Chapter

7
Entry Strategy and Strategic
Alliances
 Basic Entry Decisions

Firms entering foreign markets make three

basic decisions
 which markets to enter
 when to enter them and on what scale
 which entry mode to use

Entry modes include:

 exporting
 licensing or franchising to a company in the host
nation
 establishing a joint venture with a local company
 establishing a new wholly owned subsidiary
 acquiring an established enterprise
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 Basic Entry Decisions

Several factors affect the choice of entry mode

including:
Transportion costs
trade barriers
political risks
economic risks
costs
firm strategy

The optimal mode varies by situation – what makes sense

for one company might not make sense for another

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 1. Which Foreign Markets to Enter?

Favorable markets are

Politically stable developed and developing nations
Free market systems
No dramatic increase in inflation or private-sector debt

Less desirable markets are

 Politically unstable developing nations with mixed or
command economies
Developing nations with excessive levels of borrowing
 2. Timing of Entry
Once attractive markets are identified, the firm must
consider the timing of entry
 Early Entry
 Late Entry

Advantages in early market entry:

 First-mover advantage.
 Build sales volume.
 Move down experience curve and achieve cost advantage.
 Create switching costs (make it difficult for later entrants to win business).
 Mobile created a switching cost by selling Sim card around 3500-4000PKR

Disadvantages:

First mover disadvantage - pioneering costs (time and effort spent learning the
rules of a new market)
 the costs of business failure
 the cost of educating customers

Changes in government policy (e.g., Uber, drivers # 3 years # no criminal record).

 Classroom Performance System

refers to the time and effort spent learning the

rules of a new market.

a) First mover advantages

b) Strategic commitments
c) Pioneering costs
d) Market entry costs

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 Classroom Performance System

refers to the time and effort spent learning the

rules of a new market.

a) First mover advantages

b) Strategic commitments
c) Pioneering costs
d) Market entry costs

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 Scale of Entry

After choosing which market to enter and the timing of

entry, firms need to decide on the scale of market
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 (Local) competitive response.

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

Learn about market.
Reduce exposure risk.

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 Market Entry Modes

Six different ways to enter a foreign market:

Exporting
Turnkey Projects
Licensing
Franchising
Joint Venture
 Wholly Owned subsidiary

Managers need to consider the advantages

and disadvantages of each entry mode

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Market Entry Modes
Entry Modes
 1. Exporting

Exporting is selling of goods or services produced in one

country to another country.
Direct Exporting: involves selling directly to your target
customer in-market (e.g., selling Online).

Indirect Exporting: is selling to an intermediary, who later

sells the goods or services either directly to importing
wholesalers or to customers.

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 1. 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
 agents in a foreign country may not act in exporter’s best interest

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 2. Licensing
A licensing agreement is an arrangement whereby a licensor
grants the rights to intangible property to another entity (the licensee)
for a specified time period, and in return, the licensor receives a royalty
fee from the licensee.

e.g., a royalty fee equal to 5, 10, or 15 percent of the net sales revenue

Intangible property includes

 patents,
 inventions,
 formulas,
 processes,
 designs,
 copyrights,
 and trademarks

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 2. Licensing

Licensors with experience in the field of research and

product development may find it more efficient to license
out new products rather than take up production
themselves.

e.g., Coca cola

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 2. Licensing

Licensing is attractive because firm:

1. Reduces development costs and risks of establishing foreign
enterprise.

2. Overcomes restrictive investment barriers.

3. Firms with intangible property that might have business

applications can capitalize on market opportunities without developing
those applications itself.

For example, American Telephone & Telegraph (AT&T) company originally invented
the transistor circuit in the 1950s, but AT&T decided it did not want to produce
transistors, so it licensed the technology to a number of other companies, such as
Texas Instruments.
 2. Licensing

Licensing is unattractive because:

1. the firm doesn’t have the tight control over manufacturing,
marketing, and strategy required for realizing experience curve and
location economies
Licensing typically involves each licensee setting up its own production
operations.
This limits the firm's ability to realize experience curve and location
economies by producing its product in a centralized location.

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 2. Licensing

Licensing is unattractive because:

2. it limits a firm’s ability to coordinate strategic moves across
countries by using profits earned in one country to support
competitive attacks in another (because firms have to pay certain
amount as royalty)

3. Technological know-how constitutes the basis of many multinational

firms' competitive advantage.

Most firms wish to maintain control over how their know-how is

used, and a firm can quickly lose control over its technology by
licensing it.

e.g., RCA Corporation (a major American electronics company) once

licensed its color TV technology to Japanese firms and then
Japanese firm improved the existing TV and launched in U.S
market 14-18
 3. Franchising

Franchising is basically a specialized form of licensing in which the

franchisor not only sells intangible property to the franchisee, but also
insists that the franchisee agree to abide by strict rules as to how it does
business
 Franchising is used primarily by service firms
 Major U.S. companies with franchise operations in Pakistan include
- Marriott,
- Day's Inn,
- Pizza Hut,
- KFC,
- Subway,
- McDonald's,
- Dunkin Donuts,
- Domino's Pizza

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 3. Franchising

Franchising is attractive because:

 Firms avoid many costs and risks of opening up a foreign market
 Firms can quickly build a global presence

Franchising is unattractive because:

 It may inhibit (slow down) the firm's ability to take profits out of
one country to support competitive attacks in another

 the geographic distance of the firm from its foreign franchisees can
make poor quality difficult for the franchisor to detect

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 Licensing vs. Franchising

Licensing Franchising
Royalty Management Fees

15-20 years 5/10 Years

Concerned with specific existing products Franchisor passes to the franchisee the
and technologies benefits of ongoing research programs

Licensee enjoys substantial measure of Standard fee structure. Any variation will
fee negotiation cause confusion

Lesser control Exerts higher control

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 4. Joint Ventures

A joint venture: when two or more business entities come

together to achieve a common purpose, it’s called a joint
venture.

Under a joint venture arrangement, a foreign company invites an

outside partner to share stock ownership in the new unit –
minority or majority or 50:50 share

Example:
 Google and NASA developing Google Earth
 Banks collectively funding research to prevent cyber-crime
 BMW and Toyota co-operate on research into hydrogen fuel vehicle electrification

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 4. Joint Ventures
Joint ventures are attractive because:
 they allow the firm to benefit from a local partner's knowledge of the host
country's competitive conditions, culture, language, political systems, and
business systems

 the costs and risks of opening a foreign market are shared with the
partner

 When political considerations make joint ventures the only feasible entry
mode

Joint ventures are unattractive because:

 the firm risks giving control of its technology to its partner

 the firm may not have the tight control over subsidiaries need to realize
experience curve or location economies

 shared ownership can lead to conflicts and battles for control if goals and
objectives differ or change over time

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 5. Wholly Owned Subsidiaries

In a wholly owned subsidiary, the firm owns 100 percent

of the stock and have complete control and ownership of
international operations,

Firms can establish a wholly owned subsidiary in a

foreign market by:

 setting up a new operation in the host country (Greenfield operation)

 acquiring an established firm in the host country (acquisition)

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 5. Wholly Owned Subsidiaries
Acquisition

A company can acquire a foreign company and all its resources in a

foreign market
Acquisition provides speedy access to the resources of a foreign
company such as skilled man power, the company’s product and brand
and its distribution channels

Acquisitions are attractive because:

they are quick to execute
they enable firms to preempt their competitors
acquisitions may be less risky than Greenfield ventures
 5. Wholly Owned Subsidiaries

Acquisitions can fail when:

 the acquiring firm overpays for the acquired firm

 the cultures of the acquiring and acquired firm clash

 attempts to realize synergies run into roadblocks and take much longer
than forecast
 there is inadequate pre-acquisition screening

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 5. Wholly Owned Subsidiaries

Green field operation

The firm creates the production and marketing facilities on its own from
scratch
Green field operations preferred under following situations
 Smaller firms with limited resources
 Have the option of selecting own location on the basis of their own screening criteria.

Disadvantage:
 Greenfield ventures are slower to establish
 Greenfield ventures are also risky
 Greenfield or Acquisition?

The choice between a greenfield investment and an

acquisition depends on the situation confronting
the firm

Acquisition may be better when the market already has well-

established competitors or when global competitors are interested
in building a market presence

A greenfield venture may be better when the firm needs to transfer

organizationally embedded competencies, skills, routines, and
culture

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 6. Turnkey Projects

Turnkey projects: It is a contract under which a firm

agrees to fully design, construct and equip a manufacturing/
business/service facility and turn the project over to the
purchaser when it is ready for operation for a remuneration

Turnkey projects are common in the

chemical,
pharmaceutical,
petroleum refining,
metal refining industries

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 6. Turnkey Projects

Advantages:
Can earn a return on knowledge asset
Less risky than conventional FDI
Disadvantages:
Lack of long-term market presence
May create a competitor
Selling process technology may be selling competitive
advantage as well

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 MCQ

What is the main disadvantage of wholly owned

subsidiaries?

a) they make it difficult to realize location and experience curve economies

b) the firm bears the full cost and risk of setting up overseas operations
c) they may inhibit the firm's ability to take profits out of one country to support
competitive attacks in another
d) high transport costs and tariffs can make it uneconomical

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 MCQ

What is the main disadvantage of wholly owned

subsidiaries?

a) they make it difficult to realize location and experience curve economies

b) the firm bears the full cost and risk of setting up overseas operations
c) they may inhibit the firm's ability to take profits out of one country to support
competitive attacks in another
d) high transport costs and tariffs can make it uneconomical

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 Selecting an Entry Mode

 All entry modes have advantages and disadvantages

 The optimal choice of entry mode involves trade-offs

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Selecting An Entry Mode
 Pressures for Cost Reductions and Entry Mode

When pressure for cost reductions is high, firms are more likely to
pursue which of the following strategies?


Exporting

Turnkey Projects

Licensing

Franchising

Joint Venture
 Wholly Owned subsidiary
 Strategic Alliances

A strategic alliance is a legal agreement between two or more

companies to share access to their technology, trademarks or
other assets.

A strategic alliance does not create a new company.

Example:
 Faysal Bank, Audi Pakistan, IGI Insurance enter into strategic alliance.

 Meezan Bank has entered into a strategic cooperation alliance with Pak China
Investment Company (PCIC) for the promotion of bilateral trade and investment
between the two countries.

 National Bank of Pakistan (NBP), Telenor Pakistan (TP) and Telenor

Microfinance Bank Ltd formed a strategic alliance to further financial inclusion
in Pakistan.
 The Advantages of Strategic Alliances

Strategic alliances:
 facilitate entry into a foreign market
 allow firms to share the fixed costs of developing new products.
 bring together complementary skills and assets that neither
partner could easily develop on its own
 can help a firm establish technological standards for the industry that
will benefit the firm

Disadvantage:
 Strategic alliances can give competitors low-cost routes to new
technology and markets.
 Classroom Performance
System
Which of the following is not important to a
successful strategic alliance?

a) establishing a 50:50 relationship with partner

b) creating strong interpersonal relationships
c) a shared vision
d) learning from the partner
 Classroom Performance
System
Which of the following is not important to a
successful strategic alliance?

a) establishing a 50:50 relationship with partner

b) creating strong interpersonal relationships
c) a shared vision
d) learning from the partner