IB 150 Lecture Notes - Lecture 18: Intangible Property, Experience Curve Effects, Dominant Design

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IB 150 – Lecture 18
Entry Strategy and Strategic Alliances
What are the Basic Decisions Firms Make When Expanding Globally?
Firms expanding internationally must decide
a.1) Which markets to enter
a.2) When to enter them and on what scale
a.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
What Influences the Choice of Entry Mode?
Several factors affect the choice of entry mode including
Transport costs
Trade barriers
Political risks
Economic risks
Costs
Firm strategy
The optimal mode varies by situation – what makes sense for one company might not make
sense to another
The Opening Case: Starbucks’ Foreign Entry Strategy explores the Seattle coffee company’s
global expansion, and how the company approached each of the basic decisions.
Which Foreign Markets Should Firms Enter?
The choice of foreign markets will depend on their long-run profit potential
Favorable markets
Are politically stable
Have free market systems
Have relatively low inflation rates
Have low private sector debt
Less desirable markets
are politically unstable
have mixed or command economies
have excessive levels of borrowing
Markets are also more attractive when the product in question is not widely available and
satisfies an unmet need
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Management Focus: Tesco’s International Growth Strategy describes Tesco’s international
expansion strategy. Tesco, the largest grocery retailer in the United Kingdom has
established operations in a number of foreign countries. Typically, the company seeks
underdeveloped markets in developing nations where it can avoid the head-to-head
competition that goes on in more crowded markets, and then enters those markets via joint
ventures where the local partner provides knowledge of the market while Tesco provides
retailing expertise.
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
First-mover advantage includes:
The ability to preempt 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
Downside: 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
the costs of promoting and establishing a product offering, including the cost of
educating customers
On What Scale Should a Firm Enter Foreign Markets?
After choosing which market to enter and the timing of entry, firms need to decide on the
scale of market entry
firms that enter a market on a significant scale make a strategic commitment to the market
the decision has a long term impact and is difficult to reverse
Small-scale entry has the advantage of allowing a firm to learn about a foreign market
while simultaneously limiting the firm’s exposure to that market
Is There a “Right” Way to Enter Foreign Markets?
No, there are no “right” decisions when deciding which markets to enter and the timing and
scale of entry – the are just decisions that are associated with different levels of risk and
reward
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
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