Chapter 14 Entry Strategy and Strategic Alliances

1. Chapter 14Entry Strategy and Strategic Alliances INTERNATIONAL BUSINESS Woo Ji-hye Jo Jun-woo

2. 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

3. 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

4. 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

5. 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.

6. 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.

7. Entry modes • Exporting • Turnkey Projects • Licensing • Franchising • Joint Ventures • Wholly Owned Subsidiaries

8. 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

9. Turnkey projects • Advantages: • Can earn a return on knowledge asset • Less risky than conventional FDI • Disadvantages: • No long-term interestin the foreign country • May create a competitor • Selling process technology may be selling competitive advantage as well Contractor agrees to handle every detail of project for foreign client

10. 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 businessapplications of intangible property. Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties.

11. Licensing • Disadvantages: • Lack of control over technology • Inability to realize location and experience curve economies • Inability to engage in global strategic coordination

12. 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 Franchiser sells intangible property and insists on rules for operating business

13. 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

14. 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

15. Advantages and disadvantages of entry modes

16. 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 Franchising, subsidiaries (wholly owned or joint venture) Pressure for Cost Reduction Combination of exporting and wholly owned subsidiary Selecting an entry mode

17. 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 and Green-field - pros & cons Acquisition Greenfield

18. Acquisition or Green-field? Acquisition Well-established, incumbent firms. Competitors interested in entry. embedded skills, routines, culture. Green-field No competitors

19. 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

20. 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

21. Structuring the alliance to reduce opportunism

22. Managing the alliance • Build trust • Relational capital • Learning from partners • Diffusion of knowledge