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8/4/2019 Foreign Entrpreneurship LECT--9
http://slidepdf.com/reader/full/foreign-entrpreneurship-lect-9 1/49
Entry Strategy and StrategicAlliances
8/4/2019 Foreign Entrpreneurship LECT--9
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Basic Foreign Entry Decisions
Which foreign markets to enter?
When to enter them?
What scale?
Which entry mode?
There are no “right” decisions….just decisions that are
associated with different levels of risk and reward
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Basic Foreign Entry Decisions
Which foreign markets to enter?
When to enter them?
What scale?
Which entry mode?
8/4/2019 Foreign Entrpreneurship LECT--9
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Which Foreign Markets
With over 200 nations in the world….
and they do not all hold the same profit potential
The decision to enter which market will be based on the
assessment of the nation’s long-run profit potential
The firm needs to consider the benefits, costs and risks
of doing business in that country
But be careful of this generalization…..a firm may
enter a market due to multi-point competition and
may not be seeking profits in this specific market
8/4/2019 Foreign Entrpreneurship LECT--9
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Which Foreign Markets
Long-run economic benefits of doing business in a
country are a function of:
size of the market
purchasing power of consumers future wealth of consumers
future economic growth rates
suitability of the product for the market indigenous competition
political stability
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Which Foreign Markets
Favorable Politically stable developed and developing nations
Free market systems
No dramatic upsurge in inflation or private-sector debt
Unfavorable
Politically unstable developing nations with a mixed orcommand economy
Where speculative financial bubbles have led to excess
borrowing
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Basic Foreign Entry Decisions
Which foreign markets to enter?
When to enter them?
What scale?
Which entry mode?
8/4/2019 Foreign Entrpreneurship LECT--9
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Timing of Entry
First-Mover Advantage
Preempt rivals and capture demand by establishing
a strong brand
Build sales volume and move down experience curve
before rivals and achieve cost advantage
Create switching costs that tie customers to your
products or services and creates an entry barrier for
later entrants into the market
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Timing of Entry
First-Mover Disadvantages
Pioneering costs that a later entrant can avoid
starting at the bottom of the experience curve withthe risk of failure due to operating in uncertainty
promoting and establishing a new business mode or
product and educating the consumer
changes in government policy and regulations afterentry into the market
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Basic Foreign Entry Decisions
Which foreign markets to enter?
When to enter them?
What scale?
Which entry mode?
8/4/2019 Foreign Entrpreneurship LECT--9
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Strategic Commitments
When entering in a rapid and significant scale, thislevel of strategic commitment might:
have a long-term impact on the firm
be difficult to reverse
influence the nature of competition in the market
result in a strategic response by a local competitor
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Large-Scale Entry
Advantages Easier to attract customers and distributors
May cause rivals to rethink market entry
Might allow you to capture first-mover advantagesover a small-scale entrant
Disadvantages
Higher risks associate with large investment Fewer resources to commit elsewhere
May lead to indigenous competitive response
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Small-Scale Entry
Advantages
Limits business risks by allowing the firm to learn
about the market
Allows firm to gain market knowledge before makingstrategic decisions and large-scale investment
Disadvantages May be difficult to build market share
Difficult to capture first-mover advantages
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Basic Foreign Entry Decisions
Which foreign markets to enter?
When to enter them?
What scale?
Which entry mode?
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Entry Modes
Exporting
Turnkey Projects
Licensing
Franchising
Joint Ventures
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Determinants of Which Entry Mode
The optimal mode varies for each market situation
depending on the: transportation costs
trade barriers
political risks economic risks
business risks
costs and required investment
firm’s strategy
Different firms may enter the same market with
different entry modes
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Exporting
Advantages Avoids cost of establishing manufacturing operations
May help achieve experience curve and locationeconomies
Disadvantages
May compete with low-cost location manufacturers
Possible high transportation costs Tariff and non-tariff barriers
Possible lack of control over marketing and sales bydelegating to agents
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Turnkey Project Allows a firm to export process technology
Contractor agrees to handle every detail of project forforeign client• design• construction• training• consultation and technical support
At completion of contract, the foreign client is handedthe “key” to the project
Most common in process technology industries• chemical• pharmaceutical• petroleum refining• metal refining
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Turnkey Projects
Advantages A means of exporting process technologies
Can earn a return on valuable knowledge assets
Can overcome FDI restrictions
Less risky than conventional FDI
Disadvantages
No long-term interest in the foreign country May create a competitor
Selling process technology may be selling the firm’score competency and competitive advantage
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Licensing
Agreement where licensor grants rights to intangible
property to another entity (licensee) for a specified
period, in return for a royalty fee
Intangible property may be: patents,
inventions
formulas
processes designs,
copyrights
trademarks
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Advantages of Licensing
Reduces development costs and risks of opening a
foreign market
Attractive for firms that:
lack capital are unwilling to take financial risk in an
unfamiliar or politically volatile foreign market
must overcome restrictive investment barriers does not want to develop the business applications
of an intangible property
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Disadvantages of Licensing
Limits the firm’s control over production, marketingand strategy to required to realize experience curve
and location economies
Limits the firm’s ability to coordinate strategic moves
across countries (cross-subsidization)
Loss of technology and the creation of a potential
competitor
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Reducing the Risk of Licensing
Cross-Licensing
An agreement in which a company licenses valuable
intangible property to a foreign partner and also receives
a license for the partner’s valuable knowledge
allows firms to hold each other hostage
Joint Venture
License technology through a joint venture where the
licensor and licensee have important equity stakes and
aligns the interests of both firms
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Franchising
A specialized form of licensing in which the franchisersells intangible property to the franchisee and insists
on rules for operating the business
Tends to involve longer term commitments thanlicensing
Franchisor often assists the franchisee to run the
business on an ongoing basis
Primarily in the service sector
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Franchising
Advantages Reduces costs and risk of opening foreign market
Allows a firm to rapidly and inexpensively build a
global presence
Disadvantages
May inhibit taking profits from one country to
support competitive attacks in another country
Quality control and protecting brand equity
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Joint Venture
Establishing a firm that is jointly ownedby two or more otherwise independent firms
Typical ownership is 50/50…but not always
Having 50% or more does not necessarily mean that
you have “control” of the joint venture
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Joint Ventures
Advantages
Benefit from local partner’s knowledge of market Share costs and risks with partner
Reduce political risk
Overcome investment barriers
Disadvantages
Risk giving control of technology to partner
May not have the necessary control to realize
experience curve or location economies Limits ability to engage in coordinated global strategy
Shared ownership can lead to conflict over goals andcontrol
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Wholly Owned Subsidiary
The firm owns 100 percent of the stock and establishes
their presence via a greenfield venture or an
acquisition of an existing firm
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Wholly Owned Subsidiary
Advantages
No risk of losing control of core competency ortechnology to a competitor
Tight control over operations in different countries
Helps realize learning curve and location economies
Disadvantages
Bear full cost and risk of foreign market entry
Lack of local knowledge
culture and consumer
competition and consumers
politics and laws
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Selecting an Entry Mode
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Selecting an Entry Mode
All entry modes have advantages and disadvantages
When determining which entry mode the firm must
consider the trade-offs between each entry mode
There are no “right” decisions….just decisions that are
associated with different levels of risk and reward
8/4/2019 Foreign Entrpreneurship LECT--9
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Core Competencies and Entry Mode
Optimal entry mode partly depends on the nature of
the firm’s core competency
Technological Know-How
licensing and joint venture should be avoided to reduce
risk of losing technology
wholly owned subsidiaries overcomes this risk
exceptions to this rule exist
Management Know-How franchising and subsidiaries (joint ventures) with control
over the operations to protect brand equity
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Cost Pressures and Entry Mode
The greater the pressures for cost reductions, themore likely a firm will pursue a combination of
exporting and wholly owned subsidiaries
Wholly owned subsidiaries are generally preferred by
firms that are pursuing global standardization or
transnational strategies
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Greenfield Venture or Acquisition?
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Acquisitions
Advantages
Quick to execute Preempt competitors
Possibly less risky than greenfield ventures becausethe firm is buying assets that are producing revenue
and local knowledge
Disadvantages
Often produce poor results due to
overpayment for acquired firm’s assets overestimate of the potential for value creation (hubris)
culture clash between firms
problems with proposed operational synergies
inadequate pre-acquisition screening
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Reducing the Risk of Acquisition Failure
Carefully screen the targeted foreign firm and audit
operations and true value of technology and/brand
financial and market position
management culture
Reduce local management attrition from acquired firm
Quickly implement an integration plan
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Greenfield Venture
Advantages Can build subsidiary it designs--not acquires
Easier to establish own operating routines
Avoids the “unknown surprises” with an acquisition
Disadvantages
Slow to establish
Uncertainty and risky Preemption by aggressive competitor via acquisition
Adds new capacity to industry
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Acquisition or Green-Field Venture?
Well-established,
incumbent firms
Competitors also
interested in entry
Embedded skills,
routines, culture
No competitors
Acquisition
Green-FieldVenture
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Strategic Alliances
Cooperative agreements between
potential or actual competitors
Includes the range from joint ventures to short-term
contractual agreements on specific tasks
Contentious debate if they
create any value
only overcome short-term weaknesses
competitively weaken a firm in the long term
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Strategic Alliances
Advantages
Facilitate entry and gain access into market
Overcome local ownership regulations Learn about the market or technology
Share fixed costs and risks (especially in R & D)
Bring together complimentary skills and assets thatneither firm has or can develop
Establish industry technological standards
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Strategic Alliances
Disadvantages
Provides potential competitors a low-cost route to
technology and markets
Limits strategic “degrees of freedom”
Often is difficult and ends in “divorce”
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The Right Partner
A good partner:
helps the firm achieve its strategic goals
has skills that the firm lacks and values
shares the firm’s vision for the alliance
will not opportunistically exploit the alliance
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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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Partner Selection Criteria
Complimentary technical skills and resources
Moderate level of mutual dependency (needs)
Adequate financial resources to grow venture
Comparable size and sophistication
Similar values and goals
Compatible operating procedures
Consider potential communication barriers
Compatible management teams
Mutual understanding, trust, and commitment
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Alliance Structure
Overcoming Opportunism by Partner
Design alliance to avoid unwanted technology transfer
Establish contractual safeguards
Swap valuable skills and technologies (cross-license)
Seek credible commitments
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Managing the Alliance
Acknowledge that the alliance is dynamic
Build trust and personal relationships
(relational capital)
Learn from alliance partner and apply the knowledgewithin the parent firm
Maintain balance of partner participation