Final Exam Study Notes - Chapter 14-Entry Strategy and Strategic Alliances

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12 Oct 2010
MGT491 FINAL EXAM NOTES±Chapter 14: Entry Strategy & Strategic Alliances
x Any firm contemplating foreign expansion must first struggle with the issue of which foreign markets to enter, and
the timing and scale of entry
o Choice of which markets to enter should be driven by an assessment of relative long-run growth and
profit potential
x Choice of mode for entering a foreign market is another major issue, various modes for serving foreign markets
are: exporting, licensing, franchising, joint ventures, wholly owned subsidiary, acquisition
o Advantages and disadvantages of each are determined by a number of factors including transport
costs, trade barriers, political risks, economic risks, business risks and firm strategy
o Optimal entry mode varies by situation, depending on these factors
o Where some firms may serve a given market by exporting, other firms may better serve the market by
setting up a new wholly owned subsidiary or by acquiring an established enterprise
Basic Entry Decisions
Which Foreign Markets?
x Nations do not all hold the same potential for a firm contemplating foreign expansion, ultimately the choice must be
x Potential is a function of several factors incl. economic and political factors, attractiveness based on balancing
benefits, costs and risks associated with doing business in a country
x Long-run economic benefits of doing business in a country are also function of factors such as size of the market,
present wealth (purchasing power) of consumers in that market, and likely future wealth of consumers which
depends on economic growth rates
x Some markets are very large when measured by number of consumers (ex. china, India), but also need to
consider living standards and economic growth
x China and India ± relatively poor but growing so rapidly that they are attractive targets for inward investment
x Costs and risks associated with doing business in a foreign country are typically lower in economically advanced
and politically stable democratic nations, and greater in less developed and politically unstable nations
x Other things being equal, the benefit-cost-risk tradeoff is likely to be most favorable in politically stable developed
and developing nations that have free market systems, and where there is not a dramatic upsurge in either inflation
rates or private-sector debt
x Another important factor is the value an international business can create in foreign markets
x Value depends on the suitability of its product offering to that market and the nature of indigenous competition
x If the international business can offer a product that has not been widely available in that market and that satisfies
an unmet need, the value of that product to consumers is likely to be much greater than if the international
business simply offers the same type of products that indigenous competitors and foreign entrants are already
x Greater value translates into an ability to charge higher prices or to build sales volume more quickly
x Firms can rank countries in terms of their attractiveness and long-run profit potential
x Preference given to entering markets that rank highly
Timing of Entry
x Once the firm has identified attractive markets, must consider the timing of entry
x Entry is early when an international business enters a foreign market before other foreign firms
x Late when it enters after other international businesses have already established themselves
x First-mover advantages ± attained by entering a market early
o Ability to preempt rivals and capture demand by establishing a strong brand name
o Ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving
the early entrant a cost advantage over later entrants
Cost advantage may enable the early entrant to cut prices below that of later entrants, driving
them out of the market
o Ability of early entrants to create switching costs that tie customers into their products or services
Make it difficult for later entrants to win business
x First-mover disadvantages ± disadvantages associated with entering a foreign market before other international
o Early entry may entail pioneering costs ± costs that the firm has to bear that a later entrant can avoid
Arise when the business system in a foreign country is so different from thaWLQDILUPVKRPH
market that the enterprise has to devote considerable effort, time and expense to learning the
rules of the game
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Can include the costs of business failure if the firm, due to its ignorance of the foreign
environment, makes some major mistakes
x Certain liability is associated with being a foreigner, greater for foreign firms that enter
a national market early
x Probability of survival increases if an international business enters a national market
after several other foreign firms have already done so ± late entrant may benefit by
observing and learning from the mistakes made by the early entrants
Also include costs of promoting and establishing a product offering, including the costs of
educating customers
x Can be significant when the product is unfamiliar to local consumers
customer education by watching how the early entrant proceeded in the market, by
Early entrant may have a disadvantage relative to a later entrant if regulations change in a
x Serious risk in many developing nations where rules that govern business practices
are still evolving
x Early entrants can be at a disadvantage if a subsequent change in regulations
invalidates prior assumptions about the best business model for operations in that
Scale of Entry and Strategic Commitments
x Entering a market on a large scale involves the commitment of significant resources, but also implies rapid entry
x Not all firms have the resources necessary to enter on a large scale, and some large firms even prefer to enter
foreign markets on a small scale and then build slowly as they become more familiar with the market
x Consequences of entering on a large scale/entering rapidly ± associated with the value of the resulting strategic
x Strategic commitment ± has a long-term impact and is difficult to reverse, ex. deciding to enter a foreign market on
a significant scale is a major strategic commitment
o Can have an important influence on the nature of competition in a market
o Make it easier for the company to attract customers and distributors ± scale of entry gives both groups
reasons for believing that the company will remain in the market for the long-run
o Also give other foreign institutions considering entry a second thought ± will have to compete against
indigenous companies in the country as well as this major foreign player
o On the negative side, by committing itself heavily to one country, the firm may have fewer resources
available to support expansion into other desirable markets
x Firms must try to identify how actual and potential competitors might react to large-scale entry into a market
x Large-scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantages
associated with demand preemption, economies of scale and switching costs
x Value of commitments that flow from rapid large-scale entry into a foreign market must be balance against the
resulting risks and lack of flexibility associated with significant commitments
x Strategic inflexibility can also have value ± forces the company to work extra hard to be successful because they
have no other choices (risky to do this though)
x Benefits of small-scale entry:
o Way to gather information about a foreign market before deciding whether to enter on a significant
scale and how best to enter
o Reduces risks associated with subsequent large-scale entry
o Lack of commitment associated may make it more difficult to build market share and capture first-
mover or early-mover advantages
Risk-averse firms that enter on a small scale may limit potential losses but also may miss the
chance to capture first-mover advantages
x Entering a large developing nation before most other international businesses and entering on a large scale is
associated with high levels of risk
o Liability of being foreign is increased by the absence of prior foreign entrants whose experience can be
a useful guide
o Potential long-term rewards associated with this strategy are great
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o Early large-scale entrant into a major developing nation may be able to capture significant first-mover
advantages that will bolster its long run position in that market
x Entering developed nations after other international businesses, and entering on a small scale will be associated
with much lower levels of risk
o Potential long-term rewards also likely to be lower because firm is forgoing the opportunity to capture
first-mover advantages and because the lack of commitment signaled by small-scale entry may limit
future growth potential
x Businesses based in developing nations also have the opportunity to enter foreign markets and become global
o Tend to be late entrants into foreign markets
o Resources may be limited
o Late movers can still succeed against well-established global competitors by pursuing appropriate
o Companies based in developing nations should use the entry of foreign multinationals as an
opportunity to learn from them by benchmarking their operations and performance against them
o Local company may be able to find ways to differentiate itself from a foreign multinational, ex. by
focusing on market niches that the multinational ignores or is unable to serve effectively with a
standardized global product offering
Entry Modes
x 6 possible entry strategies: exporting, turnkey projects, licensing, franchising, establishing joint-ventures with host
country firm, or setting up a new wholly owned subsidiary in the host country
x Many manufacturing firms begin their global expansion as exporters and only later switch to another mode for
serving a foreign market
x Advantages:
o Avoids the substantial costs of establishing manufacturing operations in the host country
o Exporting may help a firm achieve experience curve and location economies
o By manufacturing the product in a centralized location and exporting it to other national markets, the
firm may realize substantial scale economies from its global sales volume
x Disadvantages
product can be found abroad (ie. if the firm can realize location economies by moving production
x Particularly for firms pursuing global standardization or transnational synergies, it may be
preferable to manufacture where the mix of factor conditions is most favorable from a value-
creation perspective and to export to the rest of the world from that location
o High transportation costs can make exporting uneconomical, especially for bulk products
x One way of getting around this is to manufacture bulk products regionally
x Enables the firm to realize some economies from large scale production and at the
same time limit its transportation costs
o Tariff barriers can also make exporting uneconomical
x Threat of tariff barriers by the host-country government can make it very risky
o If a firm delegates its marketing, sales and service in each country to another company this is risky
x Other company may be a local agent or may be another multinational with extensive
international distribution operations
x Local agents often carry the products of competing firms and have divided loyalties, and may
not do as good a job as the firm would if it managed these operations itself
x The way around these problems is to set up wholly owned subsidiaries in foreign
nations to handle local marketing, sales and service ± by doing this, the firm can
exercise tight control over marketing and sales in the country while reaping the cost
advantages of manufacturing the product in a single location, or few choice locations
Turnkey Projects
x Contractor agrees to handle every detail of the project for a foreign client, including the training of operating
x At the completion of the contract, the foreign client is handed the key to a plant that is ready for full operation
x Means of exporting process technology to other countries
x Most common in chemical, pharmaceutical, petroleum refining and metal refining industries which all use complex,
expensive production technologies
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