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Chapter 5: Entry Strategy & Strategic Alliances (How Can Firms Enter…
Chapter 5: Entry Strategy & Strategic Alliances
How Can Firms
Enter Foreign Markets?
1.Exporting – a common first step for many manufacturing firms – later, firms may switch to another mode
Turnkey projects - the contractor handles 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
Licensing - a licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee
– patents, inventions, formulas, processes, designs, copyrights, trademarks
Franchising - a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee but also insists that the franchisee agree to abide by strict rules as to how it does business
– used primarily by service firms
Joint ventures with a host country firm - a firm that is jointly owned by two or more otherwise independent firms
– most joint ventures are 50–50 partnerships
Wholly owned subsidiary - the firm owns 100 percent of the stock
– set up a new operation
– acquire an established firm
How Do Core Competencies Influence
Entry Mode?
The optimal entry mode depends on the nature of a
firm’s core competencies
When competitive advantage is based on proprietary
technological know-how
– avoid licensing and joint ventures unless the technological advantage is only transitory, or can be established as the dominant design
When competitive advantage is based on
management know-how
the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant
How Do Pressures for Cost Reductions
Influence Entry Mode?
When pressure for cost reductions is high, firms are more likely to pursue some combination of exporting and wholly owned subsidiaries
– allows the firm to achieve location and scale economies and retain some control over product manufacturing and distribution
– allows the firm to achieve location and scale economies and retain some control over product manufacturing and distribution
Strategic Alliance refer to cooperative agreements between potential or actual competitors
range from formal joint ventures to short-term contractual agreements
the number of strategic alliance has exploded in recent decade
why is this attractive?
– facilitate entry into a foreign market
– allow firms to share the fixed costs and risks of developing new products or processes
– bring together complementary skills and assets that neither partner could easily develop on its own
– help a firm establish technological standards for the industry that will benefit the firm
But, the firm needs to be careful not to give away
more than it receives
What Makes Strategic Alliances
Successful?
Partner selection
• helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values
• shares the firm’s vision for the purpose of the alliance
• will not exploit the alliance for its own ends
Alliance structure
– make it difficult to transfer technology not meant to be transferred
– have contractual safeguards to guard against the risk of opportunism by a partner
– allow for skills and technology swaps with equitable gains
– minimize the risk of opportunism by an alliance partner
The manner in which the alliance is managed but requires
• interpersonal relationships between managers
– cultural sensitivity is important
• learning from alliance partners
knowledge must then be diffused through the organization
What Are the Basic Decisions Firms Make
When Expanding Globally?
Which markets to enter
When to enter them and on what scale
Which entry mode to use
– 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
What Influences
the Choice of Entry Mode?
Several 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 makes sense for one company might not make sense for another
Which Foreign Markets
Should Firms Enter?
The choice of foreign markets will depend on their
long-run profit potential
• Favorable markets
– are politically stable
– have free market systems
– have relatively low inflation rates
– have low private sector debt
• Less desirable markets
– are politically unstable
– have mixed or command economies
– have excessive levels of borrowing
• Markets are also more attractive when the product in question is not widely available and satisfies an unmet need
Why Enter a
Foreign Market Early?
First-mover advantages
– the ability to preempt rivals by establishing a strong brand name
– the ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants
– the ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business
On What Scale Should a Firm Enter Foreign
Markets?
– firms that enter a market on a significant scale make a
strategic commitment to the market
the decision has a long term impact and is difficult to reverse
– 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
