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Chapter 14

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

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MGT491 FINAL EXAM NOTESChapter 14: Entry Strategy & Strategic Alliances N 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 N 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? N Nations do not all hold the same potential for a firm contemplating foreign expansion, ultimately the choice must be -,8043,3,88088203941,3,9L438O43J-run profit potential N 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 N 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 N Some markets are very large when measured by number of consumers (ex. china, India), but also need to consider living standards and economic growth N China and India relatively poor but growing so rapidly that they are attractive targets for inward investment N 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 N 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 N Another important factor is the value an international business can create in foreign markets N Value depends on the suitability of its product offering to that market and the nature of indigenous competition N 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 offering N Greater value translates into an ability to charge higher prices or to build sales volume more quickly N Firms can rank countries in terms of their attractiveness and long-run profit potential N Preference given to entering markets that rank highly Timing of Entry N Once the firm has identified attractive markets, must consider the timing of entry N Entry is early when an international business enters a foreign market before other foreign firms N Late when it enters after other international businesses have already established themselves N 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 N First-mover disadvantages disadvantages associated with entering a foreign market before other international businesses 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 tha9L3,1L728K420 market that the enterprise has to devote considerable effort, time and expense to learning the rules of the game www.notesolution.com Can include the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes N Certain liability is associated with being a foreigner, greater for foreign firms that enter a national market early N 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 N Can be significant when the product is unfamiliar to local consumers N ,9070397,3982,-0,-O0947L043,30,7O0397,398L3;08920398L3O0,73L3J,3 customer education by watching how the early entrant proceeded in the market, by ,;4LL3J9K00,7O0397,398.489O2L89,N08,3-0[5Ooiting the market potential .70,90-9K00,7O0397,398L3;08920398L3.:8942070:.,9L43 Early entrant may have a disadvantage relative to a later entrant if regulations change in a Z,9K,9L2L3L8K089K0;,O:041,30,7O0397,398L3;08920398 N Serious risk in many developing nations where rules that govern business practices are still evolving N 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 country Scale of Entry and Strategic Commitments N Entering a market on a large scale involves the commitment of significant resources, but also implies rapid entry N 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 N Consequences of entering on a large scaleentering rapidly associated with the value of the resulting strategic commitments N 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 o Commitment 43,O,7J08.,O0OL2L989K0.425,38897,90JL.1O0[L-LOL9 N Firms must try to identify how actual and potential competitors might react to large-scale entry into a market N 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 N 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 N 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) N Benefits of small-scale entry: o Allows a firm to learn about a 1470LJ32,7N09ZKLO0OL2L9L3J9K01L7280[548:70949K,92,7N09 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 Summary N 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 www.notesolution.com
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