1.4 Internal Growth and M&A Flashcards
How do firms choose which foreign markets to enter?
Asses a nation’s “long-run profit potential” = size of market, present and likely future wealth of consumers, costs, risks, and political stability
The value a firm can create in a foreign market depends on the suitability of its products to that market and the nature of domestic competition
Emerging markets have higher growth potential than developed markets
How do firms choose the timing to enter new foreign markets?
First to enter the market: first mover advantage, create brand loyalty before others
But there are also disadvantages
First mover advantages
Capture demand by establishing strong brand name and customer satisfaction, loyalty
Build sales volume and build experience before rivals
Create switching costs that tie customers to products
First mover disadvantages
More time and effort required, need to learn alone
Costs of promoting and establishing a product, costs of educating customers
Regulations that diminish investments
How do firms choose the scale with which to enter foreign markets?
Rapid large scale entry can have influence on the nature of competition and limited strategic flexibility
Must be balanced against the resulting risks and lack of flexibility associated with significant commitments
Small-scale entry allows time to learn about the market while limiting the firm’s exposure
Uppsala model
Firms internationalize in a gradual manner
Start by entering markets that are geographically and culturally close to the home country
Over time, expand to other areas
More market knowledge leads to more market commitment
4 stages of the Uppsala model
No regular export activities
Export activities via independent representatives or agents
Establishment of an overseas subsidiary
Overseas production and manufacturing units
Considerations with the Uppsala model
Firms with more experience can take larger steps
Firms with experience in similar markets can generalize this knowledge
When markets are stable and homogenous, knowledge can be gained from other sources not just own experience
Knowledge can be gained through external recruitment
Managers’ attitudes toward risks and incentives remain consistent regardless of how many foreign markets they entered
Born global model
Rapidly expanding from the start
Firm with a global mindset, leveraging technology, innovation and niche markets to reach international customers as early as possible
Born global model characteristics
Undertakes early and substantial internationalization via exporting
Fastest growing segment of exporters in most countries
Displays high degree of entrepreneurial orientation, proactiveness and customer service
Fewer financial and other resources than traditional MNEs
Primarily a niche payer, often technically superior in a given innovative product category
Heavy use of information and communication technologies
Entry modes
Exporting
Contractual agreements:
- Licensing
- Franchising
- Contracted manufacturing/services
- International/strategic alliances
Joint ventures
Wholly owned subsidiary
- Greenfield venture
- Acquisition
Entry mode: exporting
(Indirect, direct, company owned foreign subsidiary)
Sale of products produced in one country to residents of another country
Indirect export: firm does not directly deal with companies from foreign countries as it goes through a domestic intermediary/agent
Direct export: firms deals with foreign customers and can develop a relationship
Company owned foreign subsidiary: similar to direct export, but exporter owns the foreign intermediation operation, most advanced option
Advantages of exporting
Avoids substantial costs of establishing manufacturing operations in host country
Help to achieve experience location economies and economies of scale
Disadvantages of exporting
May not be appropriate if lower cost locations for manufacturing can be found abroad
High transport costs can make it uneconomical
Tariff barriers can be costly
Local agents for marketing, sales, and service may have divided loyalties
Entry mode: contractual agreements: licensing
Licensor grants rights to intangible property to another entity (licensee): patents, inventions, formulas, processes, designs, copyrights, trademarks
Advantages of licensing
No development costs and risks associated with entering a foreign market
Used when a firm wishes to participate in a foreign market but is prohibited form doing so by barriers to investment
When a firm has intangible property that might have business application but does not want to develop those applications itself
Disadvantages of licensing
Does not give a firm the tight control over manufacturing, marketing, and strategy required to realizing experience curve and location economies
Limits a firms ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another
Risk associated with licensing technological know-how to foreign companies
Entry mode: contractual agreements: franchising
Franchisor sells intangible property (trademark) to the franchisee and insist that the franchisee agree to abide by strict rules in business
Main difference between franchising and licensing
A big company does the marketing for franchising but in licensing the person does their own marketing
Ex. Franchising: McDonalds, Licensing: Disney to Lego
Advantages of franchising
Firm experiences lower costs and risks than operating a foreign market on its own
Helps build a global presence quickly
Disadvantages of franchising
May inhibit the firms ability to take profits out of one country to support competitive attacks in another
Quality control
Entry mode: contractual agreements: contracted manufacturing/services
Outsourcing agreements for the manufacturing of goods or services by a foreign company
Advantages of contracted manufacturing/services
Low investment
Focus on what you are best at
Disadvantages of contracted manufacturing/services
Reduces quality control
May create public perception
Reduced learning
Entry mode: contractual agreements: international/strategic alliances
An agreement between 2+ parties stating that the involved parties will act in a certain way in order to achieve a common goal
Ex. Alliance between MacDonals, Disney, CocaCola
Advantages of strategic alliances
May facilitate entry into a frozen market
Allows firms to share the fixed costs and risks of developing new products or processes
Brings together complementary skills and assets that neither company could easily develop on its own
May help the firm establish technology standard for the industry that will benefit the firm
Disadvantages of strategic alliances
May give competitors a low cost route to new technology and markets
May generate short term profits but harder to attain long term competitive advantages in the global marketplace
Entry mode: joint ventures
Cooperative undertaking between two of more firms
Most commonly 2 firms, 50/50
Aim for the partners to have complementary cababilitiesand some similar capabilities
Advantages of joint ventures
Local partner’s knowledge of the host country
Shared costs and risks
Political considerations
disadvantages of joint ventures
Loss of technological control
Lack of control over subsidiaries
Can lead to conflicts and battles of control between firms if their goals change and do not align
Entry mode: wholly owned subsidiary: Greenfield venture
Set up a new operation in host country
Advantages of Greenfield venture
Gives the firm the ability to have the kind of subsidiary it wants
Disadvantages of Greenfield venture
Slower to establish
Quite risky
Preemption by more aggressive global competitors
Entry mode: wholly owned subsidiary: acquisition
Acquire an established firm in host country
Advantages of acquisition
Quick to execute
May help preempt competitors
Less risky than Greenfield ventures
Disadvantages of acquisitions
Often produce disappointing results
Why do acquisitions fail
They are often overpaying
Culture clash
Negotiating the operations of acquiring entities takes longer than expected
Inadequate pre-acquisition screening
When to choose acquisition
Firm is seeking to enter a market where there are already well established incumbent enterprises
Global competitors are also interested in establishing presence
When to choose Greenfield
There are no incumbent competitors to be acquired
The competitive advantage of the firm is based on the transfer of organizationally embedded competencies, skills, routines and culture
3 ways to find best entry mode for your firm
Gradual involvement with foreign market
Transaction cost perspective
Hierarchical model of choice
Gradual involvement with foreign market
Fits with Uppsala model
Based on where your business is on the grid, different entry modes for different levels
Based on: control, resource commitment, flexibility, and risk
Low control strategies: export, global sourcing
Moderate control strategies: licensing, franchise, alliances
High control strategies: joint ventures, wholly owned subsidiary
Transaction cost perspective (TCE)
Making decisions on who will perform which actives in the foreign country
Firms will internalize actives that they can perform at a lower cost and outsource activities where others have the cost advanatge
Hierarchical model of choice
Choice of entry mode between non-equity and equity, then choose specific type of entry mode
Mangers compare only a few critical factors at each level of hierarchy and have different considerations in each level
