Chapter 14: Entry Strategy and

Strategic Alliances

1. L Nht Thy
2. Trn Th Ngc Mai
3. Nguyn Kiu Linh
4. Nguyn Th Trc ng
5. V Th Thi
6. Trng Hu Nhi
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 Chapter 14: Entry Strategy and
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BASIC ENTRY DECISIONS

Three basic decisions that a firm contemplating foreign

expansion must make:

Which markets to enter

When to enter those markets

On what scale

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Which Foreign Markets?

The choice based on nations long run profit potential.

Look in detail at economic and political factors which influence foreign

markets.

Long run benefits of doing business in a country depends on following

factors: Size of market, the present wealth of consumer markets, nature of
competition

By considering such factors firm can rank countries in terms of their

attractiveness and long-run profit.
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Timing of Entry
When firms enter early in the foreign market commonly known
as first-mover advantages: the ability to prevent rivals and capture
demand by establishing a strong brand name, ability to build sales
volume in that country, ability to create customer relationship

The disadvantages are:

Firm has to devote effort, time and expense to
learning the rules of the country
Risk is high for business failure

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Scale of Entry and Strategic Commitments
The consequences of entering a market on a significant scale
are associated with the value of the resulting strategic
commitments

Deciding to enter a foreign market on a significant scale is a

major strategic commitment that changes the competitive
playing field

Small-scale entry has the advantage of allowing a firm to

learn about a foreign market while simultaneously limiting the
firms exposure to that market
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ENTRY MODES

Exporting

Exporting means producing goods in one country and

selling them in another country

Most manufacturing firms begin their global expansion as

exporters and only later switch to another mode for
servicing a foreign market
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Advantages of Direct Exporting

Target management and control of the sales become possible

which is unrealistic in the case of indirect exports.
The strategy offers potential for higher profits because of
more direct contact.
Direct exports may also enable the producer to have a closer
relationship with foreign buyers and the marketplace.
Direct exporting is applicable to a wider range of goods and
services.

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Disadvantages of Direct Exporting

May be inappropriate for goods with a short work life and

are unlikely to be exported
May have high transport costs or goods that require
complex after - sales service which cannot be granted by
resellers.
May require the producer to acquire new capabilities like
marketing skills and financial resources in order to be able
to contract with clients or business partners.
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Advantages of Indirect Exporting:
The exporter will have less complexity in dealing with when
selling products in foreign markets, complexities which range
from clashing cultures to volatile exchange rates.
The exporter will not have to worry about managing product
distribution in a foreign country as this is done by an export
partner.
The market entry barriers tend to be less in this form of exporting.
Indirect exporting does not require a lot of organizational effort or
commitment of staff workers, the firm only employs a small
number of employees as the main work is carried out by foreign
trade partners.
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Disadvantages of Indirect Exporting:

Not all brokers are using the optimum market potential and
opportunities for marketing, thus mistakes and miscalculations in
their actions affect the income of producers of export goods.

May lead to diminishing returns in the long run as trading partners

try to get maximum profit from their service as mediators.

May lack recognition from the end users of the product or service,
who are much more familiar with the end product.

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Turnkey Projects

In a turnkey project, the contractor agrees to handle every

detail of the project for a foreign client, including the
training of operating personnel

At completion of the contract, the foreign client is handed

the "key" to a plant that is ready for full operation

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Advantages:

Turnkey projects are a way of earning great economic returns

from the know-how required to assemble and run a
technologically complex process

Turnkey projects make sense in a country where the political

and economic environment is such that a longer-term investment
might expose the firm to unacceptable political and/or economic
risk

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Disadvantages:

The firm that enters into a turnkey deal will have no long-term
interest in the foreign country

The firm that enters into a turnkey project may create a competitor

If the firm's process technology is a source of

competitiveadvantage, then selling this technology through a
turnkey project is also selling competitive advantage to potential or
actual competitors

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Licensing

A licensing agreement is an arrangement whereby a licensor

grants the rights to intangible property to another entity for a
specified time period, and in return, the licensor receives a
royalty fee from the licensee

Intangible property includes patents, inventions, formulas,

processes, designs, copyrights, and trademarks

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Advantages:

The firm does not have to bear the development costs and
risks associated with opening a foreign market

The firm avoids barriers to investment

It allows a firm with intangible property that might have

business applications, but which doesnt want to develop those
applications itself, to capitalize on market opportunities

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Disadvantages:

Doesnt have the tight control over manufacturing, marketing,

and strategy that is required for realizing experience curve and
location economies

Limits a firms ability to coordinate strategic moves across

countries by using profits earned in one country to support
competitive attacks in another

Is the potential for loss of proprietary technology or property

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Franchising

Franchising is a business strategy for getting and keeping

customers. It is a marketing system for creating an image in
the minds of current and future customers about how the
company's products and services can help them. It is a
method for distributing products and services that satisfy
customer needs.

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Advantages:
Low investment and low risk

Franchisor can get the information regarding the market culture,

customs and environment of the host country

Franchisor learns more from the experience of the franchisees

Franchisee gets the benefits of R&D with low cost

Franchisee escapes from the risk of product failure.

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Disadvantages:

It may be more complicating than domestic franchising

It is difficult to control the international franchisee
It reduces the market opportunities for both
Both the parties have the responsibilities to maintain
product quality and product promotion
There is a problem of leakage of trade secrets

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Joint Ventures

A joint venture is the establishment of a firm that is jointly

owned by two or more otherwise independent firms
Joint venture occurs when an international company enters in
to an agreement with a local partner to develop a new entity
and assets for a finite time by contributing equity
A joint venture can also bring positive benefits to the foreign
partner through their local partners

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Advantages:

Risk diversification and allocation of risks between the

partners
Sharing of resources
Can be a means of reducing political and other investment
risks
Access to the distribution network

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Disadvantages:

Lack of management control

Joint ventures negotiations are time consuming, requires a lot of

contractual framework and long period of due-diligence

Lack of trust

Risk of conflict as a result of cultural differences

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Wholly Owned Subsidiaries

In a wholly owned subsidiary, the firm owns 100 percent of

the stock.

Establishing a wholly owned subsidiary in a foreign market

can be done two ways:

The firm can set up a new operation in that country

The firm can acquire an established firm

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Advantages:

A wholly owned subsidiary reduces the risk of losing control over core
competencies
A wholly owned subsidiary gives a firm the tight control over operations
in different countries that is necessary for engaging in global strategic
coordination
A wholly owned subsidiary maybe required if a firm is trying to realize
location and experience curve economies

Disadvantage:
Firms bear the full costs and risks of setting up overseas operations

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SELECTING AN ENTRY MODE

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Core Competencies and Entry Mode
Technological Know-How

A firm with a competitive advantage based on proprietary

technological know-how should avoid licensing and joint venture
arrangements in order to minimize the risk of losing control over the
technology

If a firm believes its technological advantage is only transitory, or

the firm can establish its technology as the dominant design in the
industry, then licensing may be appropriate even if it does involve
the loss of know-how
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Management Know-How

The competitive advantage of many service firms is based upon

management know-how

The risk of losing control over the management skills to

franchisees or joint venture partners is not high, and the benefits
from getting greater use of brand names is significant

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Pressures for Cost Reductions and Entry Mode

The greater the pressures for cost reductions, the more likely
a firm will want to pursue some combination of exporting and
wholly owned subsidiaries

This will allow it to achieve location and scale economies as

well as retain some degree of control over its worldwide
product manufacturing and distribution

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GREENFIELD VENTURE OR ACQUISITION?

The two primary modes of investment: Greenfield and

acquisition are compared below on the basis of
their definitions, factors affecting their implementation and
the advantages & disadvantages of each.

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Pros and Cons of Acquisition

Benefits of Acquisitions
Acquisitions have three major points in their favor:

They are quick to execute

Acquisitions enable firms to preempt their competitors
Managers may believe acquisitions are less risky than
green-field ventures

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Why Do Acquisitions Fail?
Acquisitions fail for several reasons:

The acquiring firms often overpay for the assets of the

acquired firm
There may be a clash between the cultures of the acquiring
and acquired firm
Attempts to realize synergies by integrating the operations of
the acquired and acquiring entities often run into roadblocks
and take much longer than forecast
There is inadequate pre-acquisition screening

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Pros and Cons of Greenfield Ventures

The main advantage of a greenfield venture is that it gives

the firm a greater ability to build the kind of subsidiary
company that it wants

However, greenfield ventures are slower to establish

Greenfield ventures are also risky

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 Strategic Alliances
Advantages
Strategic alliances permit a company to pursue an opportunity more
quickly, leveraging the resources and knowledge of the other party.
Fewer resources are required than if a company pursued an opportunity
on its own. An alliance can provide easier access to new opportunities
and a lower barrier to entry.

Disadvantages
Implementing and managing a strategic alliance may be difficult because
each alliance partner has a different way of operating. Mistrust could
occur, particularly when competitive or proprietary information is
involved. The alliance partners could become more dependent on each
other, making it difficult to operate again as separate entities if required.
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 Making Strategic Alliances Work: Partner
Selection
Strong alliance partners are not created overnight

Each partnership should start with a well-defined project that

serves to pilot the alliance

This is a low-risk initiative that helps each partner learn about the
pros and cons of working together with a shared objective

Lessons learned from these initiatives also help to best match

alliance partners with initiatives that require more resources,
longer periods of time, higher levels of risk and greater potential
returns
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 Making Strategic Alliances Work:
Managing the Alliance

Sensitivity to cultural differences and their effects on

management style

Building interpersonal relationships among managers

from different companies

Ability to learn from alliance partners and put the

knowledge to good use

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