Factors associated with Entry Mode
Timing of an Entry
FIRST MOVER ADVANTAGE
Scale of Entry & Strategic Commitments
ENTRY MODES
Explain exporting, turnkey projects and licensing entry modes with their advantages and disadvantages.
Explain franchising, joint venture and wholly owned subsidiaries with its advantages and disadvantages.
SELECTING ENTRY MODE
PROS & CONS OF ACQUISITION
PROS &CONS OF GREENFIELD VENTURES
What is strategic alliance?
What are the advantage and disadvantages of strategic alliance?
What are the factors contributing to the success of an alliance?
2. Firms expanding internationally must decide
which markets to enter
when to enter and on what scale
which entry mode to use
Exporting
Licensing or Franchising
Joint venture
New wholly owned subsidiary
3. The choice of foreign markets will depend on their long run
profit potential.
Long run economic benefits are functions of factors such as,
Size of the market
Present wealth
Future wealth
4. Several factors affect the choice of entry mode including,
• Firm size
• Trade barriers
• Country risks
Political risks
Economic risks
• Costs
5. Favorable markets,
are politically stable
have free market systems
have relatively low inflation rates
have low private sector debt
Unfavorable markets,
are politically unstable
have mixed or command economies
have excessive levels of borrowing
6. 1. Entry is early when the firm enters a foreign market before
other foreign firms
2. Entry is late when the firm enters the market after firms have
already established themselves in the market
7. FIRST MOVER ADVANTAGE
Preempt rivals and capture demand.
Build sales volume.
Move down experience curve before rivals and achieve cost
advantage.
Create switching costs.
Disadvantages:
Pioneering costs.
Changes in government policy.
8. Large Scale Entry
Commitment of significant resources.
Easier to attract customers (will remain in market).
May cause rivals to rethink market entry.
Small Scale Entry
Time to learn about the market.
Limits company exposure.
11. Firms initially begin global expansion by exporting
Advantages
-avoids substantial cost of establishing manufacturing plant in host country
-help achieve experience curve and location economies
Disadvantages
-Exporting may be inappropriate if location economies can be realized by moving
production elsewhere
-High transport costs can make exporting uneconomical
-Threat of tariff barriers by host-country government
-Risk due to delegation of marketing ,sales and services in each country to another
country
12. In turnkey projects, the contractor handles every detail of the project for a foreign
client
On completion, the foreign client is handed a plant that is fully ready for operation
Advantages
-Know-how required to run and assemble a technologically complex technology is a
valuable asset
-Way of earning economic returns from that asset
-Less risky than conventional FDI
13. Disadvantages
-Will have no long-term interest in the foreign country
-The firm may inadvertently create a competitor
-If the technology process is a source of competitive advantage, selling this
technology through a turnkey project is selling competitive advantage to
potential competitors
14. A licensing agreement is an agreement whereby a licensor grants the rights to
intangible property to another entity for a specified period and in return the
licensor receives a royalty fee from the licensee
Intangible properties may be patents, copyrights, formulas, inventions, processes,
designs and trademarks
Advantages
-The firm does not have to bear the development costs and risk associated with
opening a foreign market
-Attractive for firms lacking the capital to develop overseas operations
-Frequently used when a firm possesses some intangible property but does not
want to develop those applications itself
15. Disadvantages
-Does not give the firm a tight control over manufacturing, marketing and strategy
-Competing in a global market may require a firm to coordinate strategic moves
across countries by using profits earned in one country to support competitive
attacks in another
-Risk associated with licensing know-how to foreign companies
17. Specialized form of licensing in which the franchiser sells
the intangible property to the franchisee and assist the
franchisee to run the business on an on going basis.
Franchisee pays some percentage of revenue as royalty
payment to the franchiser.
Advantages Disadvantages
Franchisee assumes the cost
and risk
Quality control
18. Establishing a firm that is jointly owned by two or more
otherwise independent firms
Advantages Disadvantages
Knowledge of host country
Sharing of cost and risk
Political conditions
Risk of giving control of its technology to the
partner
No tight control over the subsidiaries to realize
the experience curve
Conflicts and battle for control
19. A firm acquires 100% of stock of an established firm or
set up a new operation in that country ( green field
venture )
Advantages Disadvantages
Reduce the risk of loosing competence
Tight control over operations
Easy to realise location and experience
curve
Full capital cost and risk
22. Greenfield venture:
A market strategy with establishment of a new wholly
owned subsidiary in a foreign country by constructing its facilities
from start.
Acquisition:
Process of acquiring a company’s stock, equity, interests or
assets.
23. Quick to execute
Build presence in the target foreign market.
Ex: Daimler-Benz to DaimlerChrysler, Spanish
Telecommunication Telefonica (Latin America)
Deregulations within nations and Liberalization of governing
cross-border FDI
Ex: $60million (Vodafone), $13million (Deutsche Telekom),
$6.4million (TeleglobeCanada)
24. Acquisition is less risky than Greenfield ventures with tangible
assets (css, factories…) and intangible assets (brand name,
managers…)
Often produce disappointing results by the survey conducted
by KPMG, McKenzie
25. Hubris hypothesis.
Cultural difference.
Ex: DaimlerChrysler.
Inadequate pre acquisition screening.
26. Does not pay too much for the acquired unit.
Does not uncover any nasty surprises after acquisition.
The organisational culture is not antagonistic to that of the
acquiring enterprise.
27. To build an organisational culture from scratch.
To set its own operating routines.
Ex: Lincoln Electric.
Very risky.
Uncertainty associated with revenue.
Ex: McDonald’s
Limits the market presence globally.
28.
29. What is strategic alliance?
What are the advantage and disadvantages of strategic
alliance?
What are the factors contributing to the success of an
alliance?
30. Strategic alliance refers to cooperative agreements between
potential or actual competitors. In international business it is
strategic alliances between firms from different countries.
Strategic alliances run from formal joint ventures, in which two
or more firms have equity stakes, to short-term contractual
agreements, In which two companies agree to corporate on a
particular task.
31. Strategic alliance may facilitate entry into foreign market.
Example: Warner Bros has entered into a joint venture with
China Media Capital to develop and produce a slate of Chinese-
language films, including global tent poles, for worldwide
distribution.
It allows firms to share the fixed costs. Example: alliance
between Boeing and Japanese firms.
32. An alliance is way to bring together complementary skills and
that neither company could easily develop on its own.
Example: Biel Crystal Manufactory (HK) Ltd., one of the biggest
suppliers of cover glass to Apple Inc. and Samsung Electronics
Co.
An alliance that will help the firm establish technological
standards for the industry that will benefit the firm. Example:
Palm computer and Sony.
33. Alliances have risk.
It give competitors a low-cost route to new technology and
markets.
Factors contributing to success of alliance
Partner selection
Alliance structure
Managing the alliance