Entry Strategy and Strategic Alliances

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Basic foreign expansion entry decisions

A firm contemplating foreign expansion must make three decisions

Which markets to enter When to enter these markets What is the scale of entry

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Which foreign markets

Favorable Politically stable developed and developing

nations Free market systems

Unfavorable Politically unstable developing nations

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Timing of entry

Advantages in early market entry: First-mover advantage. Build sales volume. Move down experience curve and achieve cost

advantage. Disadvantages:

First mover disadvantage Changes in government policy.

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Scale of entry

Large scale entry Strategic Commitments - a decision that has a

long-term impact and is difficult to reverse. May cause rivals to rethink market entry.

Small scale entry: Time to learn about market.

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Entry modes

Exporting Licensing Franchising Joint Ventures

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Exporting

Advantages: Avoids cost of establishing manufacturing

operations Disadvantages:

May compete with low-cost location manufacturers Possible high transportation costs Tariff barriers

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Turnkey projects

Advantages: Less risky than conventional FDI

Disadvantages: No long-term interest in the foreign country May create a competitor

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Franchising

Advantages: Reduces costs and risk of establishing enterprise

Disadvantages: Quality control

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Joint Ventures

Advantages: Benefit from local partner’s knowledge. Shared costs/risks with partner.

Disadvantages:

Shared ownership can lead to conflict

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Wholly owned subsidiary

Subsidiaries could be Greenfield investments or acquisitions

Advantages: No risk of losing technical competence to a

competitor Tight control of operations.

Disadvantage: Bear full cost and risk

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Advantages and disadvantages of entry modes

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Partner selection

Get as much information as possible on the potential partner

Collect data from informed third parties Former partners Investment bankers Former employees

Get to know the potential partner before committing

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Managing the alliance

Build trust Learning from partners