III UNIT: GLOBAL BUSINESS

& ENTRY STRATEGIES

GLOBAL MARKET
ENTRY STRATEGIES

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 Decisions of Modes of Entry
 Companies which desire to enter in global markets face
dilemma while deciding the method of entry.
 This dilemma can be solved some extent by considering the
following factors.
1. Ownership Advantage
2. Location Advantage
3. Internationalization Advantage
Ownership Advantage: benefit by owning resources, which
provides a competitive advantage to the company over its
competitors.
Ex: TISCO owned its iron ore mines and coal mines, which gives
the advantage of low cost production.

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Location Advantage: facilities related to manufacturing located in
host country benefits a company, such as
 customer needs, preferences &tastes
 Logistics requirements
 Cheap labour
 Cheap land and acquisition cost
 Political stability
 Low cost raw materials
 Climatic conditions
 If a company has a location advantage it enters foreign markets
through direct investments. Otherwise, it enters through
exporting.
Internationalization Advantage: the benefits that a company gets
by manufacturing goods or rendering services in the host country
by itself rather than through contract arrangements with the
companies in the host country.
Ex: Toyota enters foreign markets through direct investment and
joint ventures as the local companies in foreign countries can not
produce as efficiently as Toyota.
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Basic Entry Decisions

A firm expanding internationally must decide

 Which markets to enter
 When to enter them and on what scale
 How to enter them (the choice of entry mode)

Which Foreign Markets?

 Firms need to assess the long run profit potential of each market
 The most favorable markets are politically stable developed
and developing nations with free market systems, low inflation,
and low private sector debt
 The less desirable markets are politically unstable developing
nations with mixed or command economies, or developing
nations where speculative financial bubbles have led to excess
borrowing
 Successful firms usually offer products that have not been widely
available in the market and that satisfy an unmet need
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Timing of Entry
 After a firm identifies which market to enter, it must
determine the timing of entry
 Entry is early when an international business enters a foreign
market before other foreign firms
 Entry is late when a firm enters after other international
businesses have already established themselves in the
market
 Firms entering a market early can gain first mover
advantages including
 the ability to pre-empt rivals and capture demand by
establishing a strong brand name
 the ability to build up sales volume in that country and
ride down the experience curve ahead of rivals and
gain a cost advantage over later entrants
 the ability to create switching costs that tie customers
into their products or services making it difficult for later
entrants to win business

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Timing of Entry
 First mover disadvantages - the disadvantages associated with
entering a foreign market before other international businesses
 These may result in pioneering costs (costs that an early
entrant has to bear that a later entrant can avoid) such as
 the costs of business failure if the firm, due to its ignorance
of the foreign environment, makes some major mistakes
 the costs of promoting and establishing a product offering,
including the cost of educating the customers
Scale of Entry
 Firms that enter foreign markets on a significant scale make a
major strategic commitment that changes the competitive
playing field
 involves decisions that have a long term impact and are
difficult to reverse
 Small-scale entry can be attractive because it allows the firm
to learn about a foreign market, but at the same time it limits
the firm’s exposure to that market.

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 Modes of entry
 Different Modes of Entry to International Business:

 Exporting
 Licensing
 Franchising
 Contract Manufacturing
 Assembly and Integrated Manufacturing

 The advantages and disadvantages of each entry mode are

determined by

 transport costs and trade barriers

 political and economic risks
 firm strategy

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 Exporting
1. Exporting is often the first method firms use to enter foreign market.
Simplest and widely used mode of entering foreign markets.
Advantages of exporting:
 Need for limited finance
 Low risk
 Motivation for exporting
Forms of Exporting:
 Indirect exporting- exporting the products in their original form or in the modified form
to a foreign country through another domestic company.
Ex: Himalaya publishers sells their books to various exporters which in turn exports these
books to various foreign countries.
 Direct exporting- selling the products in a foreign country directly through its distribution
or through its host country’s company.
Ex: Baskin Robbins exported its ice creams to Russia in 1990 and later opened 74 outlets
with Russian partners. Finally established ice cream plant in Moscow.
 Intra-corporate transfers- selling of products by a company to its affiliated company in
host country.
Ex: Selling of products by Hindustan Lever in India to Unilever in the USA. Which is treated as
exports in India and imports in the USA

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Factors to be considered:
 Government policies, like export policies, import policies,
export financing, foreign exchange etc.
 Marketing factors-image, distribution network,
responsiveness to the customer, customer awareness and
preferences.
 Logistical consideration-physical distribution, warehousing,
packaging, transporting, inventory carrying cost
 Distribution issues: own distribution, host country distribution.
Export Intermediaries:
 Export management companies-acts as export department
of exporting firm(client)
 Cooperative society-domestic companies exports goods
through this society which undertakes the exporting
operations of its members.
 International trading company-buys the goods from
domestic company and exports.
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Export Intermediaries:
 Manufacturer’s Agents- seek domestic orders for foreign
manufacturers, works on commission base.
 Manufacturer’s Export Agents- sells the domestic
manufacturer’s products in foreign markets and acts as
their foreign sales department.
 Export and import brokers- bridges the gap between
exporters and importers and brings both the parties
together.
 Freight forwarders-helps domestic manufacturers in
exporting goods such as physical transportation, arranging
customs documents, transportation services.

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2. LICENSING
LICENSING- The domestic manufacturer leases the right to use its
intellectual property to a manufacturer in a foreign country for a fee.
 Intellectual property include Technology, Work methods, Patents,
Copyrights, Brand names , Trademarks.
 Popular method of entering foreign markets.
 Cost of entry is less.
 Domestic company need not invest any capital.
 Domestic company earns revenue with out additional investment.
Licensing process:
Licensor Licensor

Leases the right to use the

Receives Royalty Money
intellectual property

Pays royalty to the Licensor

Uses the property to produce
for using the Intellectual
products for sale in his country
Property
Licensee Licensee
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Basic issue in International
Licensing
Boundaries of the Agreements: determine the rights and
privileges are being conveyed in the agreement.
 Determination of Royalty: negotiates for a fair royalty both
sides to implement the contract successfully.
 Determining rights, privileges and constraints: clearly specify
the rights, privilege and constraints.
 Dispute settlement mechanism: clearly mention the dispute
settlement mechanism.
 Agreement duration: two parties specify the agreement
duration

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12-13
3. Franchising
 Franchising is a form of licensing.
 Under franchising, an independent organisation called
franchises operates the business under the name of
another company-franchisor.
 The franchisor provides following services to the franchisee
 Trade marks
 Operating systems
 Product reputations
 Continuous support systems like advertising, employee
training, reservation services, quality assurance
programmes, etc.

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 Franchising Agreements:
 Franchisee has to pay a fixed amount and royalty based on
the sales to the franchiser.
 Franchisee should agree to adhere to follow the franchisor’s
requirements like appearance, financial reporting, operating
procedures, customer service etc.
 Franchisor helps the franchisee in establishing the
manufacturing facilities, services facilities, provides expertise,
advertising, corporate image etc.
 Franchisor allows some degree of flexibility in order to meet
the local tastes and preferences.

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12-16
Contract manufacturing

 Outsourcing entire or part of manufacturing

operations

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5. Joint ventures with a host country firm - a firm that is jointly owned by
two or more otherwise independent firms
 most joint ventures are 50:50 partnerships
 Advantages:
 Benefit from local partner’s 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.
6. Wholly owned subsidiary - the firm owns 100 percent of the stock
 set up a new operation
 acquire an established firm
 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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Turnkey projects
Turnkey projects involve a contractor that 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
 Turnkey projects are attractive because
 they allow firms to earn great economic returns from the know-
how required to assemble and run a technologically complex
process
 they are less risky in countries where the political and
economic environment is such that a longer-term investment
might expose the firm to unacceptable political and/or
economic risk
 Turnkey projects are not attractive when
 the firm's process technology is a source of competitive
advantage
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Advantages and
Disadvantages of Entry Modes
Entry Mode Advantage Disadvantage
Exporting Ability to realize location and High transport costs
experience curve economies Trade barriers
Problems with local marketing
agents
Turnkey Ability to earn returns from Creating efficient competitors
contracts process technology skills in Lack of long-term market
countries where FDI is presence
restricted
Licensing Low development costs and Lack of control over technology
risks Inability to realize location and
experience curve economies
Inability to engage in
global strategic
coordination

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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 Access to local partner’s Lack of control over technology

ventures 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
Table 14.1b experience economies

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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 Combination of exporting and

Reduction
wholly owned subsidiary.

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Which Entry Mode Is Best?

Advantages and Disadvantages of Entry Modes

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 How Do Core Competencies Influence
Entry Mode?

 The optimal entry mode depends on the

nature of a firm’s core competencies
 When competitive advantage is based on
proprietary technological know-how
 avoid licensing and joint ventures unless the
technological advantage is only transitory, or can
be established as the dominant design
 When competitive advantage is based on
management know-how
 the risk of losing control over the management
skills is not high, and the benefits from getting
greater use of brand names is significant

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How Do Pressures For Cost
Reductions Influence Entry Mode?
 When pressure for cost reductions is high, firms are
more likely to pursue some combination of
exporting and wholly owned subsidiaries
 allows the firm to achieve location and scale
economies and retain some control over
product manufacturing and distribution
 firms pursuing global standardization or
transnational strategies prefer wholly owned
subsidiaries

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 Which Is Better –
Greenfield or Acquisition?
 The choice depends on the situation confronting the firm
1. A greenfield strategy - build a subsidiary from the scratch
 a greenfield venture may be better when the firm needs to
transfer organizationally embedded competencies, skills,
routines, and culture
2. An acquisition strategy – acquire an existing company
 acquisition may be better when there are well-
established competitors or global competitors
interested in expanding
 The volume of cross-border acquisitions has been rising for
the last two decades

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What Are Strategic Alliances?

 Strategic alliances refer to cooperative agreements

between potential or actual competitors
 range from formal joint ventures to short-term
contractual agreements
 thenumber of strategic alliances has exploded in
recent decades
OR
 Any cooperative effort between two or more
independent organizations to develop, manufacture,
or sell products or services

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Why Choose Strategic Alliances?

 Strategic alliances are attractive because

they
 facilitate entry into a foreign market
 allow firms to share the fixed costs and risks of
developing new products or processes
 bring together complementary skills and assets
that neither partner could easily develop on its
own
 help a firm establish technological standards for
the industry that will benefit the firm
 But, the firm needs to be careful not to give
away more than it receives
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What Makes Strategic Alliances Successful?

 The success of an alliance is a function of

1. Partner selection
 A good partner
 helps the firm achieve its strategic goals
and has the capabilities the firm lacks and
that it values
 shares the firm’s vision for the purpose of the
alliance
 will not exploit the alliance for its own ends

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What Makes Strategic Alliances Successful?

2. Alliance structure
 The alliance should
 make it difficult to transfer technology not
meant to be transferred
 have contractual safeguards to guard
against the risk of opportunism by a partner
 allow for skills and technology swaps with
equitable gains
 minimize the risk of opportunism by an
alliance partner

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What Makes Strategic Alliances
Successful?
3. The manner in which the alliance is
managed
 Requires
 interpersonal relationships between
managers
 cultural sensitivity is important
 learning from alliance partners
 knowledge must then be diffused
through the organization

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 The Strategic Management Process
External
Analysis

Strategic Strategy Competitive

Mission Objectives
Choice Implementation Advantage

Which Businesses
Internal to Enter?
Analysis
Corporate Level • Vertical Integration
Strategy • Diversification

• Strategic Alliances
• mode of entry

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Motivation for Alliances
Create economic value by:

• accessing complementary resources and capabilities

• leveraging existing resources and capabilities

An alliance is an organizational form of exchange

that:

• should produce a gain from trade due to

some comparative or absolute advantage
Implication: Choose partners that are better at
something than you are (complementary resources)

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 Three Types
Of
Alliances

Nonequity Joint
Alliance Venture
Contracts Joint Equity
Equity
• licensing Alliance Holdings
• supply & • independent
distribution Cross Equity firm is
agreements Holdings created
• partners own
stakes in
eachother
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How Strategic Alliances Create Value

Improve Current Operations

Value
Creation Shaping the Competitive Environment

Facilitating Entry and Exit

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How Strategic Alliances Create Value

Improving Current Operations

Exploiting economies of scale
• a partner brings increased market share
and/or manufacturing capacity

Learning from partners

• a partner brings technology and/or
market knowledge

Risk and cost sharing

• a partner bears a portion of the risk and/or
cost of the alliance
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How Strategic Alliances Create Value

Shaping the Competitive Environment

Facilitating technology standards

• partners may agree on a standard and avoid
a market battle for the standard

Facilitating tacit collusion

• partners may communicate within an alliance
in subtle, legal ways whereas the same
communication between competitors outside
an alliance would be illegal

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How Strategic Alliances Create Value
Facilitating Entry and Exit
Low-cost entry into new industries
• a partner provides instant access and legitimacy

Low-cost exit from industries

• a partner is an informed buyer

Managing uncertainty
• alliances may serve as ‘real options’
Low-cost entry into new geographic markets
• partners provide local market knowledge, access,
and legitimacy with governments and customers
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 Modes of Foreign Direct Investments
through alliances
 Mergers and Acquisitions
 Joint company ventures
Mergers and Acquisitions:
 Domestic companies enter international business through
mergers and acquisitions.
 A domestic company selects a foreign company and merges
itself with the foreign company in order to enter international
business.
 The domestic company may purchase the foreign company
acquires its ownership and control.
Ex: Mittal steel -Arcelor

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Joint Venture

 Two or more firms join together to create a new

business entity that is legally separate and distinct
from its parents.
 Joint ventures provide required strengths in terms
of required capital, latest technology, required
human talent, etc., and enable the companies to
share the risks in the foreign markets.

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12-41
Cost-Benefit Analysis

 Cost/benefit analysis, comparing

 Expected costs
 Expected benefits
 Issues
 Estimating costs
 Estimating benefits
 Use of financial models to evaluate

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Cost-Benefit Analysis
Two Steps

 Identifying and estimating all of the costs

and benefits of carrying out the project
and operating the delivered application
 Expressing the costs and benefits in
common units

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Cost-Benefit Analysis
Cost Estimation
 Estimate costs to compare with
benefits/other investment options
 Overall estimation based on
 Estimation of required activities (structure)
 Estimation for each activity
 Estimation of installation/setup cost
 Estimation of operational cost

 Difficult, as a lot of these are estimates;

estimation errors cascade

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Cost-Benefit Analysis
Cost Category
 Development costs
 Setup costs
 Operational costs

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Cost-Benefit Analysis
Development Costs

 Salaries (base, incentives, and bonuses)

 Equipment for development
 Hardware

 Software

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Cost-Benefit Analysis
Setup Cost

 Hardware and software infrastructure

 Recruitment/staff training
 Installation and conversion costs

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Cost-Benefit Analysis
Operational Costs

 Costs of operating the system once it has

been installed
 Support costs
 Hosting costs
 Licensing costs
 Maintenance costs
 Backup costs

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Cost-Benefit Analysis
Benefit Estimation

 Estimate benefits of new system based on

 Estimationof cost savings and money
generation when deployed
 Value of information obtained for
objective driven project
 Value of intangibles
 In other words: direct, indirect and
intangible benefits

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Cost Benefits Analysis
Direct Benefits

 Directly accountable to new

system
 Cost savings (e.g., less staff, less paper,
quicker turnaround)
 Money generation (e.g., new revenue
stream, new markets)
 Measurable after system is
operational
 Have to be estimated for
cost/benefit analysis
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Cost Benefits Analysis
Indirect Benefits
 Secondary benefits of new system
 Examples: Better work flow, increased flexibility
 Somewhat quantifiable after the system is
operational
 Have to be estimated for cost/benefit analysis

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Cost Benefits Analysis
Intangible Benefits

 Positive side effects of new system

 External (e.g., increase branding,
entry to new markets)
 Internal (increased interest in job for
users, enabler for other systems)
 Often very specific to a project; not
measurable even after a system is
operational

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Cash Flow Forecasting
Cash Flow Analysis

 Typically there are outgoing payments

initially and then incoming payments
 There might be additional costs at the
end of the project life
 Cash flow considerations
 Is initial funding for the project available?
 Is timing of incoming/outgoing cash flow in
line with financial plans?
 Risky/expensive projects might be
funded using venture capital
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Cost-Benefit Evaluation
Techniques
 Costs and benefits have to be expressed
using the same scale to be comparable
 Usually expressed in payments at certain
times (cash flow table)
 Payments at different points in time are not
comparable based only on the dollar
amount
 Time of payment should be considered

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Cost-Benefit Evaluation
Techniques
 Techniques
 Net profit
 Payback period
 Return on investment
 Net present value
 Internal rate of return

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Cost-Benefit Evaluation Techniques
Net Profit
 Difference between total cost and total
income
 Pros: Easy to calculate
 Cons
 Does not show profit relative to size
investment (e.g., consider Project 2)
 Does not consider timing of payments (e.g.,
compare Projects 1 and 3; income comes
late in Project 1)

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Cost-Benefit Evaluation Techniques
Payback Period

 Time taken to break even (pay back the initial

investment)
 Pros
 Easy to calculate
 Gives some idea of cash flow impact
 Cons: Ignores overall profitability
 Not very useful by itself, but a good measure for
cash flow impact

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Cost-Benefit Evaluation Techniques
Payback Period

 The Payback Period approach states

that all projects with a Payback Period
less than a specified number of years
should be accepted

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Cost-Benefit Evaluation Techniques
Payback Period
 The Payback Period approach states that all
projects with a Payback Period less than a
specified number of years should be
accepted

 NCF: Net Cash Flow

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Cost-Benefit Evaluation Techniques
Return On Investment

 Also known as the accounting rate of return (ARR)

 Provides a way of comparing the net profitability
to the required investment
 The common formula
 ROI = (average annual profit/total investment)
X 100
 For project 1: ROI = ((50,000/5)/100,000) x 100 =
10%
 For project 4: ROI = ((75,000/5)/120,000) x 100 =
12.5%
 For project 2: 2%; project 3: 10%

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Cost-Benefit Evaluation Techniques
Return On Investment

 Pros: Easy to calculate

 Cons
 Does not consider the timing of payments
 Misleading: does not consider bank interest rates

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Cost-Benefit Evaluation Techniques
Net Present Value

 A technique that takes into account the profitability of a

project and the timing of the cash flows that are produced
 Sum of all incoming and outgoing payments, discounted using
an interest rate
 Rationale: $100 is better now than next year

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Cost-Benefit Evaluation Techniques
Net Present Value

 Present value = (value in year t)/(1+r)^t

 r is the discount rate (discounting the future value)
 t is the number of years into the future that the cash
flow occurs

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Cost-Benefit Evaluation Techniques
Internal Rate of Return

 Pros
 Calculates
figure which is easily
comparable to interest rates
 Cons: Difficult to calculate (iterative)
 Standard way to compare projects

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