CHAPTER 14: CHAPTER 14: ENTRY STRATEGYENTRY STRATEGY

CHAPTER 15: EXPORTINGCHAPTER 15: EXPORTING(selected topics: lecture + (selected topics: lecture +

pages 534-46)pages 534-46)

Basic Decisions for Market Basic Decisions for Market EntryEntry

►Which markets to Which markets to enter?enter?

►When to enter When to enter these markets?these markets?

►What is the scale What is the scale of entry?of entry?

Which Markets to Enter?Which Markets to Enter?►Attractiveness of a foreign market is Attractiveness of a foreign market is

based on balancing benefits, costs, and based on balancing benefits, costs, and risks associated with doing business in risks associated with doing business in that country.that country.

►The political, economic, legal, and The political, economic, legal, and cultural differences of each market must cultural differences of each market must be evaluated.be evaluated.

► Is a firm’s product or service offering Is a firm’s product or service offering suited to a market and to the suited to a market and to the competitive environment in that market?competitive environment in that market?

Which Markets to Enter?Which Markets to Enter?

► Favorable Favorable Politically stable Politically stable

developed and developed and developing nationsdeveloping nations

Free market Free market systemssystems

No dramatic No dramatic upsurge in upsurge in inflation or inflation or private-sector debtprivate-sector debt

► UnfavorableUnfavorable Politically unstable Politically unstable

developing nations developing nations with a mixed or with a mixed or command command economy or where economy or where speculative speculative financial bubbles financial bubbles have led to excess have led to excess borrowingborrowing

When to Enter the Market?When to Enter the Market?►Advantages in early market entry:Advantages in early market entry:

First-mover advantage.First-mover advantage. Build sales volume.Build sales volume. Move down experience curve and achieve Move down experience curve and achieve

cost advantage.cost advantage. Create switching costs.Create switching costs.

►Disadvantages:Disadvantages: First mover disadvantage - pioneering costs.First mover disadvantage - pioneering costs. Changes in government policy.Changes in government policy.

Scale of Entry in MarketScale of Entry in Market

►Large scale entryLarge scale entry Strategic Commitments - a decision that has Strategic Commitments - a decision that has

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

response.response.

►Small scale entry:Small scale entry: Time to learn about market.Time to learn about market. Reduces exposure risk.Reduces exposure risk.

Decisions about EntryDecisions about Entry►There is no”right” decisionThere is no”right” decision►Depends on level of risk associated with Depends on level of risk associated with

entry and the attitude and willingness of entry and the attitude and willingness of the company towards the risk.the company towards the risk.

►Businesses in developing countries Businesses in developing countries should use entry of foreign multinationals should use entry of foreign multinationals as a way to increase learning, identify as a way to increase learning, identify ways to differentiate their own company ways to differentiate their own company and improve performance. and improve performance. ExampleExample: : Jollibee Fast Foods from the PhilippinesJollibee Fast Foods from the Philippines

Example: JollibeeExample: Jollibee

www.jollibee.com

ENTRY MODESENTRY MODES

► ExportingExporting► Turnkey ProjectsTurnkey Projects► LicensingLicensing► FranchisingFranchising► Joint VenturesJoint Ventures► Wholly Owned Wholly Owned

SubsidiariesSubsidiaries

EXPORTINGEXPORTING

► EXPORTING: sale of products EXPORTING: sale of products produced in one country to produced in one country to residents of another countryresidents of another country

► Advantages:Advantages: Avoids cost of establishing Avoids cost of establishing

manufacturing operationsmanufacturing operations May help achieve experience May help achieve experience

curve and location economiescurve and location economies► Disadvantages:Disadvantages:

May compete with low-cost May compete with low-cost location manufacturerslocation manufacturers

Possible high transportation Possible high transportation costscosts

Tariff barriersTariff barriers Possible lack of control over Possible lack of control over

distribution channelsdistribution channels

PROCESS OF EXPORTING: TRANSPORTATIONPROCESS OF EXPORTING: TRANSPORTATIONEXAMPLE: EXPORTING FLOWER POWEREXAMPLE: EXPORTING FLOWER POWER

NATIONAL GEOGRAPHIC, “Flower Trade.” April 2001, page 113. NATIONAL GEOGRAPHIC, “Flower Trade.” April 2001, page 113.

PROCESS OF EXPORTING:PROCESS OF EXPORTING:Many Details to ManageMany Details to Manage

STARTING POINT: the EXPORT STARTING POINT: the EXPORT QUOTATIONQUOTATION

► Shipping terms, terms of sale, or international trade terms Shipping terms, terms of sale, or international trade terms are all titles used in exporting to clearly define the are all titles used in exporting to clearly define the respective duties and liabilities of the buyer and seller in respective duties and liabilities of the buyer and seller in order to avoid misunderstandings and disputes.order to avoid misunderstandings and disputes.

► Terms are defined in the Incoterms, introduced by the Terms are defined in the Incoterms, introduced by the International Chamber of Commerce. They are updated International Chamber of Commerce. They are updated approximately every 10 years.approximately every 10 years.

► Incoterms identify transportation responsibilities, transfer of Incoterms identify transportation responsibilities, transfer of risk of loss (i.e. ownership), and responsibilities of cost.risk of loss (i.e. ownership), and responsibilities of cost.

► Proforma invoice: a written quotation detailing the shipping Proforma invoice: a written quotation detailing the shipping and payment terms, estimated weight and complete and payment terms, estimated weight and complete description of goods to be supplied is highly recommended.description of goods to be supplied is highly recommended.

Export Quotation (cont’d)Export Quotation (cont’d)► COMMON SHIPPING TERMSCOMMON SHIPPING TERMS

EXWEXW - Ex-Works, named place where shipment is available to the - Ex-Works, named place where shipment is available to the buyer, not loaded.buyer, not loaded.The seller will not contract for any transportation.The seller will not contract for any transportation.This can be a factory, warehouse, ranch, mill, etc).This can be a factory, warehouse, ranch, mill, etc).

International Carriage NOT Paid by SellerInternational Carriage NOT Paid by Seller

FOBFOB - Free On Board vessel, named ocean port of shipment. - Free On Board vessel, named ocean port of shipment.This term is used for ocean shipments only where it is important that This term is used for ocean shipments only where it is important that the goods pass the ship's rail.the goods pass the ship's rail.

International Carriage Paid by the SellerInternational Carriage Paid by the Seller

CIFCIF - Cost, Insurance and Freight, named ocean port of destination. - Cost, Insurance and Freight, named ocean port of destination.This term is used for ocean shipments that are not containerized.This term is used for ocean shipments that are not containerized.

..

..

INCOTERMSINCOTERMS

EXPORT-IMPORT FINANCINGEXPORT-IMPORT FINANCING► The biggest problem is a The biggest problem is a Lack of trustLack of trust between international between international

trading partners due to several factors:trading partners due to several factors: Parties have never metParties have never met Language, cultural and legal system differencesLanguage, cultural and legal system differences Difficulties in tracking down a party in case of default Difficulties in tracking down a party in case of default

► Problem solved by using a third party trusted by both as an Problem solved by using a third party trusted by both as an intermediary – normally a reputable bankintermediary – normally a reputable bank

► Extension of credit by exporter to importer must be evaluated Extension of credit by exporter to importer must be evaluated by consideration of:by consideration of: Country stabilityCountry stability Customer creditworthinessCustomer creditworthiness CompetitionCompetition Exporter’s financial resourcesExporter’s financial resources

Export and Import Financing Export and Import Financing

Preference of a US exporting Firm

Preference of a French Importing Firm

Figs. 15-1, 15-2 , p541

TRADE FACILITATED BY USE OF TRADE FACILITATED BY USE OF A THIRD PARTY: THE BANKA THIRD PARTY: THE BANK

Fig 15.3

THREE KEY FINANCIAL DEVICES THREE KEY FINANCIAL DEVICES in EXPORT/IMPORT in EXPORT/IMPORT

TRANSACTIONSTRANSACTIONS► Letters of Credit (L/C)Letters of Credit (L/C)

Bank guarantee on behalf of importer to exporter Bank guarantee on behalf of importer to exporter assuring payment when exporter presents specified assuring payment when exporter presents specified documentsdocuments

► Drafts (Bill of Exchange)Drafts (Bill of Exchange) Written order of the exporter, telling an importer to Written order of the exporter, telling an importer to

pay a specified amount of money at a specified time. It pay a specified amount of money at a specified time. It is the instrument which is used as formal demand for is the instrument which is used as formal demand for payment in a business transactionpayment in a business transaction

► Bill of LadingBill of Lading Issued to exporter, by carrier. Serves as receipt, Issued to exporter, by carrier. Serves as receipt,

contract and document of title. Straight bill of lading is contract and document of title. Straight bill of lading is delivered to a designated consignee but is not a delivered to a designated consignee but is not a document of title. An order bill of lading directs a document of title. An order bill of lading directs a carrier to deliver goods to the order of a designated carrier to deliver goods to the order of a designated party and grants title only to whom the document is party and grants title only to whom the document is addressed.addressed.

LETTER OF CREDITLETTER OF CREDIT

► Issued by a bank at the request of the Issued by a bank at the request of the importerimporter

► Bank pays a specified sum to a beneficiary, Bank pays a specified sum to a beneficiary, normally the exporter, on presentation of normally the exporter, on presentation of particular, specified documentsparticular, specified documents

► Fee paid by importer for letter of creditFee paid by importer for letter of credit► May reduce borrowing ability of importer May reduce borrowing ability of importer

since the letter is a financial liabilitysince the letter is a financial liability

LETTER OF CREDITLETTER OF CREDIT

LETTER OF CREDITLETTER OF CREDIT

DRAFT (BILL of EXCHANGE)DRAFT (BILL of EXCHANGE)

► Written by an exporter instructing an Written by an exporter instructing an importer to pay specified amount of money importer to pay specified amount of money at specified timeat specified time

► Required before the buyer can obtain the Required before the buyer can obtain the merchandisemerchandise

►Two typesTwo types Sight drafts - payable on presentation to Sight drafts - payable on presentation to

the draweethe drawee Time draft - negotiable instrument Time draft - negotiable instrument

allowing for delay in paymentallowing for delay in payment

DRAFTS/ BILLS OF EXCHANGEDRAFTS/ BILLS OF EXCHANGE

BILL OF LADINGBILL OF LADING

► Issued to the exporter by the common Issued to the exporter by the common carrier transporting the merchandisecarrier transporting the merchandise

► Serves three purposes:Serves three purposes: Receipt - merchandise described on document Receipt - merchandise described on document

has been received by carrierhas been received by carrier Contract - carrier is obligated to provide Contract - carrier is obligated to provide

transportation service in return for a certain transportation service in return for a certain chargecharge

Document of title – can be used to obtain Document of title – can be used to obtain payment or a written promise before the payment or a written promise before the merchandise is released to the importermerchandise is released to the importer

BILL OF LADINGBILL OF LADING

Letter of Credit process:Letter of Credit process:

UsingUsing all three types of documentsall three types of documents► FIGURE 15.4FIGURE 15.4

EXPORTING:EXPORTING:OTHER METHODS OF PAYMENTOTHER METHODS OF PAYMENT

► OPEN ACCOUNT (only with established OPEN ACCOUNT (only with established relationship)relationship)

► CREDIT CARDCREDIT CARD► PAYMENT IN ADVANCE (CIA = cash in PAYMENT IN ADVANCE (CIA = cash in

advance; or advance wire transfer)advance; or advance wire transfer)► DOCUMENTARY COLLECTION (sight bank DOCUMENTARY COLLECTION (sight bank

draft or time bank draft)draft or time bank draft)► LETTER OF CREDITLETTER OF CREDIT► COUNTERTRADE (barter, COUNTERTRADE (barter,

counterpurchase, etc.)counterpurchase, etc.)

The Problems and Pitfalls The Problems and Pitfalls of Exportingof Exporting

►Firms that do not export lose out on huge Firms that do not export lose out on huge opportunities for growth and cost reductionopportunities for growth and cost reduction

►Large firms pro-active in seeking foreign Large firms pro-active in seeking foreign opportunitiesopportunities

►Medium and small-sized firms slow to respondMedium and small-sized firms slow to respond Too busy with local side of businessToo busy with local side of business Ignorance of potential opportunitiesIgnorance of potential opportunities Intimidated by mechanics of exporting to a foreign Intimidated by mechanics of exporting to a foreign

countrycountry

BIGGEST PROBLEMS TO BIGGEST PROBLEMS TO EXPORTINGEXPORTING► Biggest impediment to exporting is lack of knowledge of the Biggest impediment to exporting is lack of knowledge of the

opportunities available.opportunities available.► More than 200 countries with widely differing cultures compose the More than 200 countries with widely differing cultures compose the

world of export opportunities.world of export opportunities.► Overcome impediments by collecting informationOvercome impediments by collecting information

► Japan: Ministry of International Trade and Industry (MITI) and Japan: Ministry of International Trade and Industry (MITI) and trading houses (Sogo sosha)trading houses (Sogo sosha)

► US: Department of Commerce (International Trade US: Department of Commerce (International Trade Administration, Foreign Commercial Service Agency, USDA, Administration, Foreign Commercial Service Agency, USDA, etc. http://www.export.gov/etc. http://www.export.gov/

International Trade AdministrationInternational Trade Administration United States and Foreign Commercial service agencyUnited States and Foreign Commercial service agency

► Provide “best prospects” list, “comparison shopping service,” Provide “best prospects” list, “comparison shopping service,” and customized market research survey for a small feeand customized market research survey for a small fee

► Organizes exhibitions at international trade fairs to help Organizes exhibitions at international trade fairs to help potential exporters make foreign contacts and explore export potential exporters make foreign contacts and explore export opportunitiesopportunities

► Matchmaker programMatchmaker program► Trade CommissionsTrade Commissions

Maintained by many large citiesMaintained by many large cities Provide business counseling, information gathering, and financingProvide business counseling, information gathering, and financing

► Commercial banks and major accounting firmsCommercial banks and major accounting firms

EXPORT MANAGEMENT EXPORT MANAGEMENT STRATEGYSTRATEGYRisks can be decreased by Risks can be decreased by

taking few stepstaking few steps► Hire an EMC or Hire an EMC or

experienced export experienced export consultant to identify consultant to identify opportunities and deal opportunities and deal with red-tapewith red-tape

► Focus on a few markets Focus on a few markets to learn what is needed to learn what is needed to succeedto succeed

► Enter on a small scale to Enter on a small scale to reduce costs of any reduce costs of any failurefailure

► Invest time and Invest time and managerial commitment managerial commitment in building export salesin building export sales

► Build strong and Build strong and enduring relationships enduring relationships with local distributors & with local distributors & customers.customers.

► Use all sources of Use all sources of information and gather information and gather as much intelligence as as much intelligence as possible.possible.

► Hire local personnel.Hire local personnel.► Keep option of local Keep option of local

production openproduction open cost-efficient cost-efficient

economies of scaleeconomies of scale greater market greater market

acceptanceacceptance

Management focus: Exporting Management focus: Exporting strategy at 3Mstrategy at 3M

► Minnesota Mining and Manufacturing Co.Minnesota Mining and Manufacturing Co.► 55% of the firm’s revenue was through exporting55% of the firm’s revenue was through exporting► Export Strategy Export Strategy

Enter on a small scale to reduce risks: make a little sell a Enter on a small scale to reduce risks: make a little sell a littlelittle

Add additional product lines once the exporting Add additional product lines once the exporting operations start to become successfuloperations start to become successful

Hire locals to promote the firm’s products; adapt to local Hire locals to promote the firm’s products; adapt to local requirementsrequirements

Formulate global strategic plans for the export and Formulate global strategic plans for the export and eventual overseas production of its productseventual overseas production of its products

FIDO – First in defeat othersFIDO – First in defeat others Start with exporting; once a product has gained Start with exporting; once a product has gained

acceptance and demand is sufficient, move to local acceptance and demand is sufficient, move to local productionproduction

HOW EXPORTERS CAN AVOID HOW EXPORTERS CAN AVOID TROUBLE: POST 9/11TROUBLE: POST 9/11

MANAGEMENT MANAGEMENT ISSUES/POTENTIAL RISKS in the ISSUES/POTENTIAL RISKS in the

EXPORT PROCESSEXPORT PROCESS►Transportation Transportation (value/weight ratios, special (value/weight ratios, special packaging/handling?/frequent shipments, etc.)packaging/handling?/frequent shipments, etc.)

►Trade barriers Trade barriers (e.g. tariffs, administrative (e.g. tariffs, administrative trade policies, etc)trade policies, etc)

►Payment Payment (large or small transactions/long-(large or small transactions/long-time or new customers, etc)time or new customers, etc)

► Issues/risks unique to an individual Issues/risks unique to an individual productproduct

(safety issues, government regulations/ (safety issues, government regulations/ standards, consumer preferences, etc.)standards, consumer preferences, etc.)

TURNKEY PROJECTSTURNKEY PROJECTS► TURNKEY PROJECT: contractor agrees to handle design, TURNKEY PROJECT: contractor agrees to handle design,

construction, and start-up of project, including training of construction, and start-up of project, including training of personnel. At completion of contract, foreign client is personnel. At completion of contract, foreign client is handed the “key” to the project.handed the “key” to the project.

► Examples: construction of an oil refinery, electric power Examples: construction of an oil refinery, electric power plant, plant,

housing developmenthousing development► Advantages:Advantages:

Can earn a return on knowledge assetCan earn a return on knowledge asset Less risky than conventional FDILess risky than conventional FDI

► Disadvantages:Disadvantages: No long-term interest in the foreign countryNo long-term interest in the foreign country May create a competitorMay create a competitor Selling process technology may be selling competitive Selling process technology may be selling competitive

advantage as welladvantage as well

Recall: Case of Starbuck’sRecall: Case of Starbuck’s

LICENSINGLICENSING► LICENSING: A company (licensor) licenses the right to use intangible LICENSING: A company (licensor) licenses the right to use intangible

property (intellectual property), including patents, inventions, property (intellectual property), including patents, inventions, formulas, designs, copyrights, trademarks, work systems, work formulas, designs, copyrights, trademarks, work systems, work methods, technology, etc. to another firm (licensee). In return for methods, technology, etc. to another firm (licensee). In return for giving this permission to licensee, licensor collects a royalty fee on giving this permission to licensee, licensor collects a royalty fee on every unit the licensee sells.every unit the licensee sells.

► Example: sodas, pharmaceuticals, Mickey Mouse toysExample: sodas, pharmaceuticals, Mickey Mouse toys► Advantages:Advantages:

Overcomes restrictive investment barriers.Overcomes restrictive investment barriers. Increases profitability.Increases profitability. Extends profitability, product life cycle, and applications of Extends profitability, product life cycle, and applications of

intangible propertyintangible property Allows firms with inadequate capital to participate in global Allows firms with inadequate capital to participate in global

arena.arena.► Disadvantages:Disadvantages:

Lack of tight control over activity in a market.Lack of tight control over activity in a market. Limits flexibility of a firm to obtain most benefit from experience Limits flexibility of a firm to obtain most benefit from experience

curves and learning effectscurves and learning effects Can help to create future competitors.Can help to create future competitors.

LicensingLicensing

Example:Example:

PharmaceuticalsPharmaceuticals

Introduction to BHC Pharma International Cooperation & Licensing (ICL)

At Bayer, we've increased research productivity more than 50% over the past five years. We've implemented new technologies like Pharmaco- and Toxicogenomics to refine our drug development process. We've launched new drugs while continuing to support cornerstone products like Cipro®, Avelox®, and the classic Bayer Aspirin line. We've become the recognized leader in clinical trial standards, ensuring greater safety for the patients who use our drugs. And our partners helped us every step of the way.

Our collaborations help us discover new therapies smarter and faster. That's why our International Cooperation and Licensing Group (ICL) is always looking to develop new partnerships that enhance our internal capabilities. Whether through research, licensing, or marketing agreements, together we can form an alliance that truly impacts human health.

FRANCHISINGFRANCHISING► Franchising: specialized form of licensing in which an Franchising: specialized form of licensing in which an

entrepreneur (franchisee) buys the use of intangible entrepreneur (franchisee) buys the use of intangible property and operates a business under a license property and operates a business under a license issued by a parent company (franchisor). The issued by a parent company (franchisor). The franchisee pays the franchisor for use of trademarks, franchisee pays the franchisor for use of trademarks, products, formulas, and business plans. The franchisor products, formulas, and business plans. The franchisor usually insists on certain standards and assists the usually insists on certain standards and assists the franchisee in management of the business.franchisee in management of the business.

► Examples: McDonald’s, Hilton HotelsExamples: McDonald’s, Hilton Hotels► Advantages:Advantages:

Reduces costs and risk of establishing enterpriseReduces costs and risk of establishing enterprise Building a global presence can be quickerBuilding a global presence can be quicker

► Disadvantages:Disadvantages: May prohibit movement of profits from one country May prohibit movement of profits from one country

to support operations in another countryto support operations in another country Quality controlQuality control

► Top 10 Global Franchises for 2005Top 10 Global Franchises for 2005

► SubwaySubway ► CurvesCurves ► Quizno's Franchise Co., Quizno's Franchise Co., ► The Kumon Math & Reading Centers The Kumon Math & Reading Centers ► KFC Corp. KFC Corp. ► UPS Store, The UPS Store, The ► RE/MAX Int'l. Inc. RE/MAX Int'l. Inc. ► Domino's Pizza LLC Domino's Pizza LLC ► Jani-King Jani-King ► GNC Franchising Inc. GNC Franchising Inc.

► Top 10 Global Franchises for 2006Top 10 Global Franchises for 2006

► Subway Subway ► Quizno's Franchise Co.,Quizno's Franchise Co.,► Curves Curves ► UPS Store, The/Post-Net, UPS Store, The/Post-Net, ► Pizza HutPizza Hut► WSI InternetWSI Internet► KFC Corp.KFC Corp.► Century 21 Real Estate LLCCentury 21 Real Estate LLC► RE/MAX Intl Inc.RE/MAX Intl Inc.► Jani-King Jani-King

Source: Entrepreneur.comSource: Entrepreneur.com

FRANCHISINGFRANCHISING

FRANCHISINGFRANCHISING

► Top 10 Global Top 10 Global Franchises for Franchises for 2005: Services 2005: Services are increasing in are increasing in importance importance

Source: Source: Entrepreneur.comEntrepreneur.com

Recall: Reasons for FDI Recall: Reasons for FDI WHEN TO CHOOSE HORIZONTAL FOREIGN DIRECT WHEN TO CHOOSE HORIZONTAL FOREIGN DIRECT

INVESTMENTINVESTMENT

How high are How high are transportation costs transportation costs

and tariffs?and tariffs?

Is know-how amenable Is know-how amenable to licensing?to licensing?

Is tight control over foreign Is tight control over foreign operation required?operation required?

Can know-how be protected by Can know-how be protected by licensing contractlicensing contract??

Then licenseThen license

ExportExport

No

Yes

Yes

Low

No

Yes

No

Horizontal FDI

Horizontal FDI

Horizontal FDI

High

FDI Chosen as an alternative over Exporting or Licensing.

JOINT VENTURESJOINT VENTURES► Joint venture: cooperative undertaking between Joint venture: cooperative undertaking between

two or more firms, usually to create a completely two or more firms, usually to create a completely new, separate legal entity. The partners involved new, separate legal entity. The partners involved usually assume equity positions in the joint usually assume equity positions in the joint venture.venture.

► Example: NUMMI (j.v. between Toyota and GM),Example: NUMMI (j.v. between Toyota and GM), Fuji-XeroxFuji-Xerox► Advantages:Advantages:

Benefit from local partner’s knowledge.Benefit from local partner’s knowledge. Shared costs/risks with partner.Shared costs/risks with partner. Reduced political risk.Reduced political risk.

► Disadvantages:Disadvantages: Risk giving control of technology to partner.Risk giving control of technology to partner. May not realize experience curve or location May not realize experience curve or location

economies.economies. Shared ownership can lead to conflictShared ownership can lead to conflict

JOINT VENTURESJOINT VENTURES

Shenker, Oded and Luo, Yadong. International Business. Hoboken, New Jersey: wiley & Sons, 2004. (p323).

WHOLLY-OWNED WHOLLY-OWNED SUBSIDIARIESSUBSIDIARIES

► Wholly-owned subsidiary: a subsidiary in which a Wholly-owned subsidiary: a subsidiary in which a company owns 100%company owns 100%

► Subsidiaries can be established through either Subsidiaries can be established through either Green-field investments or acquisitions.Green-field investments or acquisitions.

► Examples: Starbuck’s purchases Seattle Coffee Examples: Starbuck’s purchases Seattle Coffee chain in Great Britain; Disney Corp. builds Euro chain in Great Britain; Disney Corp. builds Euro Disney in ParisDisney in Paris

► Advantages:Advantages: No risk of losing technical competence to a competitor.No risk of losing technical competence to a competitor. Tight control of operations.Tight control of operations. Realize learning curve and location economies.Realize learning curve and location economies.

► Disadvantage:Disadvantage: Bear full cost and risk.Bear full cost and risk. Greater economic and political risksGreater economic and political risks Greater uncertaintyGreater uncertainty

Acquisition and Green-field: pros & Acquisition and Green-field: pros & conscons

► Pro:Pro: Quick to executeQuick to execute Preempt competitorsPreempt competitors Possibly less riskyPossibly less risky

► Con:Con:

Disappointing resultsDisappointing results

Overpay for firmOverpay for firm

Optimism about value Optimism about value creation (hubris)creation (hubris)

Culture clashCulture clash

Problems with proposed Problems with proposed synergiessynergies

► Pro:Pro: Can build Can build

subsidiary it subsidiary it wantswants

Easy to establish Easy to establish operating routinesoperating routines

► Con:Con: Slow to establishSlow to establish RiskyRisky Preemption by Preemption by

aggressive aggressive competitorscompetitors

Acquisition Greenfield

Acquisition or Green-field?Acquisition or Green-field?

Well-established,incumbent firms.

Competitors interested in

entry.

Embedded skills,routines, culture.

No competitors

Acquisition

Green-field

ADVANTAGES & ADVANTAGES & DISADVANTAGES DISADVANTAGES

ENTRY MODESENTRY MODES

Core Competencies & Entry Core Competencies & Entry ModeMode

► Companies often expand to earn greater Companies often expand to earn greater returns from their core competencies, returns from their core competencies, transferring skills and products they have to transferring skills and products they have to markets which are lacking in these skills and markets which are lacking in these skills and products.products.

► Entry mode may depend on whether core Entry mode may depend on whether core competency is technological know-how or competency is technological know-how or management know-how.management know-how.

► Recall that we established that firms will Recall that we established that firms will choose foreign direct investment when the choose foreign direct investment when the other options of exporting or licensing will not other options of exporting or licensing will not work or are not profitable.work or are not profitable.

Selecting an entry modeSelecting an entry mode

Technological Know-How

Management Know-How

Wholly owned subsidiary, except:

1. Venture is structured to reduce risk of loss of technology.

2. Technology advantage is transitory.

Then licensing or joint venture OK

Franchising, subsidiaries (wholly owned or joint venture)

Pressure for Cost Reduction leading to adoption of Global Standardization or Transnational strategy

Combination of exporting and wholly owned subsidiary

International Strategic International Strategic AlliancesAlliances► Cooperative agreements between potential or Cooperative agreements between potential or

actual actual competitorscompetitors in different countries. in different countries.► Scope of strategic alliances: complete or by Scope of strategic alliances: complete or by

function (e.g. production, marketing, R & D, function (e.g. production, marketing, R & D, financial)financial)

► Nature of strategic alliances: from joint ventures to Nature of strategic alliances: from joint ventures to loose, short-term contractual agreementsloose, short-term contractual agreements

► Advantages:Advantages: Facilitate entry into marketFacilitate entry into market Share fixed costsShare fixed costs Bring together skills and assets that neither company has Bring together skills and assets that neither company has

or can developor can develop Establish industry technology standardsEstablish industry technology standards

► Disadvantages:Disadvantages: Competitors get low cost route to technology and markets, Competitors get low cost route to technology and markets,

opportunism of alliance partner prevailsopportunism of alliance partner prevails

Global Alliances are DifferentGlobal Alliances are Different►Firms join to attain world leadershipFirms join to attain world leadership►Each partner has significant strength to Each partner has significant strength to

bring to the alliancebring to the alliance►A true global visionA true global vision►Relationship is horizontal not verticalRelationship is horizontal not vertical►When competing in markets not part of When competing in markets not part of

alliance, they retain their own identityalliance, they retain their own identity►Can be useful if host country requires some Can be useful if host country requires some

local ownershiplocal ownership

Strategic Alliances: ResultsStrategic Alliances: Results

► Many companies find that Strategic Many companies find that Strategic Alliances are a good way to:Alliances are a good way to: Get access to foreign marketsGet access to foreign markets Learn without the entire riskLearn without the entire risk Participate in markets when a company may not Participate in markets when a company may not

have the skill, resources, or people to do it alonehave the skill, resources, or people to do it alone Avoid the high cost of technology developmentAvoid the high cost of technology development

► But, there is a high rate of failure and But, there is a high rate of failure and difficulty in achieving the desired success.difficulty in achieving the desired success.

Strategic Alliances: ApproachStrategic Alliances: Approach► Partner SelectionPartner Selection

Get as much information as possible on the potential Get as much information as possible on the potential partnerpartner

► Collect data from informed third partiesCollect data from informed third parties► Former partnersFormer partners► Investment bankersInvestment bankers► Former employeesFormer employees

Get to know the potential partner before committingGet to know the potential partner before committing► Managing the Alliance Managing the Alliance

Build trustBuild trust►Relational capitalRelational capital

Learning from partnersLearning from partners►Diffusion of knowledgeDiffusion of knowledge

► Focus on quality, clarity, and frequency of Focus on quality, clarity, and frequency of communicationscommunications

Strategic Alliances: ApproachStrategic Alliances: Approach

Fig 14.1 ALLIANCE STRUCTURE

Strategic Alliance: Strong Strategic Alliance: Strong Foundation RequiredFoundation Required

Cateora, Philip R., & Graham, John L. International Marketing, 12th edition. P.332

Strategic Alliance: ExampleStrategic Alliance: Example► General Mills and Nestle General Mills and Nestle

created Cereal Partners created Cereal Partners Worldwide, a joint Worldwide, a joint venture.venture.

► Nestle had: established Nestle had: established plants, well-known brand plants, well-known brand name, strong distribution name, strong distribution in Europein Europe

► General Mills: cereal General Mills: cereal technology, proven cereal technology, proven cereal brands, and solid brands, and solid marketing.marketing.

► Results: so successful( #2 Results: so successful( #2 on European continent), on European continent), they plan to extend to they plan to extend to other market areas other market areas outside of Europeoutside of Europe

Cateora, Philip R., & Graham, John L. International Marketing, 10th edition. P.333