ENTRY STRATEGY

AND
STRATEGIC ALLIANCES
 LEARNING OBJECTIVES
After you have read the chapter, you should able to:
• Explain the three basic decisions that firms contemplating foreign
expansion must make: which market enter, when to enter those
markets, and on what scale.
• Outline the advantage and disadvantages of the different modes that
firm use to enter foreign markets.
• Identify the factors that influence a firm’s choice of entry mode.
• Evaluate the pros and cons of acquisitions versus green-field
ventures as an entry strategy.
• Evaluate the pros and cons of entering into strategic alliances.
 INTRODUCTION
This chapter is concerned with two closely related topics:
1. The decision of which foreign markets to enter,
when to enter them, and on what scale
2. The choice of entry mode
Any firm contemplating foreign expansion must first struggle with
the issue of which foreign markets to enter and the timing and scale
entry. The choice of which markets to enter should be driven by an
assessment of relative long-run growth and profit potential.

Firms expanding internationally must decide:

Which market to enter
When to enter them and what scale
Which entry mode to use
The choice of mode for entering a foreign market is another major issue
with which international business must wrestle.

The various modes for serving foreign markets are:

• Exporting
• Licensing or franchising to host-country firms
• Establishing joint ventures with a host-country firm
• Setting up a wholly owned subsidiary in a host country to serves its
market
• Acquiring an stablished enterprise in the host nation to serve that
market
Each of these option has advantages and disadvantages. This
magnitude of the advantages associated with each entry mode is
determined by a numbers of factors including:
• Transport cost
• Trade barriers
• Political risks
• Economic risk
• Business risks
• Cost
• Firm strategy
 BASIC
ENTRY DECISIONS
Which foreign markets?
 The choice must be based on an assessment of a nation’s long-run profit
potential.

 Long-run economic benefits are functions of factors such as:

• Size of the markets
• Present wealth
• Future wealth
Timing of Entry
It is important once attractive market have been identified.
We say that entry is early when an international business enters a
foreign market before other firms and late when it enters after other
international businesses have already established themselves.
 First-mover advantages is the advantages frequently associated with
entering a market early. The following are the advantages of being a
first-mover:
1. The ability to preempt rivals and capture demand by
establishing a strong band name.
2. The ability to build sales volume in that country and ride
down the experience curve ahead of rivals, giving the early
entrant a cost advantage over later entrants. This cost advantage
may enable the early entrant to cut prices below that of later
entrants , thereby driving them out of the market.

3. The ability of early entrants to create switching costs make it

difficult fir later entrants to win business. Such switching costs
make it difficult for later entrants to win business.
 First-mover disadvantages is the disadvantages upon entering a foreign
market before other international businesses. These advantages may
give rise to pioneering costs.
 Pioneering cost
- a cost that an early entrant has to beat that a later entrant
avoid
-it arise when the business system in a foreign country is so
different from that in firm’s home market that the
enterprise has to devote considerable effort, time, and
expenses to learning the rules of the game.
- it includes the costs of business failure if the firm, due to
its ignorance of the foreign environment, makes some major
mistakes.
- It also include the costs of the promoting and establishing a
product offering, including the costs of educating customers.
- These costs can be significant when the product being promoted
is unfamiliar to local consumers.
Scale of Entry and Strategic Commitment
 It is another issue that an international business needs to consider when
contemplating market entry.
 After choosing which market to entry, firms need to decide on the scale of
market entry.
 Entering a market on a large scale involves the commitment of significant
resources and implies rapid entry.
 Firms that enter a market on a significant scale make a strategic
commitment to the market.
 Strategic Commitment
- is the decision has a long term impact and is difficult to reverse.
 small-scale entry has the advantage of allowing a firm to learn
about a foreign market while simultaneously limiting the firm’s
exposure to that market.
IS THERE A RIGHT WAT TO ENTER
FOREIGN MARKET?
 No, there no right decision when deciding which market
enter, and the timing and scale of entry – just decision
that are associated with different levels of risk and
reward.
 ENTRY MODE
Once a firm decide to enter a foreign market, the question arises as to
the best mode of entry.
There are six different ways to enter a foreign market
1. Exporting
2. Turnkey projects
3. Licensing
4. Franchising
5. Joint venture
6. Wholly owned subsidiaries
1. Exporting

 Many manufacturing firms begin their global expansions as

exporters and only later switch to another mode for serving a
foreign market.
 Exporting refers to the selling and sending of goods and services
to another country
Advantages
Low cost. It avoids the often substantial costs of establishing manufacturing operations
in the host country.
High efficiency- Exporting may help a firm achieve experience curve and location
economies.
favorable government policies - exporting goods or services abroad is one of the key
activities that brings foreign currency into home countries and helps create foreign
currency reserves.
Disadvantages
 Can be expensive -there may be lower-cost locations for manufacturing the product can
be found abroad.
 High transport costs and long lead time.
 Tariff barriers can make exporting risky the threat of tariff barriers by the government
of the host country
 foreign exchange risks the exchange rate is the value of one currency for the purpose of
conversion to another for companies that want to export products to.
 Agents in a foreign country may not act exporter’s best interest.
2. Turnkey Projects
The contractor agrees and handle every detail of the project for a
client, including training operational personnel.
At completion of the contract, the foreign client is handled the
“key” to a plant that is ready for full operation—hence, the term
turkey. This is a means of exporting process technology to other
countries.
These are the most common in the chemical, pharmaceutical,
petroleum refining, and metal refining industries, all of which use
complex, expensive production technologies.
Advantages
 More revenue in the short term they are a way of earning economic returns from
the know-how required to assemble and run a technologically complex process.
 they can be less risky than conventional FDI

Disadvantages
 possible revenue loss in the long term the firm has no longer-term interest in the
foreign country
 unintended competition -the firm may create a competitor
 the potential loss of a competitive advantage if the firm’s process technology is a
source of competitive advantage, then selling this technology this technology
through a turnkey project is also selling competitive advantage to potential and/or
actual competitors
3.Licensing
The licensor grants the rights to intangible property to
the licensee for a specified tie period, and in turn,
receives a royalty free from the license.
 Intangible property includes:
 Patents
 Inventories
 Formulas
 Processes
 Designs
 Copyrights
 Trademarks
 Advantages

 the firm does not have to bear the development costs and risk
associated with opening a foreign market.
 very attractive for firms lacking the capital to develop operation
overseas
 can be attractive when a firm is unwilling to commit substantial
financial resources to an unfamiliar or politically volatile foreign
market.
 potentially better marketing
 the ability to enter foreign markets more easily
 the diffusion of conflicts
Disadvantages
 risk of IP theft
it does not give a firm the tight control over manufacturing,
marketing, and strategy that is required for realizing experience
curve and location economies
 no guarantee of revenue
 risk of diminished reputation
 potential conflicts licensing also exposes the licensor to potential
conflicts with their licensees particularly if those licensees try
withholding revenue from the licensor
4. Franchising
It is similar to licensing, although franchising tends to involve
longer-term commitments than licensing
 basically, a specialized form of licensing in which the
franchiser not only sells intangible property (normally a
trademark) to the franchise, but also insist that the franchise
agree to abide by strict rules as to how it does the business
 the franchiser will also often assist the franchisee to run
business on an ongoing basis
As with licensing, the franchiser typically receives a royalty
payment which amount to some percentage of the franchisee’s
revenues
Advantages
 the advantages of franchising as an entry mode are very similar
to those of licensing
 the firm is relieved of many of the costs and risks of opening a
foreign market on its own
 the franchisee typically assumes those costs and risks
 it creates a good incentive for the franchisee to build a
profitable operation as quickly as possible
 using a franchising strategy, a service firm can build a global
presence quickly and at a relatively low cost and risk
Disadvantages
 the disadvantages of franchising are less pronounced that in the
case of licensing
Since franchising is often used by service companies, there is no
reason to consider the need to coordinate manufacturing to
achieve experience curve and location economies
5. Joint venture with a host country firm
 a firm that is jointly owned by two or more otherwise
independent
 most joint ventures are 50:50 partnerships
Advantages
 gaining support from a local partner thus having Access to local’s
partners knowledge
 Sharing development costs and risks
 politically acceptable

Disadvantages
 Lack of control over technology
 Inability to realize location and experience economies
6. Wholly owned subsidiaries
the firm owns 100 percent of stock
in establishing a wholly owned subsidiary in a foreign market
can be done in two ways:
New operation, often referred to as a greenfield venture
Acquired an established firm
 TWO WAYS
Acquisition Greenfield venture
• an acquisition is defined as a • refers to when a company creates a
corporate transaction in which one subsidiary in a different country
company purchases either a portion or building its operations from the
all of another company's shares or ground up in addition to the
assets acquisitions are typically made construction of new production
in order to take control of and build facilities these projects can sometimes
on the target companies strengths and include the building of new
to capture synergies. distribution hubs offices and living
quarters establishing Greenfield
ventures are quite common in the
automobile industry
 Advantages
 when a firm’s competitive advantages is based on
technological competence, a wholly owned subsidiary will
often be the preferred entry mode because it reduces the risk of
losing control over that competence
 wholly owned subsidiary gives a firm tight control over
operation in different countries
 wholly owned subsidiary may be required if a firm is trying to
realize location and experience curve economies
Disadvantages

 establishing a wholly owned subsidiary is generally the most

costly method of serving a foreign market from a capital
investment standpoint firm taking this approach must bear the full
capital cost and risks of setting up overseas operation.
 a lack of local support their cultural and political challenges that may
negatively affect the performance of a firm's wholly owned subsidiary
 HOW DO CORE
COMPETENCIES INFLUENCE THE ENTRY
MODE ?
 the optimal entry mode depends on the nature of a firm’s core competencies
 when competitive advantage is based on proprietary technology know-how
 avoid licensing and joint ventures unless the technological
advantage is only transitory, or can be established as the dominant
design

 when competitive advantage is based on management know-how

 the risk of losing control over the management skills is not high, and the
benefits from getting use of brand name is significant
 HOW DO PRESSURE FOR COST
REDUCCTIONS INFLUENCE ENTRY
MODE?
 When pressure for cost reductions is high, firms are more likely to
pursue some combination of exporting and wholly owned
subsidiaries
 allows the firm to achieve location and scale economies and
retain some control over product manufacturing and
distribution
 firms pursuing global standardization or translation
strategies prefer wholly owned subsidiaries
 WHICH IS BETTER GREENFIELD OR
ACQUISITION?
 The choice depends on the situation confronting the firm
1.A greenfield strategy
- build a subsidiary from the group up
 A greenfield venture may be better when the firm needs to transfer
organizationally embedded competencies, skills, routines, and culture

2. An acquisition strategy
- acquire an existing company
 Acquisition may be better when there are well-established competitors or
global competitors interested in expanding
 The volume of cross-border acquisitions has been rising for the last two
decades
 WHY CHOOSE ACQUISITION?
 Acquisition are attractive because
 They are quick to execute
 They enable firms to preempt their competitors
 They may be less risky that greenfield ventures

 Acquisition can fail when

 The acquiring firm overpays for the acquired firm
 The cultures of the acquiring and acquiring firm clash
 Anticipated synergies are slow and difficult to achieve
 There is inadequate pre-acquisition screening

 To avoid these problems, firm should

 Carefully screen the firm to be acquired
 More rapidly to implement an integration plan
 WHY CHOOSE GREENFIELD?
The main advantage of a greenfield venture is that it gives the firm
a greater ability to build the kind of subsidiary company that it
wants
But, greenfield venture are slower to establish
Greenfield ventures are also risky
 WHAT ARE STRATEGIC ALLIANCES?
Strategic alliances refer to cooperative agreement between
potential or actual competitors
 range from formal joint ventures to short-term contractual
agreement
the number of strategic alliances has exploded in recent decades
WHY CHOOSE STRATEGIC ALLIANCES?
Strategic alliances are attractive because they
facilitate entry into a foreign market
allow firms to share the fixed costs and risks of developing new
product or processes
bring together complementary skills and assets that neither partner
could easily develop on its own
help a firm establish technological standards for the industry that
will benefit the firm
But, the firm needs to be careful not to give away more that it
receives
 WHAT MAKES STRATEGIC ALLIANCES
SUCCESSFUL?
The success of an alliance is a function of

1.Partner selection
 A good partner
helps the firm achieve its strategic goals and has the capabilities the
firm lacks and that it values
shares the firm’s vision for the purpose of the alliance
will not exploit the alliance for its own ends
2. Alliance structure
 The alliance should
 make it difficult to transfer technology not meant to be transferred
 have contractual safeguards to guard against the risk of opportunism by a
partner
 allow for skills and technology swaps with equitable gains
 minimize the risk of opportunism by an alliance partner

3. The manner in which the alliance is managed

 Requires
 interpersonal relationships between managers
 cultural sensitivity is important
 learning from alliance partners
 knowledge must then be diffused through the organization