Chapter 14 Entry Strategy and Strategic Alliances Woo Ji-hye Jo Jun-woo INTERNATIONAL BUSINESS.
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Transcript of Chapter 14 Entry Strategy and Strategic Alliances Woo Ji-hye Jo Jun-woo INTERNATIONAL BUSINESS.
Chap. 14 Entry Strategy and Strategic Alliances
2 INTERNATIONAL BUSINESS
Case: Diebold
Began to sell ATM machines in foreign markets in 1980’s
1980’s Distribution agreement with Philips 1990 Diebold establishes joint venture with
IBM 1997 foreign sales 20% of Diebold’s total
revenues Diebold decides to go it alone with local
manufacturing presence for local customization Through acquisitions joint ventures
Chap. 14 Entry Strategy and Strategic Alliances
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Basic foreign expansion entry decisions
A firm contemplating foreign expansion must make three decisions
Which markets to enter
When to enter these markets
What is the scale of entry
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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 or command economy or where speculative financial bubbles have led to excess borrowing
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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 entry Strategic Commitments - a decision that
has a long-term impact and is difficult to reverse.
May cause rivals to rethink market entry. May lead to indigenous competitive
response. 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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Exporting Advantages:
Avoids cost of establishing manufacturing operations
May help achieve experience curve and location economies
Disadvantages: May compete with low-cost location
manufacturers Possible high transportation costs Tariff barriers Possible lack of control over marketing reps
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Turnkey projects
Advantages: Can earn a return on knowledge asset Less risky than conventional FDI
Disadvantages: No long-term interest in the foreign
country May create a competitor Selling process technology may be
selling competitive advantage as well
Contractor agreesto handle everydetail of projectfor foreign client
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Licensing Advantages:
Reduces development costs and risks of establishing foreign enterprise.
Lack capital for venture. Unfamiliar or politically volatile market. Overcomes restrictive
investment barriers. Others can develop
business applications of intangible property.
Agreement wherelicensor grants rights
to intangible property to another entity for a
specified period of time in return for royalties.
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Licensing
Disadvantages: Lack of control over technology Inability to realize location and
experience curve economies Inability to engage in global strategic
coordination
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Franchising
Advantages: Reduces costs and risk of establishing
enterprise Disadvantages:
May prohibit movement of profits from one country to support operations in another country
Quality controlFranchiser sells
intangible propertyand insists on rules
for operating business
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Joint Ventures Advantages:
Benefit from local partner’s knowledge. Shared costs/risks with partner. Reduced political risk.
Disadvantages: Risk giving control of technology to
partner. May not realize experience curve or
location economies. Shared ownership can lead to conflict
Chap. 14 Entry Strategy and Strategic Alliances
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Wholly owned subsidiary
Subsidiaries could be Greenfield investments or acquisitions
Advantages: No risk of losing technical competence to
a competitor Tight control of operations. Realize learning curve and location
economies. 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 OKFranchising, subsidiaries (wholly owned or joint venture)
Pressure for Cost Reduction
Combination of exporting and wholly owned subsidiary
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Acquisition and Green-field - pros & cons
Pro: Quick to execute Preempt competitors Possibly less risky
Con: Disappointing results Overpay for firm optimism about value
creation (hubris) Culture clash. Problems with
proposed synergies
Pro: Can build subsidiary it
wants Easy to establish
operating routines Con:
Slow to establish Risky Preemption by
aggressive competitors
Acquisition Greenfield
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Acquisition or Green-field?
Well-established,incumbent
firms.Competitors interested in entry.
embedded skills,routines, culture.
No competitors
Acquisition
Green-field
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Strategic Alliances Cooperative agreements between potential
or actual competitors. Advantages:
Facilitate entry into market Share fixed costs Bring together skills and assets that neither
company has or can develop Establish industry technology standards
Disadvantages: Competitors get low cost route to technology
and markets
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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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Structuring the alliance to reduce opportunism