Chapter 15 - Entry strategic alliances Flashcards
International firms must consider
- The decision of which foreign markets to enter, when to enter them, and on what scale.
- The choice of entry mode.
- The role of strategic alliances.
Modes for serving foreign markets
- Exporting
- Licensing
- Franchising
- Joint-ventures
- Setting up a new wholly owned subsidiary in a host country
- Acquiring an established enterprise
Strategic alliance
Cooperative agreements between potential or actual competitors.
Done in order to be predatory
Greater market access
Strategic alliances include
– Cross-shareholding deals. – Licensing arrangements. – Formal joint ventures. – Informal cooperative arrangements. → How does this differentiate from a merger and acquisition? Merger: Combine with another company Acquisition: Buy
which foreign market based on
- size
- present and likely future wealth of consumers
- costs and risks
- value and international business can create in foreign market
benefit-cost-risk trade off
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.
Basic entry decisions:
which foreign market
timing of entry
scale of entry and category of commitment
Timing of entry
First-mover advantages: Preempt rivals and capture demand by establishing a strong brand name and customer satisfaction
- > The cost advantage may enable the early entrant to cut prices below that of later entrants, thereby driving them out of the market
- > Pioneering costs: Costs that an early entrant has to bear that a later entrant can avoid
Scale of entry
Entering a market on a large scale involves the commitment of significant resources and implies rapid entry
-> Large scale entrant is more likely than the small-scale entrant to be able to capture first-mover advantage associated with demand preemption, scale economies and switching costs
Even some large firms prefer: small scale and then build slowly as they become more familiar with the market
-> Small-scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market
Entry modes
- exporting
- Turnkey project
- Licensing
- Franchising
- Joint ventures
- Wholly owned subsidiaries
Exporting pros
Avoids costs of establishing manufacturing operations in the host country
experience curve and location economies
Exporting cons
May not be appropriate if lower cost locations for manufacturing the product can be found abroad
High transport costs
Tariff barriers
Turnkey projects
->contractor agrees to handle every detail of the project for a client, including the training of operating personnel. At completion of the project, the foreign client is handed the “key” to a plant that is ready for full term operation
-> exporting process technology to other countries
Common in chemical, pharmaceutical, petroleum-refining and metal-refining industries
Turnkey pros
Preserve know-how valuable asset
Can earn great economic returns
Strategy is particularly useful when FDI is limited to host-government regulations
less risky than conventional FDI
Turnkey cons
The firm that enters into a turnkey deal will have no long term interest in the foreign country
One way around this is to take a minority equity interest in the operation
May inadvertently create a competitor
Selling a technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors
Licensing agreement
An arrangement whereby a licensor grants the right to intangible property to another entity (the licensee) in exchange for royalty
Intangible property
Patents, inventions, formulas, processes, designs, copyrights and trademarks
Licensing pros
no development costs/risks (good when a firm has no capital or does not want to commit)
- > firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investment
- > when a firm has intangible property but doesn’t want to use it themselves
Licensing cons
no tight control over manufacturing, marketing and strategy
cannot coordinate strategic moves across the country
lose control over its technology (must enter cross-licensing agreement (know-how against license))
Mostly for manufacturing firms
Franchising
A specialized form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business.
Mostly for service firms
franchising pros
Firm experiences lower costs and risks than opening a foreign market on its own
Helps build a global presence quickly
franchising cons
May inhibit the firm’s ability to take profits out of one country to support competitive attacks in another
Quality control
Joint ventures
Entails establishing a firm that is jointly owned by two or more otherwise independent firms
Joint venture pros
Local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems and business
Shared costs and risks
Joint venture cons
Loss of technology control
Lack of control over subsidiaries
Conflicts and battles for control between the investing firms
Wholly owned subsidiaries can be done 2 ways (owned 100%)
Greenfield venture
Acquisitions
Greenfield venture
set up a new operation in host country
Acquisition
acquire an established firm in a host nation
Acquisitions pros
Can tightly control operations in different countries
Location and experience curve economies
100% share of profits
quick to establish
Acquisition cons
Bear full costs and risk of establishing new market
if firm has technology know-how
Licensing and joint venture arrangements should be avoided unless the technological advantage is transitory (can be moved back to you for your advantage)
if firm has management know-how
Less risk for franchises or joint ventures
If pressures for cost reduction
1) pursue some combination of exporting and wholly owned subsidiaries
2) Wholly owned marketing subsidiaries give the firm tight control that might be required for coordinating a globally dispersed value chain
Pros of greenfield ventures
Gives the firm a much greater ability to build the kind of subsidiary company that it wants
Slower to establish
Risky, but less risky than acquisitions
Preemption by global competitors
Choose acquisitions when
enter a market where there are already well-established incumbent enterprises
Global competitors are also interested in establishing a presence
choose greenfield ventures when
There are no other competitors to be acquired (unique to us and only ones who can implant it)
The competitive advantage of the firm is based on the transfer of organizationally embedded competencies, skills, routines and culture
Strategic Alliances pros
May facilitate entry into a foreign market
Allow firms to share the fixed costs and associated risks of developing new products or processes
Brings together complementary skills and assets that neither company could easily develop on its own
establish technological standards
Strategic alliance cons
May give competitors a low-cost route to new technology and markets
a good partner for strategic alliance
Helps the firm achieve its strategic goals
Has the capabilities the firm lacks
Is unlikely to try to opportunistically exploits its partner
Alliance structure
Risk of giving away too much to the partner
risk of opportunism by a partner
Agree in advance to swap skills and technologies that the other (wants), thereby ensuring a chance for equitable gain
Cross-licensing agreements
Extract a significant credible commitment from the partner in advance
How to make alliances work
Be sensitive to cultural differences
Build trust
Build relational capital (invest in the relationship)
Learn from the alliance partner and apply the knowledge within one’s own organization
