Entry Modes Analysis

8/12/2019 Entry Modes Analysis

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International Strategy

Entry Modes


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Pressures for Global Integration and

National Differentiation

see C. Bartlett (1986)

GlobalOrganization

MultinationalOrganization

Forces for

Global

Integrat ion

Forces for

Nat ional

Differentiat ion

Lo

Lo

High

High

TransnationalOrganization

InternationalOrganization


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Basic Entry Decisions

Which markets to enter?

When to enter the markets?What scale of entry?

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Which Foreign Markets?

Favorable benefit-cost-risk-trade-off:

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 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 costadvantage.

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 hasa 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

LicensingFranchising

Joint Ventures

Wholly Owned Subsidiaries

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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 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 foreigncountry.

May create a competitor.

Selling process technology may be sellingcompetitive advantage as well.

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Licensing

Advantages:Reduces costs and risks of establishingenterprise.

Overcomes restrictive investment barriers.

Others can develop business applications ofintangible property.

Disadvantages:

Lack of control.Cross-border licensing may be difficult.

Creating a competitor

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Franchising

Advantages:

Reduces costs and risk of establishingenterprise.

Disadvantages:

May prohibit movement of profits from onecountry to support operations in another

country.Quality control.

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Joint Ventures

Advantages:Benefit from local partners knowledge.Shared costs/risks with partner.

Reduced political risk.

Disadvantages:Risk giving control of technology to partner.

May not realize experience curve or location

economiesShared ownership can lead to conflict.

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Wholly Owned Subsidiary

Advantages:

No risk of losing technical competence to acompetitor.

Tight control of operations.

Realize learning curve and locationeconomies.

Disadvantage:Bear full cost and risk.

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Advantages and Disadvantages of

Entry Modes

Entry Mode Advantage Disadvantage

Exporting Ability to realize location andexperience curve economies

High transport costsTrade barriersProblems with local marketing

agentsTurnkeycontracts

Ability to earn returns fromprocess technology skills incountries where FDI isrestricted

Creating efficient competitorsLack of long-term marketpresence

Licensing Low development costsandrisks Lack of control over technologyInability to realize location andexperience curve economies

Inability to engage inglobal strategiccoordination

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d d d f


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Advantages and Disadvantages of

Entry Modes

EntryMode Advantage Disadvantage

Franchising Low development costs andrisks

Lack of control over qualityInability to engage in global strategic

coordination

Jointventures

Access to local partnersknowledge

Sharing development costsand risks

Politically acceptable

Lack of control over technologyInability to engage in global strategic

coordinationInability to realize location and

experience economies

Whollyownedsubsidiaries

Protection of technologyAbility to engage in global

strategic coordinationAbility to realize location and

experience economies

High costs and risks

Table 14.1b14-15


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Selecting an Entry Mode

Technological Know-How

Management Know-How

Wholly owned subsidiary, except:1. Venture is structured to reducerisk of loss of technology.

2. Technology advantage istransitory.

Then licensing or joint venture OK.

Franchising, subsidiaries(wholly owned or jointventure).

Pressure for CostReduction

Combination of exporting andwholly owned subsidiary.

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Entry Mode and Competitive

Advantage

Advantage Based on Technological Know-How

Exporting, Licensing, or Wholly-owned subsidiaries

Examples: Honda, Intel

Advantage Based on Management Know-How

Franchising, Joint Ventures, or subsidiariesExamples: McDonalds, Marriott


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Strategic Alliances

Cooperative agreements between potential oractual competitors.

Advantages:

Facilitate entry into market.

Share fixed costs.

Bring together skills and assets that neither companyhas or can develop.

Establish industry technology standards.

Disadvantage:

Competitors get low cost route to technology andmarkets.

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Alliances Are Popular

High cost of technology development

Company may not have skill, money orpeople to go it alone

Good way to learn

Good way to secure access to foreign

marketsHost country may require some localownership

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Global Alliances, however, are different

Companies join to attain worldleadership

Each partner has significant strength to

bring to the allianceA true global vision

Relationship is horizontal not vertical

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

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Partner Selection

Get as much information as possible onthe potential partner

Collect data from informed third parties

former partners

investment bankers

former employees

Get to know the potential partnerbefore committing

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Characteristics of a Global Alliance

Players are independent prior to thecreating of the alliance

Players share

benefits of the alliance

control over operations

Players continue to contribute

technology

products

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Characteristics of a Strategic Alliance

Independence ofParticipants

SharedBenefits

OngoingContributions

Markets

Benefits

Control Products

Technology

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Problems with Strategic Alliances

Have to give up some authority/control

Could be strengthening a future

competitorTechnology transfer

Management practices

Operating procedures

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Entry Modes Analysis

Documents

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