Entry Strategy and Strategic Alliances - chapter 14 for International Business

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Chapter 14: Entry Strategy and
Strategic Alliances
•1. Lý Nhật Thy
•2. Trần Thị Ngọc Mai
•3. Nguyễn Kiều Linh
•4. Nguyễn Thị Trúc Đăng
•5. Võ Thị Thôi
•6. Trương Huệ Nhi

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Chapter 14: Entry Strategy and
Strategic Alliances
BASIC ENTRY DECISIONS
Three basic decisions that a firm contemplating foreign
expansion must make:
• Which markets to enter
• When to enter those markets
• On what scale

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Which Foreign Markets?
•The choice based on nation’s long run profit potential.
•Look in detail at economic and political factors which influence foreign
markets.
•Long run benefits of doing business in a country depends on following
factors: Size of market, the present wealth of consumer markets, nature of
competition
•By considering such factors firm can rank countries in terms of their
attractiveness and long-run profit.

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Strategic Alliances
Timing of Entry
•When firms enter early in the foreign market commonly known
as first-mover advantages: the ability to prevent rivals and capture
demand by establishing a strong brand name, ability to build sales
volume in that country, ability to create customer relationship
•The disadvantages are:
Firm has to devote effort, time and expense to
learning the rules of the country
Risk is high for business failure

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Strategic Alliances
Scale of Entry and Strategic Commitments
• The consequences of entering a market on a significant
scale are associated with the value of the resulting strategic
commitments
• Deciding to enter a foreign market on a significant scale is
a major strategic commitment that changes the competitive
playing field
• Small-scale entry has the advantage of allowing a firm to
learn about a foreign market while simultaneously limiting
the firm’s exposure to that market

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Strategic Alliances
ENTRY MODES
Exporting
• Exporting means “producing goods in one country and
selling them in another country”
• Most manufacturing firms begin their global expansion as
exporters and only later switch to another mode for
servicing a foreign market

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Strategic Alliances
Advantages of Direct Exporting
•Target management and control of the sales become possible
which is unrealistic in the case of indirect exports.
•The strategy offers potential for higher profits because of
more direct contact.
•Direct exports may also enable the producer to have a closer
relationship with foreign buyers and the marketplace.
•Direct exporting is applicable to a wider range of goods and
services.

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Strategic Alliances
Disadvantages of Direct Exporting
•May be inappropriate for goods with a short work life and
are unlikely to be exported
•May have high transport costs or goods that require
complex after - sales service which cannot be granted by
resellers.
•May require the producer to acquire new capabilities like
marketing skills and financial resources in order to be able
to contract with clients or business partners.

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Strategic Alliances
Advantages of Indirect Exporting:
• The exporter will have less complexity in dealing with when
selling products in foreign markets, complexities which range
from clashing cultures to volatile exchange rates.
• The exporter will not have to worry about managing product
distribution in a foreign country as this is done by an export
partner.
• The market entry barriers tend to be less in this form of exporting.
• Indirect exporting does not require a lot of organizational effort or
commitment of staff workers, the firm only employs a small
number of employees as the main work is carried out by foreign
trade partners.

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Strategic Alliances
Disadvantages of Indirect Exporting:
• Not all brokers are using the optimum market potential and
opportunities for marketing, thus mistakes and miscalculations in
their actions affect the income of producers of export goods.
• May lead to diminishing returns in the long run as trading partners
try to get maximum profit from their service as mediators.
• May lack recognition from the end users of the product or service,
who are much more familiar with the end product.

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Strategic Alliances
Turnkey Projects
• In a turnkey project, the contractor agrees to handle every
detail of the project for a foreign client, including the
training of operating personnel
• At completion of the contract, the foreign client is handed
the "key" to a plant that is ready for full operation

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Strategic Alliances
Advantages:
• Turnkey projects are a way of earning great economic returns
from the know-how required to assemble and run a
technologically complex process
•Turnkey projects make sense in a country where the political
and economic environment is such that a longer-term investment
might expose the firm to unacceptable political and/or economic
risk

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Strategic Alliances
Disadvantages:
• The firm that enters into a turnkey deal will have no long-term
interest in the foreign country
• The firm that enters into a turnkey project may create a competitor
• If the firm's process technology is a source of
competitiveadvantage, then selling this technology through a
turnkey project is also selling competitive advantage to potential or
actual competitors

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Strategic Alliances
Licensing
• A licensing agreement is an arrangement whereby a licensor
grants the rights to intangible property to another entity for a
specified time period, and in return, the licensor receives a
royalty fee from the licensee
• Intangible property includes patents, inventions, formulas,
processes, designs, copyrights, and trademarks

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Advantages:
• The firm does not have to bear the development costs and
risks associated with opening a foreign market
• The firm avoids barriers to investment
• It allows a firm with intangible property that might have
business applications, but which doesn’t want to develop those
applications itself, to capitalize on market opportunities

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Disadvantages:
• Doesn’t have the tight control over manufacturing, marketing,
and strategy that is required for realizing experience curve and
location economies
• Limits a firm’s ability to coordinate strategic moves across
countries by using profits earned in one country to support
competitive attacks in another
• Is the potential for loss of proprietary technology or property

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Franchising
Franchising is a business strategy for getting and keeping
customers. It is a marketing system for creating an image in
the minds of current and future customers about how the
company's products and services can help them. It is a
method for distributing products and services that satisfy
customer needs.

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Advantages:
• Low investment and low risk
• Franchisor can get the information regarding the market culture,
customs and environment of the host country
• Franchisor learns more from the experience of the franchisees
• Franchisee gets the benefits of R&D with low cost
• Franchisee escapes from the risk of product failure.

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Strategic Alliances
Disadvantages:
•It may be more complicating than domestic franchising
•It is difficult to control the international franchisee
•It reduces the market opportunities for both
•Both the parties have the responsibilities to maintain
product quality and product promotion
•There is a problem of leakage of trade secrets

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Joint Ventures
• A joint venture is the establishment of a firm that is jointly
owned by two or more otherwise independent firms
• Joint venture occurs when an international company enters in
to an agreement with a local partner to develop a new entity
and assets for a finite time by contributing equity
•A joint venture can also bring positive benefits to the foreign
partner through their local partners

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Advantages:
• Risk diversification and allocation of risks between the
partners
•Sharing of resources
•Can be a means of reducing political and other investment
risks
•Access to the distribution network

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Disadvantages:
• Lack of management control
•Joint venture’s negotiations are time consuming, requires a lot of
contractual framework and long period of due-diligence
•Lack of trust
•Risk of conflict as a result of cultural differences

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Wholly Owned Subsidiaries
In a wholly owned subsidiary, the firm owns 100 percent of
the stock.
Establishing a wholly owned subsidiary in a foreign market
can be done two ways:
• The firm can set up a new operation in that country
• The firm can acquire an established firm

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Advantages:
• A wholly owned subsidiary reduces the risk of losing control over core
competencies
• A wholly owned subsidiary gives a firm the tight control over operations
in different countries that is necessary for engaging in global strategic
coordination
• A wholly owned subsidiary maybe required if a firm is trying to realize
location and experience curve economies
Disadvantage:
• Firms bear the full costs and risks of setting up overseas operations

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SELECTING AN ENTRY MODE

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Core Competencies and Entry Mode
Technological Know-How
• A firm with a competitive advantage based on proprietary
technological know-how should avoid licensing and joint venture
arrangements in order to minimize the risk of losing control over
the technology
• If a firm believes its technological advantage is only transitory, or
the firm can establish its technology as the dominant design in the
industry, then licensing may be appropriate even if it does involve
the loss of know-how

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Management Know-How
• The competitive advantage of many service firms is based upon
management know-how
• The risk of losing control over the management skills to
franchisees or joint venture partners is not high, and the benefits
from getting greater use of brand names is significant

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Pressures for Cost Reductions and Entry Mode
• The greater the pressures for cost reductions, the more likely
a firm will want to pursue some combination of exporting and
wholly owned subsidiaries
• This will allow it to achieve location and scale economies as
well as retain some degree of control over its worldwide
product manufacturing and distribution

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GREENFIELD VENTURE OR ACQUISITION?
The two primary modes of investment: Greenfield and
acquisition are compared below on the basis of
their definitions, factors affecting their implementation and
the advantages & disadvantages of each.

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Pros and Cons of Acquisition
Benefits of Acquisitions
Acquisitions have three major points in their favor:
• They are quick to execute
• Acquisitions enable firms to preempt their competitors
• Managers may believe acquisitions are less risky than
green-field ventures

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Why Do Acquisitions Fail?
Acquisitions fail for several reasons:
• The acquiring firms often overpay for the assets of the
acquired firm
• There may be a clash between the cultures of the acquiring
and acquired firm
• Attempts to realize synergies by integrating the operations of
the acquired and acquiring entities often run into roadblocks
and take much longer than forecast
• There is inadequate pre-acquisition screening

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Pros and Cons of Greenfield Ventures
• The main advantage of a greenfield venture is that it gives
the firm a greater ability to build the kind of subsidiary
company that it wants
• However, greenfield ventures are slower to establish
• Greenfield ventures are also risky

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Strategic Alliances
Advantages
• Strategic alliances permit a company to pursue an opportunity more
quickly, leveraging the resources and knowledge of the other party.
Fewer resources are required than if a company pursued an opportunity
on its own. An alliance can provide easier access to new opportunities
and a lower barrier to entry.
Disadvantages
• Implementing and managing a strategic alliance may be difficult because
each alliance partner has a different way of operating. Mistrust could
occur, particularly when competitive or proprietary information is
involved. The alliance partners could become more dependent on each
other, making it difficult to operate again as separate entities if required.

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Making Strategic Alliances Work:
Partner Selection
• Strong alliance partners are not created overnight
• Each partnership should start with a well-defined project that
serves to “pilot” the alliance
• This is a low-risk initiative that helps each partner learn about the
pros and cons of working together with a shared objective
• Lessons learned from these initiatives also help to best match
alliance partners with initiatives that require more resources,
longer periods of time, higher levels of risk and greater potential
returns

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Making Strategic Alliances Work:
Managing the Alliance
• Sensitivity to cultural differences and their effects on
management style
• Building interpersonal relationships among managers
from different companies
• Ability to learn from alliance partners and put the
knowledge to good use