Entry Strategy and Strategic Alliances
Chapter 14
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Operating in Japan for 35 years.
First foreign securities firm in Japan.
Only foreign securities firm listed on the Tokyo
Stock Exchange.
Analysts provide research
on over 300 companies.
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14-1
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
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.
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Licensing
Advantages:
Reduces costs and risks of establishing enterprise.
Overcomes restrictive investment barriers.
Others can develop business applications of
intangible 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 establishing enterprise.
Disadvantages:
May prohibit movement of profits from one
country to support operations in another country.
Quality control.
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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.
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Wholly Owned Subsidiary
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
Entry Mode
Advantage
Exporting
Ability to realize location and
experience curve economies
Turnkey
contracts
Ability to earn returns from
process technology skills in
countries where FDI is
restricted
Licensing
Low development costs and
risks
Table 14.1a
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Disadvantage
High transport costs
Trade barriers
Problems with local marketing
agents
Creating efficient competitors
Lack of long-term market
presence
Lack of control over technology
Inability to realize location and
experience curve economies
Inability to engage in
global strategic
coordination
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Advantages and Disadvantages of
Entry Modes
Entry Mode
Advantage
Disadvantage
Franchising Low development costs and Lack of control over quality
risks
Inability to engage in global strategic
coordination
Joint
ventures
Access to local partner’s
Lack of control over technology
knowledge
Inability to engage in global strategic
Sharing development costs
coordination
and risks
Inability to realize location and
Politically acceptable
experience economies
Wholly
Protection of technology
High costs and risks
owned
Ability to engage in global
subsidiaries strategic coordination
Ability to realize location and
experience economies
Table 14.1b
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Selecting an Entry Mode
Technological 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.
Management Know-How
Pressure for Cost
Reduction
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Franchising, subsidiaries
(wholly owned or joint
venture).
Combination of exporting and
wholly owned subsidiary.
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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.
Disadvantage:
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
Companies 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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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
Walling off
critical technology
Establishing
contractual
safeguards
Opportunism by partner
reduced by:
Figure 14.1
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Agreeing to swap
valuable skills
and technologies
Seeking credible
commitments
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Characteristics of a Global Alliance
Players are independent prior to the creating
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
Benefits
Independence of
Participants
Products
Control
Shared
Benefits
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Technology
Ongoing
Contributions
Markets
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Problems with Strategic
Alliances
Have to give up some authority/control
Could be strengthening a future competitor
Technology transfer
Management practices
Operating procedures
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