Chapter 15 | ENTRY STRATEGY & STRATEGIC ALLIANCES

Basic Entry Decisions

Three basic decisions need to be made by the companies contemplating foreign expansion.

Which foreign market?

The choice of location must be based on an assessment of a nation’s long-run profit potential. Choice of location depends on
- The economic and political factors of a country.
- Factors such as the size of the market (in terms of demographics), the present wealth (purchasing power) of consumers in
that market and the likely wealth of consumers. E.g. India and China are very large market when measured in terms of
number of consumers but are small in economic terms as consumers have very low living standard.
- The attractiveness of a country as a potential market depends on balancing the benefits, costs and risks. This trade-off is
most favourable in politically stable developed and developing nations that have free market systems and where there is no
dramatic upsurge in either inflation rates or private sector debt.
- In terms of long-term profit potential, emerging markets are attractive. For example, Brazil and China.
- Success or value of international business also depends on the suitability of its product offering to that market and the
nature of indigenous competition.

Timing of entry
Entry is early when an international business enters a foreign market before other foreign firms. The advantages associated with
entering a market early are commonly known as first-mover advantages.

- First movers are able to pre-empt rivals and capture demand by establishing a strong brand name.
- They are able to build sales volume in that country and ride down the experience curve ahead of rivals.
- They are able to create switching costs make it difficult for late entrants to win business.
First-mover disadvantages (namely pioneering cost)
- A certain liability is associated with being a foreigner and this liability is greater for early entrants. The late entrant may
benefit by observing and learning from the mistakes made by early entrants.
- Pioneering cost include the cost of promoting and establishing a product offering including the cost of educating
customers. E.g. KFC and McDonalds.
- An early entrant may be put at a severe disadvantage relative to later entrant if regulations change in a way that diminishes
the value of an early entrant’s investments.

Scale of entry and strategic commitments

Large scale entrant involves,
- The commitment of significant resource
- Rapid entry
Advantages:
- A strategic commitment has a long-term impact. It makes easy for the company to attract customers and distributors.
- Large scale entry may create entry barrier for other foreign institutions.
- Large scale entrant is more likely than the small scale entrant to be able to capture first-mover advantages associated with
demand pre-emption, scale economies and switching cost.
Disadvantage:
- Significant commitment is reduced the chance for strategic flexibility.
- Large-scale entry involves significant risk. Small scale entry is a way to gather information and learn about a foreign
market before deciding whether to enter on a significant scale and how best to enter.
Entry modes

Once a firm decides to enter a foreign market the question arise as to the best mode of entry.

Exporting

Definition:

To ship to another country for sale or exchange

Advantage:

- It avoids often substantial cost of establishing manufacturing operations in the host country.
- Exporting may help a firm achieving experience curve and location economies. E.g. Matshusita (See pg. 487)
Disadvantage:

- Exporting from the home base may not be appropriate if there are low-cost locations for manufacturing the product
abroad. This problem can be avoided by producing in other low-cost location and then exporting from there.
- High transport cost can make exporting uneconomical, particularly for bulk products. One way of getting around this is to
manufacture bulk products regionally.
- Tariff barrier can make exporting uneconomical. E.g. Japanese cars established production plants in USA.
- Fourth drawback to exporting arises when a firm delegates its marketing, sales and service in each country where it does
business to another company. The local agent may lack commitment. E.g. IBM and Diebold (See pg. 487).

Turnkey Project

In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, including the training of
operating personnel. At completion of he contract, the foreign client is handed the ‘key’ to a plant that is ready for full operation.
Hence this arrangement is called turnkey.

Advantages:

- Turnkey projects are a way of earning great economic returns from know-how which is a critical asset.
- The strategy is particularly useful where FDI is limited by host-government regulations. E.g. host governments of many
oil-rich countries restrict FDI in this sector. So such deals are often attractive to the selling firm because without them,
they would have no way to earn a return on their valuable know-how in that country.
- Turnkey strategy is less risky as there is no commitment of resources.

Disadvantages

- The firm that enters into a turnkey deal will have no long-term interest in the foreign country. This may be
disadvantageous if the country proves to be a profitable market in future.
- The firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor. E.g. Saudi oil
companies may compete with US firms in their home market.

Licensing

A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee)
for a specified period and in return, the licensor receives a royalty fee from the licensee.
E.g. to enter Japanese market, Xerox, inventor of the photocopier, established a joint venture with Fuji Photo that is known as Fuji-
Xerox. Xerox then licensed its xerographic know-how to Fuji-Xerox.

Advantages:

- The foreign firm does not have to bear the development costs and risks associated with opening a foreign market.
- Licensing is attractive for firms lacking the capital to develop operations overseas.
- Licensing can be attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar or
politically volatile foreign market.
- Licensing is also used by firm that wishes to participate in a foreign market but is prohibited from doing so by barriers to
investments. E.g. Fuji-Xerox (Pg. 489)
- Finally, licensing is frequently used when a firm possesses some intangible property that might have business applications,
but it does not want to develop those applications itself.

Disadvantages:

- It does not give a firm the tight control over manufacturing, marketing and strategy that is required for realizing
experience curve and location economies.
- Competing in a global market may require a firm to co-ordinate strategic moves across countries by using profits earned in
one country to support competitive attacks in another. Licensing limits form’s ability to do this
- There is a risk associated with licensing technological know-how to foreign companies. E.g. RCA Corporation example (pg
489)

Ways to reduce risk in licensing

- By entering into a cross-licensing agreement with a foreign firm.

- By forming joint-venture in which licensor and licensee both will have stake. E.g. Fuji-Xerox.

Franchising

Franchising is basically a specialized form of licensing in which the franchiser 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. E.g. McDonalds.

Advantages:

- The firm is relieved of many of the costs and risks of opening foreign market on its own.
- This creates a good incentive for the franchisee to build a profitable operation as quickly as possible.

Disadvantages:

- This may inhibit the firm’s ability to take profits out of one country to support competitive attacks in another.
- As firm’s brand name remain associated with all the franchisees, so the firm must be conscious about quality control. This
quality control becomes problematic in franchising arrangements. E.g. Hilton hotel.

One way to deal with this disadvantage is to set up a subsidiary in each country in which the firms expands. The subsidiary might be
a WOE.

Joint Ventures:
A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms. E.g. Grameen Phone

Advantages:

- A firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political
systems and business systems.
- A firm gains from sharing the set-up cost and risk with a local partner.
- In many countries political considerations make JV the only feasible entry mode. E.g. Bangladeshi RMG industry. JV face
a low risk of being subject to nationalization or other forms of adverse government interference.

Disadvantages:

- A firm that enters into a JV risk giving control of its technology to its partner. Firms can wall-off the technology by holding
majority share or entering into a cross licensing agreement.
- A JV does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location
economies.
- It does give a firm tight control over a foreign subsidiary that it might need for engaging in coordinated global attacks
against its rivals. E.g. TI in Japan (see pg. 493)
- Shared investment may lead to conflicts regarding control as the firms may have different goals, objectives and culture.
E.g. Daimler-Chrysler.

Wholly Owned Subsidiaries

In a WOE, the firm owns 100% of the stock. It can be done in two ways; acquisition and Greenfield investment.

Advantages:

- When a firm’s competitive advantage is based on technological competence, WOE subsidiary will often be the preferred
entry mode as it reduces the risk of loosing control over that competence.
- A WOE gives a firm tight control over operations in different countries. It helps to build global strategic coordination.
- WOE helps a firm to realize location and experience curve economies. A national subsidiary may specialize in
manufacturing only part of the product line or certain components of the end product, exchanging parts and products with
other subsidiaries in the global system. JV or licensing do not allow such flexibility.

Disadvantages:

- Firms doing this must bear full capital costs and risks of setting up overseas operations.
- Acquisition increases the risk of culture clash.
Establishing a WOE: Greenfield venture or acquisition?

Greenfield: Setting up a new operation in a country. E.g. BAT, Unilever

Acquisition: Acquire an established firm in the host nation and use that firm to promote its products. E.g. Banglalink. Orascom, the
Egyptian company, acquired Sheba telecom.

Please see page 497-502

Strategic Alliances:
Strategic alliances refer to cooperative agreements between potential or actual competitors.

Strategic alliances run the range from formal joint ventures, in which two or more firms have equity stakes, to short-term
contractual agreements, in which two companies agree to cooperate on a particular task.

Advantages:

- Strategic alliances may facilitate entry into a foreign market. E.g. Motorola formed strategic alliance with Toshiba to
overcome high trade barriers in Japanese cellular market.
- Strategic alliances allow firms to share the fixed cost and risk of developing new products and process.
- Alliance brings together the complementary skills and assets that neither company could easily develop on its own.
- It can make sense to form an alliance that will help the firm establish technological standards for the industry that will
benefit the firm.

Disadvantages:

- Alliances give a low cost route to new technology and market. Firms can loose their competitive advantage to the
competitors.