Chapter 7

Market Entry Strategies and Strategic Alliances

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Contents:

The decisions of which foreign markets to enter, when to enter them and on what sale

The choice of entry mode The mechanics of exporting

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Which foreign markets to enter?

The choice between foreign markets must be made on an assessment of their long-term profit potential.

This is a function of a large number of factors, many of which we have already discussed earlier like political, economic, legal and cultural differences.

The attractiveness of a country as potential market for an international business depends on balancing the benefits, costs and risks associated with doing business in that country.

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The most attractive foreign markets tend to be found in politically stable developed and developing nations that have free market systems and where there is not a dramatic upsurge in either inflation rates or private sector debt.

Other markets that do not fit this description may be attractive for other reasons. The size of the Chinese market certainly makes it attractive to firms with a long-term perspective.

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Timing of entry: There are several advantages associated

with entering a national market early, before other international businesses have established themselves. These advantages are called “first mover advantages.”

Scale of entry: Large-scale entry into a national market

constitutes a major strategic commitment (a decision that has a long-term impact and is difficult to reverse).

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Entry Modes

The various modes of entry are: Exporting Licensing Franchising Joint ventures Wholly owned subsidiaries

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Exporting: Many manufacturers begin their global

expansion as exporters and later switch to another mode for serving a foreign market. Manufacturing in existing locations and transporting into new markets is called exporting.

Manufacturing in existing locations and transporting into new markets is called exporting.

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Exporting is desirable

If economical to produce in the home country.

No legal restrictions on import of given product in the foreign markets.

May take either the form of direct and indirect exporting.

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Advantages: Avoid costs of investing in new location. Realize experience curve and location economies.

By manufacturing the product in a centralized location and exporting it to other national markets, the firm may be able to realize substantial sale economies from its global sales volume.

Disadvantages: new locations may have lower manufacturing

costs High transport costs can make exporting

uneconomical, particularly for bulk products. Tariff and non-tariff barriers by the host country

government can make it risky and costly. Agents in the foreign country may not act in

exporter’s best interest.

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Licensing:

Licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to the licensee for specified time in exchange for royalties.

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Advantages: The firm does not have to bear the costs and risks

of investment, it is an attractive option for firms lacking capital to develop operations overseas.

Avoid political/economic problems or restrictions in a country. This is used when a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investment.

Disadvantages: Licensing does not give a firm tight control over

manufacturing, marketing and strategy that is required for realizing experience curve and location economies. Loss of control over operations (marketing, manufacturing, strategy)

Unable to realize experience curve and locational economies

Limited in coordinating international strategy against competitors

Loss of technological know-how

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Franchising: franchising is a specialized form of

licensing in which the franchiser not only sells intangible property to the franchisee (normally trademark) but also insists that the franchisee agree to abide strict rules as to how to do the business.

Franchising is similar to licensing. This tends to involve a longer-term commitments than licensing. Selling limited rights to use of a brand name and service know-how.

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Advantages: Franchisor do not bear the costs and risks of

investment Avoid political/economic problems and

restrictions in a country Quicker international expansion possible Disadvantages: Limited in coordinating international strategy

against competitors Loss of control over quality and service

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Joint Ventures:

A joint venture is an establishment of a firm that is jointly owned by tow or more otherwise independent firms. Work with a local partner and share in the costs/profits of an operation.

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Advantages: Benefit from local firm’s knowledge about the host

country’s competitive conditions, culture, language, political systems and business systems.

shared costs/risks of development political constraints on other options Disadvantages: Loss of control over technology to its partner. JVs do not give the firm the tight control over

subsidiaries that it might need to relisse experience curve or location economies. Limited ability to realize experience curve and location economies

limited ability to coordinate international strategy against competitors

conflicts between partners over goals and objectives of the JV.

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Wholly Owned Subsidiaries In wholly owned subsidiary, the firm

owns 100 percent of the stock. Establishing a wholly owned

subsidiary in a foreign market can be done in two ways. The firm can either set up a new operation in that country or it can acquire an established firm and use that firm to promote its products in the country’s market

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In case of import bans or excessive transportation cost

Set up manufacturing subsidiaries abroad Assembly operations Contract manufacturing- Feasible,

1. If foreign governments allow FDI2. Raw materials & labor are locally

available at competitive prices.- In case FDI is disallowed..

- GO for either licensing/franchising - Joint Venture

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Advantages: Control over technological know-how ensured,

especially when a firm’ competitive advantage is based on technological competence. Many high tech firms prefer this entry mode for overseas expansion.(firms in semiconductor, electronics and pharmaceuticals).

control over ability to coordinate international strategy

ability to realize location and experience economies

ability to coordinate with other subsidiaries Disadvantages: Most costly method of serving a foreign market. The firm entering through this mode must bear

the full costs and risks of setting up overseas operations.