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Chapter 15: Entry Strategies and Strategic Alliances (Influences choice of…
Chapter 15: Entry Strategies and Strategic Alliances
Influences choice of entry mode
Transport costs
Trade barriers
Political risks
Economic risks
Costs
Firm strategy
Favourable markets
Politically stable
Have free market systems
Have relatively low inflation rates
Have low private sector debt
Less desirable market
Are politically unstable
Have mixed or command economies
Have excessive levels of borrowing
How firms enter foreign market
1) Exporting
Advantages
Avoid costs of establishing local manufacturing operations
Increase speed and flexibility of engaging target markets
Disadvantages
Helps firms achieve experience curve and location economies
High transport costs
Trade barrier
Problems with local marketing agents
2) Turnkey projects
Advantage
Ability to earn returns from process technology skills in countries where FDI is restricted
Less risky than FDI
Disadvantages
Creation of efficient competitors
Lack of long-term market presence/interest in foreign country
3) Licensing
Advantage
Avoid developmental costs and risks associated with opening foreign market
Avoid barriers to onvestment
Capitalise on market opportunities without developing applications itself
Disadvantage
Firms dont have tight control
Limited ability to coordinate strategic moves across countries
Intangible assets may be lost (use cross licensing)
4) Franchising
Advantage
Avoid costs and risks of opening foreign market
Quickly build global presence
Disadvantage
Lack of control over quality (geographic location)
Inhibits firm's ability to take profits out of one country to support competitive attacks in other countries
5) Joint Ventures
Advantage
Benefit from local partner's knowledge
Shared costs and risks of opening foreign market
Satisfy political considerations for market entry
Disadvantage
Risk giving control of technology to partner
May not have tight control to realise experience curve or location economies
Shared ownership may lead to conflict, battle for control if goals and objectives change over time
6) Wholly-owned Subsidiaries
Advantages
Protection of technology (Reduce risk of losing control over core competencies)
Tight control in different countries for global strategic coordination
Ability to realise location and experience curve economies
Disadvantages
Bear full costs and risks of setting up overseas operations
First mover advantage
Ability to preempt rivals by establishing strong brand name
Ability to build up sales volume, ride down experience curve ahead of rivals, gain cost advantage over later entrants
Ability to create switching costs that tie customers to products, making it difficult for later entrants to win business
First mover disadvantage
Pioneering costs
Foreign business system very different from home market
Devote a lot of time, effort, expenses to learn rules of game
Costs of business failure
If firm make mistake due to ignorance of foreign market
Cost of promoting and establishing product offering
Costs of educating customers