Scale Of Entry

International Business Environment
Large scale entry

 Strategic Commitments - a decision that has a long-
term impact and is difficult to reverse
 May cause rivals to rethink market entry
 May lead to indigenous competitive response
Session – 9, 10

Small scale entry:
Entry Strategy: Exporting and
 Time to learn about market
Collaborating
 Reduces exposure risk

Entry Modes

The organization arrangement by which a business firm brings

its products and/or services to market in another country
 Exporting
 Contractual Entry
 Turnkey Projects
 Licensing
 Franchising
 Investment Entry
 Joint Ventures
 Wholly Owned Subsidiaries

Entry Modes for International

Expansion Why Do Companies Export?

High Wholly Owned

Gain Experience Low cost, low risk way of getting
Extent of Investment Risk

Subsidiary
started in the international market and learning about
Joint Venture international buyers
Strategic Alliance
Expand Sales when domestic market has become
Franchising saturated or growth at home is limited
Licensing
Diversify Sales among different markets over a wide
Exporting range of countries which gives stability to company
Low
Low Degree of Ownership and Control High

1
Exporting Problems with Export Transactions

Advantages:
 Avoids cost of establishing manufacturing operations

Lack of trust between international trading partners
 May help achieve experience curve and location due to:
economies
 They have never met

Disadvantages:
 Not physically close to market  Language barriers
 Removed from consumer and competition
 Cultural barriers
 May have to compete with lower cost manufacturing
firms in target market  Different legal systems and jurisdictions
 Possible high transportation costs  How to track the party in case of default
 Tariff barriers
 Possible lack of control over marketing reps
As a result both exporter and importer have different
 Potential problems with identifying customers, finding preferences for payments
retail space, and advertising

Preference Of The Indian Exporter Preference Of The French Importer

French Importer Indian Exporter

French Importer Indian Exporter

Tools Used To Aid Transactions Letter Of Credit

Letters of Credit (LC)
Issued by a bank at the request of the importer

 Bank guarantee on behalf of importer to exporter assuring
payment when exporter presents specified documents

Drafts (Bill of Exchange)
 Written order by exporter, telling an importer to pay a
specified amount of money at a specified time

Bill of Lading
 Issued to exporter, by carrier. Serves as receipt, contract
and document of title

Bank pays a specified sum to a beneficiary,
normally the exporter, on presentation of
particular, specified documents

Fee paid by importer for letter of credit

May reduce borrowing ability of importer since
the letter is a financial liability

2
The Use Of A Third Party Variants of LCs

Irrevocable - A letter of credit that cannot be amended or cancelled

without prior mutual consent of all parties to the credit.

Revocable - A letter of credit that can be canceled or altered by the
drawee (buyer) after it has been issued by the drawee's bank.

Transferable - A letter of credit that can be redirected at the sellers
French Indian request.
Importer Exporter

Sight - A letter of credit that requires payment to be made upon
presentation of documents.

Time Draft - A letter of credit that states payment is due within a
certain time (usually 30, 60, 90, or 180 days), in other terms allows
credit to the buyer.

Draft (Bill Of Exchange)

Written by an exporter instructing an importer to
pay specified amount of money at specified time

Required before the buyer can obtain the
merchandise

Two types
 Sight drafts - payable on presentation to the
drawee
 Time draft - negotiable instrument allowing for
delay in payment
Bill Of Lading

Issued to the exporter by the common carrier
transporting the merchandise

Serves three purposes:
 Receipt - merchandise described on document has been
received by carrier
 Contract - carrier is obligated to provide transportation
service in return for a certain charge
 Document of title – can be used to obtain payment or a
written promise before the merchandise is released to the
importer

A Typical International Transaction Common Forms of Investment Entry

Wholly Owned Subsidiaries

 The foreign facility is entirely owned and controlled by a “single”
parent.
 Coca Cola India (100% owned by Coca Cola)

Joint Ventures
 Shared ownership arrangement a newly created company.
 A separate company is created and jointly owned by two or more
companies.
 Hong Kong Government and Walt Disney Co: Hong Kong Disneyland

Strategic Alliances
 Two or more companies agree to cooperate with one another but
do NOT form a separate company

3
 Acquisition vs. Greenfield: Pros &
Wholly Owned Subsidiary Cons

Subsidiaries could be Greenfield investments or Acquisition Green-field Venture

acquisitions
Pro:
Pro:
 Quick to execute  Can build subsidiary it wants

Advantages:
 Preempt competitors  Easy to establish operating
 No risk of losing technical competence to a competitor  Possibly less risky routines
 Tight control of operations.
Con:
Con:
 Realize learning curve and location economies.  Disappointing results  Slow to establish

Disadvantage:  Overpay for firm  Risky
 Culture clash  Preemption by aggressive
 Bear full cost and risk  Problems with proposed competitors
synergies

Acquisition or Greenfield?

Well-established,
incumbent firms.
Acquisition
Competitors Collaborative
interested in
entry
Strategies
Embedded skills,
routines, culture
Green-field
No competitors

Strategic Alliances Collaborative Strategies

Cooperative agreements between potential or actual
When two or more independent organizations
competitors. cooperate to develop, manufacture or sell a

Advantages: product/service
 Facilitate entry into market  Non-equity alliance
 Share fixed costs  No equity participation, managed through contracts
 Bring together skills and assets that neither company has or can  Licensing agreement, supply agreement, distribution agreement
develop
 Establish industry technology standards  Equity alliance
 Cooperating firms supplement contracts with equity holdings in

Disadvantages: alliance partners
 Competitors get low cost route to technology and markets
 Joint venture
 Cooperating firms create a legally independent firm

4
Collaborative Strategies Alliance Opportunities along VC

Tacit collusions / Cartels

 Supply control agreements, pricing agreements, territorial allocation Trademark
Common
Engineering Patent licence
 Industry-wide agreements – agreeing to promote industry’s product together – Research
contract licence
Consortium Distribution
(common agreements
egg/coffee/oil Common marketing)
Research Common
purchase Subcontracting

Strategic alliances contract production

 Joint marketing / distribution

 Joint service
 Joint research

Joint ventures
Ways

Licensing arrangements supplying producing marketingdelivering
of...
designing

Franchising arrangements Know-how transfer
contract

Why Enter into Alliances? Economies of Scale

Exploiting economies of scale
Exploiting economies of scale in R&D,

Learning from competitors manufacturing, distribution etc.

Example

Sharing risks and costs
 Picture tube and semiconductor manufacturing

Government requirement in some countries  Aluminum industry
 Efficient scale of bauxite mine is far greater than for a aluminum
smelter
 Selling bauxite in open market may be difficult
 Aluminum firms enter into JVs in mining
 More than half of world’s bauxite mines are operated by JVs

Learning from Competitors

Learning may be used in firms’ other operations
Learning presumed to be balanced

Example
Risks
 JV between GM and Toyota
 It may allow competitor to learn something which can be
 Help GM learn manufacturing high quality small cars
beneficial in other business segments
 GM rotated managers from its plants to JV and back
 May attract anti-trust laws – Tacit collusion
 Enabled Toyota to gain foothold in US market, distribution
channels, political support  A learning race can develop in an alliance
 Learnt to manage in US

5
Sharing Risks and Costs How do Alliances Perform?

Spreads the risk of failure by sharing cost among partners

Alliance Researchers Year Failure Rate

Example
 Semiconductor manufacturing McKinsey & Company 1993 33%
 Offshore oil drilling
The Darden School
 Big auto companies continue to compete in product markets but have alliances to 1996 60%
invest in high-potential research efforts (Prof. Robert Spekman)

 Toshiba + Siemens + Motorola = 1GB chips KPMG 1996 70%

 Northwest + KLM, American Airlines + British Airways, Star Alliance
 GE + Honda – Small jet engines PricewaterhouseCoopers 1998 50%

Anderson Consulting 1999 61%

The Lared Company 2000 60%

Problems with alliances Comparing Expansion Options

Multiple decision making centers

Constant bargaining and clash of interests Organic growth Acquisition Alliance

Considerably more complex than organizations with single Level of Control Complete Control Significant Control Medium / Low
line of command
Level of Complexity Not Complex Somewhat Complex Complex
 Airbus A320 – 150 seater, short to medium range aircraft
Speed of Execution Slow Medium Medium / Fast
 Variants A321
 A319 – 120/130 seater got delayed due to objections and Cost Somewhat Costly Highest Costs Less Costly
negotiations among partners Likelihood of Culture
None Some Significant
Clash
 Boeing 737-500 first to market
Riskiness of Venture Somewhat Risky Highest Risks Less Risky

Selecting an Entry Mode

Technological Know-How Wholly owned subsidiary, except:

1. Venture is structured to reduce risk of
loss of technology
2. Technology advantage is transitory
Then licensing or joint venture OK

Management Know-How Franchising, subsidiaries (wholly owned or

joint venture)

Pressure for Cost Reduction Combination of exporting and wholly

owned subsidiary

6
 IKEA Value Innovation

What is IKEA’s Customer Value Proposition?
Value innovators who look for quantum leaps in customer
 Substandard quality value should ask the following questions (Kim & Mauborgne,
 No in-store sales assistance 1997)
 Limited variety  Which of the factors that our industry takes for granted should be
 No delivery eliminated?
 No installation  Which factors should be reduced well below the industry's

Why do customer’s still buy from it? standards?
 Which factors should be raised well above the industry’s
standards?
 Which factors should be created that the industry never offered?

How has IKEA addressed these Blue Ocean vs. Red Ocean

Which of the factors that our industry takes for granted should be
eliminated? Red Ocean Strategy Blue Ocean Strategy
 Door-to-door delivery, Assembly, life-time guaranty Compete in existing market Create uncontested market
space space

Which factors should be reduced well below the industry's standards?
Beat the competition Make the competition irrelevant
 Quality, Variety, Store assistance
Exploit existing demand Create and capture new demand

Which factors should be raised well above the industry’s standards?
Make the value/cost trade-off Break the value/cost trade-off
 Price, In-store atmosphere (Theme park)
Align the whole system of Align the whole system of

Which factors should be created that the industry never offered? company’s activities with its company’s activities with its
 Overall shopping experience, Day care center, Delightful strategic choice of differentiation strategic choice of differentiation
cafes OR low cost AND low cost

IKEA Augmented Product Concept

Basic product: core benefit that

How does it deliver it’s Value Proposition? is being offered
 Overnight shelter for a hotel
 Product Strategy room
Augmented Product
 Transportation for a car
 Store operations
Expected product: meets
Expected Product

How is the US furniture industry structured? consumers’ minimal purchase

conditions
Basic

What were the problems in US? Product

 Clean bed sheets and fresh
towels in a hotel

What should it do differently in US?  Air-conditioning and stereo in
a car

Augmented product: benefits
and attributes that are
designed to produce delight

Potential product: a

7
The Augmentation Trend

Ethan Allen, Jordan’s

Furniture, Mercedes Benz

Augmented Product
Wallmart, Kmart,
easyJet
Augmented Product

Augmented Expected Expected

Product Product Product

Time