UNIT 2- ENTRY MODES

Question 1

Merger- definition

Answer 1

• the case when two companies (often of similar size) decide to form a new company instead of operating separately
• they negotiate how relative value will translate into the amount of ownership each party will have in the company
• the stocks of both companies are surrendered, and new stocks are issued
• one of the parents usually emerges as the dominant management

Question 2

Aquisition

Answer 2

• the case when one company takes over another and establishes itself as the owner of the new business
• the buyer company “swallows” the target company, which may or may not cease to exist
• can be friendly or hostile
• if the board of directors of targeted company agrees friendly
• if the board does not agree hostile
  Ways to avoid it white knights (third company) or poison pills (cheap stock for existing stakeholders)

Question 3

Mergers and acquisitions- reasons why

Answer 3

1. Grow capacity quickly- capacity is the amount of output that a firm can produce with existing assets. Acquiring another business might enable it to be able to increase its capacity relatively quickly.
2. Improve economies of scale- the advantages of a larger scale production that results in lower cost per unit produced.
3. Filling a gap in the product offering- a business may feel that its product portfolio is not sufficient to cate3re for different customer needs
4. Entering a new market through an existing player- particularly as a way to expand internationally, where customers taster, business systems, infrastructure, legal requirements may all be different. Buying a local player allows you to use their experience and knowledge and avoid many of the problems of entering new markets.
5. Synergies- expanding the product range allows you to move customers from one product to another.
6. Internal market efficiencies- the more similar the companies are, the greater the possibilities may be. Two back offices can be joined together to reduce costs. This may include training programs, employee performance evaluations, financial planning software, centralized ordering systems etc.
7. Accessing technology or skills- a firm may be targeted for acquisition because it has specific skills within its staff or has a particular technology that would be useful to another business.
8. Tax reasons- business are always looking for ways to reduce their tax exposure

Question 4

Mergers and acquisitions- reasons for failure

Answer 4

1. A merger or acquisition is a relationship- it involved people and ideas from two different organizations and require time to understand each other and patience to learn to compromise on competing ideas. It also requires that they see some type of common future
2. The cost of the merger/acquisition- a booming stock market encourages mergers. Companies with cash (and interest in reducing that cash level for tax reasons) may often pay far more than the market value.
3. Doing it for the wrong reasons- a competitor does a big merger, so other companies feel they must follow or lose competitiveness.
4. Confusing personal interest with clear strategic vision for the company- people may receive big bonuses if the merger/acquisition is completed on time, as well as influence and opinions from bankers/lawyers/consultants who can earn big fees and who clearly incentives to close the deal.
5. Corporate and work culture- it can be very difficult to integrate two companies with different work cultures. Different ideas where the added value come from, different ethical concepts, different decision-making structures etc.
6. Forgetting that all proposed gains are predictions- all future savings calculations are complex predictions. It can be easy to look at the possible gains and forget other possible issues.

Question 5

Joint ventures- definition

Answer 5

When two or more parties agree to combine resources to achieve a specific task.

• This task can be a new project or any other business activity
• Each of the participants is responsible for profit, losses and costs associated with it
• However, the venture is its own entity, separate and apart from the participants other business interests.

A+B = A+B+C

Question 6

Joint ventures- reasons why

Answer 6

1. A greater incentive to collaborate than to compete
2. The same two companies who collaborate on one product/service may still compete in other areas
   - can lead to a type of organizational schizophrenia

Question 7

Joint ventures- possible problems

Answer 7

1. To access or share knowledge or resources new product development or product development in new markets, an often be achieved quicker and more efficiently if a number of companies collaborate
2. To share the risk- particularly if a project is expensive or has a high possibility of not being successful (research projects)
3. There needs to be a greater incentive to collaborate than to compete, and the same two companies who collaborate may still compete in other areas.

Question 8

Franchise- definition

Answer 8

A type of license that allows franchisee to have access to a business´s (the franchisor) proprietary knowledge, processes and trademarks so they can see a product or service using the business´s name.

• Franchisee usually pays the franchisor initial start-up and annual licensing fees.
• US- more than 40% of all retail sales come through franchising

Question 9

Types of franchises

Answer 9

PRODUCT FRANCHISES

• Manufacturer allows franchisee to distribute their goods, using the name and trademark of the manufacturer.
• Franchisee pays a fee or purchase a minimum inventory of stock in exchange
• Example: Car dealership

BUSINESS FORMAT FRANCHISING

• Company provides a business model using name and trademark of the company.
• Company usually provides assistance in starting and managing the company. The franchisee pays a fee or royalty in return
• Example: McDonalds, DunkinDonuts ++ many retail operators

MANUFACTURING FRANCHISE (License of production)

• Allows an organization to manufacture a product and sell it to the public, using the franchisor´s name and trademark.
• Often used in the food and beverage industry
• Example: Coca Cola

Question 10

Franchises- negative points

Answer 10

1. Flexibility- lack of flexibility on operations, suppliers, training, maybe even opening hours
2. Company image- business is tied to the image of the franchise company. If they have a financial or product-related scandal, your franchise will be affected.
3. Franchise fees- costs can be expensive

Question 11

Service contracts

Answer 11

Where the company offers a service or manages everyday operation such as maintenance services in a certain market.

Company A may provide technology/knowledge/training so servicing can be carried out in a certain way/to a certain standard. Company B can make profits as clients who use company A’s products will have to go to company B to get those products serviced. It’s a type of licensing where company B is licensed to do certain things for company A.

It means company A don’t have to have many of their own employees/maintenance teams in every region just to carry out routine tasks.

Question 12

Management agreements

Answer 12

Where an independent company outsource some of its management functions to others.

It enables the smaller operator to focus on key customer service without being burdened by certain management practices they may not be very good at.

It allows the management operator to participate in a market sector where they haven’t traditionally been present, or to offer a wide product range without massive investment.

Question 13

Exporting- positive and negative points

Answer 13

1. Cheap- no FDI required
2. Full control- over production and quality process
3. Costs- may include things such as marketing for multiple audiences (different languages etc)
4. Trade costs- transportation, tariffs etc.
5. May require close relationships with local distributors and regulators
6. Risks include high trade cost such as transportation, distance from clients, loss of local economic advantages, lack of knowledge of local consumer tastes etc.

Question 14

Exporting- when to use

Answer 14

1. There are advantages of producing at home (La Rioja wine, French perfume, Swiss chocolate etc.)
2. There are low trade costs (a lot easier with chocolate than cars)
3. There is low need to adapt product to local market (a Chanel Perfume is the same everywhere

Question 15

ACQUISITION (BROWNFIELD)

Answer 15

We buy a supermarket chain the new market

Question 16

Brownfield- positive and negative points

Answer 16

1. Gain local knowledge
2. Access to existing base supplier relationships
3. Use existing business practices in the country
4. Developed management skills
5. Cultural/social problems
6. Lose motivation- local employees may lose it when being controlled by a MNC
7. Expensive
8. Deep restructuring and massive integration may be required into our global operations short time period

Question 17

Brownfield- when to use

Answer 17

1. Foreign market is developed- less room for us to enter as a new competitor, so better to buy a local operator than set up ourselves)
2. There is a real/possible strategic fit (the culture, organization and strategies are compatible) between us and the company we are buying
3. We have a strong brand, financial resources and ability to manage a new company
4. Opportunities for economies of scale and supplier consolidation

Question 18

Greenfield

Answer 18

We construct and develop our own supermarkets

Question 19

Greenfield- positive and negative points

Answer 19

1. Maintain direct control of operations
2. Apply company policies and processes
3. Local operation is highly integrated with global operation (avoid integration problems that come with acquisitions)
4. Costly and high-risk investment
5. Involves a long-term commitment
6. Lack of local knowledge- government regulations, opening hours, local competition, consumer preferences, access to suppliers etc- long delays and costly mistakes

Question 20

Greenfield- when to use

Answer 20

1. We have knowledge of the new market in-house
2. Strong brand awareness
3. Strong financial resources and operational ability

Question 21

Licensing and franchising- positive and negative points

Answer 21

1. Cheap- no direct investment in country required
2. Low costs and can generate very high returns
3. Local knowledge- local franchisees
4. Many of the gains from production and marketing may benefit more the local franchisee
5. “Selling knowledge” risk of new competitor
6. Any mistakes by franchisee will create risk to our brand image

Question 22

Licensing and franchises- when to use

Answer 22

1. There is strong copyright protection- if conflict with the franchisee not following the conditions or someone copying our brand- effective legal system to stop this
2. Local knowledge is important
3. We need to adapt product/service to local conditions

Question 23

Joint venture (with a local company)- positive and negative points

Answer 23

1. Gain access to partner’s knowledge
2. Maintain significant control over operation
3. Increase economies of scale by expanding distribution/supply, logistics network
4. Conflict over investment levels and ownership of outputs
5. Mixed incentives- may be a collaboration vs competition conundrum
6. Problems of ending the relationship and dividing newly created resources that were developed during the joint venture

Question 24

Joint venture (with a local company)- when to use

Answer 24

1. Large gains are expected from both sides
2. Each has something of similar value to offer
3. Trade secrets can be protected
4. Cultural differences are not too high

Question 25

Service contracts

Answer 25

The local company manages everyday operations such as maintenance services in a certain market

Question 26

Service contracts- positive and negative points

Answer 26

1. Cheap- little direct investment in country required
2. Enables us to expand our services and after-sales network
3. Can require high training investment for our partners and tight supervision
4. Reputational risk- if local partners don´t comply with company standards

Question 27

Service contracts- when to use

Answer 27

1. Product is mass marketed

2. Suitable quality local partners are available

Question 28

Management agreements

Answer 28

Where independent companies services appear as part of a global group

Question 29

Management agreements- positive and negative points

Answer 29

FOR THE GLOBAL GROUP:

1. Access to local resources
2. Low cost
3. Maintain strategic control

FOR THE LOCAL COMPANY

1. Access to global resources
2. Low cost
3. Maintain operational control

FOR THE GLOBAL GROUP:

1. You don´t know service abilities of local operation or their incentive levels

FOR THE LOCAL COMPANY

1. Problems with reputation or quality in global operation, can affect you
2. Can be hard to maintain individual feel of your business

Question 30

Management agreements- when to use

Answer 30

FOR THE GLOBAL GROUP:

1. Need to grow product offering
2. Local company has strong reputation
3. Systems and culture are compatible

FOR THE LOCAL COMPANY

1. Need to react more to customers
2. Need to focus on core competencies
3. Ability to work well with global operator

Question 31

Waterfall strategy

Answer 31

Sequential procedure: A product is launched in one country at a time, and new markets are entered only certain targets (e.g. profitability, EBITDA, sales) are reached in the previous market

Question 32

Waterfall strategy- who and when to use

Answer 32

1. Risk- adverse companies that want to preserve their resources or have little international experience.
2. Useful if there are important differences between existing markets and proposed new markets and/or there are not sufficient resources for parallel entry of new markets.
3. May work best with a multinational strategy.
   (Each market is different and high level of local adaption required)

Question 33

Sprinkler strategy

Answer 33

Enter as many countries as possible in the shortest time possible.

Question 34

Sprinkler strategy- who and when to use

Answer 34

1. High level of competition in the individual domestic markets or a high degree of globalization/standardization of the industry.
2. Advantages of being a first mover and possibility of capturing large market share, but also risk of making many mistakes.
3. Often used in industries with short product or technology life cycles.
4. May work best with global strategy.
   (low local adaption required)

Question 35

Toyota and GM joint venture- key points WHY

Answer 35

GM:

• Had to build small cars- they were lousy and lost money- lack of experience
• De-motivation and rebellious behavior in the workforce
• Strikes, everything was a fight. Constant chaos hated management and sabotaged vehicles

TOYOTA:

• Countering Honda and Nissan with minimal financial risk
• Learning to work with an American workforce
• Import restrictions from the US Congress
• Did not understand how to deal with US automobile workers and the powerful trade unions

Question 36

Toyota and GM joint venture- problems GM had trying to transfer the new knowledge

Answer 36

• Employees were skeptical to the new ways
• Lack of receptiveness to change
• Too many people convinced they didn’t need to change
• Highly decentralized company- plant managers were king
• Video recording to distribute knowledge from NUMMI- showed “what” and not the “how” or “why”

Question 37

Problems Toyota have nowadays

Answer 37

• Started making the same mistakes as GM had- quantity over quality
• The problem of creating internal tension between those working in each company and those working in the joint venture

Question 38

GM and Toyota- who gained more from the venture

Answer 38

• Toyota- learned working with an American workforce and the powerful US unions
• Learned important strategic information for their long-term position in the US
• GM could have benefited a lot however where not able to successfully take advantage of their new knowledge