International Strategy

Entry Modes

Pressures for Global Integration and National Differentiation

High

Global Organization Transnational Organization

Forces for Global Integration

Lo Lo

International Organization
Forces for National Differentiation

Multinational Organization
High see C. Bartlett (1986)

Basic Entry Decisions

Which markets to enter? When to enter the markets? What scale of entry?

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Which Foreign Markets?

Favorable benefit-cost-risk-trade-off:
Politically stable developed and developing nations. Free market systems No dramatic upsurge in inflation or private-sector debt.

Unfavorable
Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing..

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Timing of Entry
Advantages in early market entry:
First-mover advantage. Build sales volume. Move down experience curve and achieve cost advantage. Create switching costs.

Disadvantages:
First mover disadvantage - pioneering costs. Changes in government policy.

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Scale of Entry
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.

Small scale entry:

Time to learn about market. Reduces exposure risk.
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Entry Modes
Exporting Turnkey Projects Licensing Franchising Joint Ventures Wholly Owned Subsidiaries

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Exporting
Advantages:
Avoids cost of establishing manufacturing operations. May help achieve experience curve and location economies.

Disadvantages:
May compete with low-cost location manufacturers. Possible high transportation costs. Tariff barriers. Possible lack of control over marketing reps.

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Turnkey Projects
Advantages:
Can earn a return on knowledge asset. Less risky than conventional FDI.

Disadvantages:
No long-term interest in the foreign country. May create a competitor. Selling process technology may be selling competitive advantage as well.
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Licensing
Advantages:
Reduces costs and risks of establishing enterprise. Overcomes restrictive investment barriers. Others can develop business applications of intangible property.

Disadvantages:
Lack of control. Cross-border licensing may be difficult. Creating a competitor
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Franchising
Advantages:
Reduces costs and risk of establishing enterprise.

Disadvantages:
May prohibit movement of profits from one country to support operations in another country. Quality control.
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Joint Ventures
Advantages:
Benefit from local partners knowledge. Shared costs/risks with partner. Reduced political risk.

Disadvantages:
Risk giving control of technology to partner. May not realize experience curve or location economies Shared ownership can lead to conflict.
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Wholly Owned Subsidiary

Advantages:
No risk of losing technical competence to a competitor. Tight control of operations. Realize learning curve and location economies.

Disadvantage:
Bear full cost and risk.
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Advantages and Disadvantages of Entry Modes

Entry Mode Exporting Advantage Ability to realize location and experience curve economies Ability to earn returns from process technology skills in countries where FDI is restricted Low development costs and risks Disadvantage High transport costs Trade barriers Problems with local marketing agents Creating efficient competitors Lack of long-term market presence Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination

Turnkey contracts

Licensing

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Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Disadvantage Franchising Low development costs and Lack of control over quality risks Inability to engage in global strategic coordination Joint ventures Access to local partners Lack of control over technology knowledge Inability to engage in global strategic Sharing development costs coordination and risks Inability to realize location and Politically acceptable experience economies

Wholly Protection of technology High costs and risks owned Ability to engage in global subsidiaries strategic coordination Ability to realize location and experience economies Table 14.1b

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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.

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Entry Mode and Competitive Advantage

Advantage Based on Technological KnowHow
Exporting, Licensing, or Wholly-owned subsidiaries Examples: Honda, Intel

Advantage Based on Management Know-How

Franchising, Joint Ventures, or subsidiaries Examples: McDonalds, Marriott

Strategic Alliances
Cooperative agreements between potential or actual competitors. Advantages:
Facilitate entry into market. Share fixed costs. Bring together skills and assets that neither company has or can develop. Establish industry technology standards.

Disadvantage:
Competitors get low cost route to technology and markets. 14-17

Alliances Are Popular

High cost of technology development Company may not have skill, money or people to go it alone Good way to learn Good way to secure access to foreign markets Host country may require some local ownership
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Global Alliances, however, are different

Companies join to attain world leadership Each partner has significant strength to bring to the alliance A true global vision Relationship is horizontal not vertical When competing in markets not part of alliance, they retain their own identity
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Partner Selection
Get as much information as possible on the potential partner Collect data from informed third parties
former partners investment bankers former employees

Get to know the potential partner before committing

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Characteristics of a Global Alliance

Players are independent prior to the creating of the alliance Players share
benefits of the alliance control over operations

Players continue to contribute

technology products
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Characteristics of a Strategic Alliance

Benefits Control

Independence of Participants

Technology Products

Shared Benefits

Ongoing Contributions

Markets

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Problems with Strategic Alliances

Have to give up some authority/control Could be strengthening a future competitor
Technology transfer Management practices Operating procedures

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