CHAPTER 15
Entry Strategy and Strategic Alliances
What Are The Basic Decisions Firms Make When
Expanding Globally?
• Firms expanding internationally must decide:
1. Which markets to enter- it might be at times smarter to enter growing
markets, eg: Tesco
2. When to enter them and on what scale
3. Which entry mode to use
• exporting
• licensing or franchising to a company in the host nation
• establishing a joint venture with a local company
• establishing a new wholly owned subsidiary
• acquiring an established enterprise
When Should A Firm Enter A Foreign Market?
Once attractive markets are identified, the firm must consider the timing of
entry
1. Entry is early when the firm enters a foreign market before other
foreign firms
2. Entry is late when the firm enters the market after firms have already
established themselves in the market
Why Enter A Foreign Market Early?
First mover advantages include
• the ability to pre-empt rivals by establishing a strong brand name
• the ability to build up sales volume and ride down the experience
curve ahead of rivals and gain a cost advantage over later entrants
• the ability to create switching costs that tie customers into products
or services making it difficult for later entrants to win business
Why Enter A Foreign Market Late?
First mover disadvantages include
• pioneering costs - arise when the foreign business system is so
different from that in the home market that the firm must devote
considerable time, effort and expense to learning the rules of the
game
• the costs of business failure if the firm, due to its ignorance of the
foreign environment, makes some major mistakes or becomes
complacent. Eg: Citycell?
• the costs of promoting and establishing a product offering,
including the cost of educating customers
Why Enter A Foreign Market Late?
The late entrant can capitalize on the early entrants investments in
learning and customer education:
•Watch how the early entrant proceeded in the market
•Avoid costly mistakes
•Gain market share by learning from early entrants investments in
customer education. Eg: McDonald’s in China
Types Of Entry Modes: 1. Exports
1.Exporting - common first step for many manufacturing firms
• later, firms may switch to another mode
Advantages of Exporting are:
• it avoids the costs of establishing local manufacturing operations
• it helps the firm achieve experience curve and location economies
• Manufacturing in centralized location can help achieve substantial
economies of scale from global sales volume
• E.g. Sony in the TV market, Japanese automakers entering the
US market, Samsung gained market share in computer memory
chip
Continued
Disadvantages of exporting are:
• there may be lower-cost manufacturing locations
• high transport costs and tariffs can make it uneconomical
• agents in a foreign country may not act in exporter’s best
interest
2. Turnkey Arrangement
Turnkey projects - the contractor handles every detail of the project
for a foreign client, including the training of operating personnel
• at completion of the contract, the foreign client is handed the
"key" to a plant that is ready for full operation
Continued
Turnkey projects are attractive because
• they are a way of earning economic returns from the know-how
required to assemble and run a technologically complex
process
• they can be less risky than conventional FDI
• E.g. oil rich countries lacked petroleum refining technology
Turnkey projects are unattractive because
• the firm has no long-term interest in the foreign country
• the firm may create a competitor- if the firm's process
technology is a source of competitive advantage, then selling
this technology through a turnkey project is also selling
competitive advantage to potential and/or actual competitors
3. Licensing
Licensing - a licensor grants the rights to intangible property to the
licensee for a specified time period, and in return, receives a royalty fee
from the licensee
• patents, inventions, formulas, processes, designs,
copyrights, trademarks
Advantages of licensing are:
• the firm avoids development costs and risks associated with opening a foreign
market
• the firm avoids barriers to investment.
E.g. Fuji-Xerox in 1962 in Japan
• the firm can capitalize on market opportunities without developing those
applications itself.
E.g. Coca Cola has licensed its famous trademark to clothing
manufacturers
Continued
• Disadvantages of Licensing are:
• the firm doesn’t have the tight control required
for realizing experience curve and location
economies, in factors such as manufacturing,
marketing and strategy.
• the firm’s ability to coordinate strategic
moves, by transferring profits from one
country to launch attacks in across countries is
limited.
• proprietary (or intangible) assets could be lost
• E.g. RCA Corporation once licensed its color
TV technology to Japanese firms like Sony
and Matsushita.
• to reduce this risk, firms can use cross-
licensing agreements
Continued
Getting around the disadvantages:
•Enter a cross licensing agreement. In this scenario, both parties will
have some license of each others proprietary secrets.
•Reduces the risks associated with licensing technological know how
•Enables firms to hold each other hostage
•Licensor and licensee having important stakes: Eg: the risk that Fuji
Photo might appropriate Xerox's technological knowledge, and then
compete directly against in the global photocopier market, was
reduced due to the establishment of the Joint Venture, since both
companies had important stakes in the company.
