays for the acquired firmthe cultures of the acquiring and acquired firm clashattempts to realize synergies run into roadblocks andtake much longer than forecastthere is inadequate pre-acquisition screeningTo avoid these problems, firms should:carefully screening the firm to be acquiredmove rapidly once the firm is acquired to implement anintegration plan
    • 37. 14-37Pros And Cons Of Greenfield VenturesThe main advantage of a greenfield venture is that itgives the firm a greater ability to build the kind of subsidiarycompany that it wantsHowever, greenfield ventures are slower to establishGreenfield ventures are also risky
    • 38. 14-38Greenfield Or Acquisition?The choice between a greenfield investment and anacquisition depends on the situation confronting the firmAcquisition may be better when the market already haswell-established competitors or when global competitorsare interested in building a market presenceA greenfield venture may be better when the firm needsto transfer organizationally embedded competencies, skills,routines, and culture
    • 39. 14-39Classroom Performance SystemAll of the following are advantages of acquisitions excepta) they are quicker to executeb) it is easy to realize synergies by integrating theoperations of the acquired entitiesc) they enable firms to preempt their competitorsd) they may be less risky
    • 40. 14-40Strategic AlliancesStrategic alliances refer to cooperative agreementsbetween potential or actual competitorsStrategic alliances range from formal joint ventures toshort-term contractual agreementsThe number of strategic alliances has exploded in recentdecades
    • 41. 14-41The Advantages Of Strategic AlliancesStrategic alliances:facilitate entry into a foreign marketallow firms to share the fixed costs (and associated risks)of developing new products or processesbring together complementary skills and assets thatneither partner could easily develop on its owncan help a firm establish technological standards for theindustry that will benefit the firm
    • 42. 14-42The Disadvantages Of Strategic AlliancesStrategic alliances can give competitors low-cost routesto new technology and markets, but unless a firm is careful,it can give away more than it receives
    • 43. 14-43Making Alliances WorkThe success of an alliance is a function of:partner selectionalliance structurethe manner in which the alliance is managed
    • 44. 14-44Making Alliances WorkA good partner:helps the firm achieve its strategic goals and has thecapabilities the firm lacks and that it valuesshares the firm’s vision for the purpose of the allianceis unlikely to try to opportunistically exploit the alliance forits own ends: that it, to expropriate the firm’s technologicalknow-how while giving away little in return
    • 45. 14-45Making Alliances WorkOnce a partner has been selected, the alliance should bestructured:to make it difficult to transfer technology not meant to betransferredwith contractual safeguards written into the allianceagreement to guard against the risk of opportunism by apartnerto allow for skills and technology swaps with equitablegainsto minimize the risk of opportunism by an alliance partner
    • 46. 14-46Making Alliances WorkAfter selecting the partner and structuring the alliance,the alliance must be managedSuccessfully managing an alliance requires managersfrom both companies to build interpersonal relationshipsA major determinant of how much a company gains froman alliance is its ability to learn from its alliance partners
    • 47. 14-47Classroom Performance SystemWhich of the following is not important to a successfulstrategic alliance?a) establishing a 50:50 relationship with partnerb) creating strong interpersonal relationshipsc) a shared visiond) learning from the partner