MGRECON401

Economics of International Business and Multinationals

LECTURE 8

Entry Strategy and Strategic Alliances

12-2

Lecture Focus

Which markets to enter

When to enter these markets

What is the scale of entry

What is the mode of entry

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Which foreign marketsFavorable

Politically stable developed and developing nationsFree market systemsStable macroeconomyGrowing market for your product

UnfavorablePolitically unstable developing nations Mixed or command economyUnstable macroeconomy

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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.Create switching costs.

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

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Scale of entry

Large scale entryStrategic 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.Reduces exposure risk.

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Entry modes

Exporting

Turnkey Projects

Licensing/Franchising

Joint Ventures

Wholly Owned Subsidiaries

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ExportingAdvantages:

Avoids fixed cost of establishing manufacturing operationsMay help reduce costs from economies of scale in production

Disadvantages:May compete with low-cost location manufacturersPossible high transportation costsTariff barriers

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Turnkey projectsContractor agrees to handle every

detail of initial setup for foreign client

Advantages:Can earn a return on knowledge assetLess risky than conventional FDI

Disadvantages:May create a competitorSelling process technology may be selling competitive advantage as well

12-9

Licensing/FranchisingAgreement where licensor grants rights to intangible property

to another entity for a specified period of time in return for royalties.

AdvantagesReduces development costs and risks of establishing foreign enterpriseUnfamiliar or politically volatile marketOvercomes restrictive investment barriersOwnership solves many incentive problems

DisadvantagesFree-rider problem

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Joint Ventures

AdvantagesBenefit from local partner’s knowledgeShared costs/risks with partnerReduced political risk

DisadvantagesRisk giving control of technology to partnerShared 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 competitorTight control of operations.

Disadvantage:Bear full cost and risk

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Advantages and disadvantages of entry modes

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Selecting 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

Combination of exporting and wholly owned subsidiary

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Acquisition and Greenfield: pros & consAcquisition

Pro:Quick to executePreempt competitorsPossibly less risky

Con:Disappointing resultsOverpay for firm due to optimism about value creation (hubris)Culture clashProblems with proposed synergies

GreenfieldPro:

Can build subsidiary it wantsEasy to establish operating routines

Con:

Slow to establishRiskyPreemption by aggressive competitors

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Acquisition or Greenfield?

Well-established,incumbent firms.

Competitors interested in

entry.

embedded skills,routines, culture.

No competitors

Acquisition

Greenfield

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Case: DieboldManufacturer of ATM machines

1980’s Distribution agreement with Philips to supply foreign markets

1990 Diebold establishes joint venture with IBM70% Diebold: supplied machines30% IBM: supplied global marketing, sales, and service

1997: foreign sales 20% of Diebold’s total revenues

Diebold forecast growing demand in China, India, BrazilDiebold bought out IBMDiebold expanded rapidly through acquisitions

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Case: ING Group

Top ten worldwide financial service firmBased in the NetherlandsInsurance, banking, and investment products

International expansion through acquisitionPrompted by WTOPrompted by relaxed banking rules in the USLeft acquired asset untouched, but required sales of ING products

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Case: Jollibee Foods

Philippine based fast-food chainDominant market share in PhilippinesCater to local Filipino taste

Which markets should it enter?

How should it enter?

What should be its scale of entry?

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Strategic Alliances

Cooperative agreements between potential or actual competitors.

Advantages:Facilitate entry into marketShare fixed costsBring together skills and assets that neither company has or can developEstablish industry technology standards

Disadvantages:Competitors get low cost route to technology and markets

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Alliances are popular

High cost of technology development

Company may not have skill, money or people to go it alone

Good way to learn

Good way to secure access to foreign markets

Host country may require some local ownership

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Global Alliances, however, are different

Firms join to attain world leadership

Each partner has significant strength to bring to the alliance

A true global vision

Relationship is horizontal not vertical

When competing in markets not part of alliance, they retain their own identity

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Xerox and Fuji Xerox

What role has Fuji Xerox played in Xerox’s global strategy? How do you expect this role to change in the future?

Is Fuji Xerox a successful joint venture in 1990? How do you measure its performance? Please be as concrete and specific as possible.

What were the key success factors in this alliance in the past? Do you expect these factors to change in the future?