International Strategy: Entry Modes Flashcards
List the different entry modes
Homebased:
- Exporting
- LIcensing
- Franchising
FDI
Collaborative Entry:
- Strategic Alliance
- Equity Joint Venture
Wholly Owned Entry:
- M&A
- Greenfield
Factors to consider with entry mode (also external/internal)
- Goals and objectives
- Degree of control
- The firm’s resources and capabilities
- Types of risk in each entry mode
- Value-adding activities the firm is willing to perform itself
- Strategic Importance
- Characteristics of the product or service
External factors:
Target country market factors, target country environmental factors, TC production factors, Home Country factors
Internal factors:
Company product factors, Management attitude, resources and commitment factors
Framework with Risk, Flexibility, Resource Commitment, Control
See slides
Exporting
Description, Pro & Con
Export channels: Independent distributor or agent. Firm’s own marketing subsidiary abroad.
Advantages
- Low risk, low cost and flexible
- Increase overall sales
- economies of scale
- profit margins often more favorable than in the domestic market
- Diversify markets
- Minimize risk
- Maximize flexibility
- leverage capabilities of foreign distributor
Disadvantage
- firm may need new capabilites
- sensitive to tariffs
- exchange fluctuations
- fewer opportunities to learn
Licensing
Description, Pro & Con
An arrangement in which the owner of intellectual property grants another firm the right to use this property for specified use. Licensee pays the licensor a royalty fee + amount upfront.
Types of Licensing:
- Trademark licensing
- Copyright licensing
- Know-How licensing
Advantages for licensor:
- Low investment
- Low involvement
- Low effort once established
- Low-cost initial entry strategy
Disadvantages
- Performance depends on the licensee
- limited control
- risk of creating a future competitor
Franchising
Description, Pro & Con
An arrangement in which the firm allows another the right to use the entire business system in exchange for fees, royalties or other compensation.
Keywords
- Business format franchising
- Master franchiser
- More comprehensive and longer-term than licensing
Advantages for Franchisor
- Low investment
- Can internationalize quickly to many markets
- Low effort once established
- Can leverage franchisees’ knowledge
Disadvantage for franchisor
- Maintaining control over franchisee may be difficult
- limited control
- risk of creating future competitor
FDI - general
The firm establishes a physical presence abroad
- Represent substantial resource commitment
- Implies local presence and operations
- Substantial risk and uncertainty
- Deal more intensively with social and cultural variables
Collaborative ventures (EJV and allicances) + purpose
Cross-border alliances pool resources and share the costs and risks of a venture. Opportunities to learn and achieve goals.
Helps overcome the often substantial risk and high costs
The purpose is to join
- Exploration
- R&D
- Production
- Marketing
- Supply
- Management
Four C’s of strategic alliance
- Complementary: Complementary resource
- Congruent Goals: Common goals for the future
- Compatibility: Culture and Organization
- Change: Adaptability to changes over time
Failure is often due to bad execution in those dimensions
Key question for equity/ non-equity JV
- Depency
- Sharing of responsibiliites
- Assets at risk
- Other risks
- Growth opportunites
- Venture Management
Greenfield
Description
Firm sets up presence abroad from scratch and alone.
This takes time and a lot of commitment and resources. Locals should be hired. Less knowledge will be lost in this process
Greenfield vs. M&A vs. Collaborative ventures
Greenfields
- high commitment, high control
- often costly and time consuming to set up
M&A
- high commitment, high control
- fast than greenfields generally
- overcome entry barriers
- access to local knowledge
- difficult to integrate, costly
Collaborative ventures
- local partners with knowledge + resources
- less commitment than the other two
- risk of losing resources
- parnter may act opportunistically
Collaborative ventures - Equity Joint Venture Pro & Con
In an equity JV, a new legal entity is set up
advantages
+ greater control
+ facilitate knowledge transfer between the partners
+ common goals
disadvantages
- complex management structure
- coordination between partners may be a concern
- difficult to terminate
- political risk
Collaborative ventures - (Contractual) Alliances Pro & Con
A strategic alliance is governed by a contract
advantages:
+ Easy to set up
+ simple management structure
+ take advantage of respective strengths
+ quick response to changing tech and market conditions
+ easy to terminate
disadvantages:
- knowledge transfer less straightforward
- greater emphasis on trust
- conflicts harder to resolve
