Transcript Document

MGRECON401
Economics of International Business
and Multinationals
LECTURE 8
Entry Strategy and Strategic Alliances
12-2
Lecture Focus
Which markets to enter
When to enter these markets
What is the scale of entry
What is the mode of entry
12-3
Which foreign markets
Favorable
Politically stable developed and developing
nations
Free market systems
Stable macroeconomy
Growing market for your product
Unfavorable
Politically unstable developing nations
Mixed or command economy
Unstable macroeconomy
12-4
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.
12-5
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.
Small scale entry:
Time to learn about market.
Reduces exposure risk.
12-6
Entry modes
Exporting
Turnkey Projects
Licensing/Franchising
Joint Ventures
Wholly Owned Subsidiaries
12-7
Exporting
Advantages:
Avoids fixed cost of establishing manufacturing
operations
May help reduce costs from economies of scale
in production
Disadvantages:
May compete with low-cost location
manufacturers
Possible high transportation costs
Tariff barriers
12-8
Turnkey projects
Contractor agrees to handle every
detail of initial setup for foreign client
Advantages:
Can earn a return on knowledge asset
Less risky than conventional FDI
Disadvantages:
May create a competitor
Selling process technology may be selling competitive
advantage as well
12-9
Licensing/Franchising
Agreement where licensor grants rights to intangible property to
another entity for a specified period of time in return for
royalties.
Advantages
Reduces development costs and risks of establishing
foreign enterprise
Unfamiliar or politically volatile market
Overcomes restrictive investment barriers
Ownership solves many incentive problems
Disadvantages
Free-rider problem
12-10
Joint Ventures
Advantages
Benefit from local partner’s knowledge
Shared costs/risks with partner
Reduced political risk
Disadvantages
Risk giving control of technology to partner
Shared ownership can lead to conflict
12-11
Wholly owned subsidiary
Subsidiaries could be Greenfield
investments or acquisitions
Advantages:
No risk of losing technical competence to a
competitor
Tight control of operations.
Disadvantage:
Bear full cost and risk
12-12
Advantages and disadvantages of entry modes
12-13
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
Pressure for Cost
Reduction
Franchising, subsidiaries (wholly
owned or joint venture)
Combination of exporting and wholly
owned subsidiary
12-14
Acquisition and Greenfield: pros & cons
Pro:
Acquisition
Quick to execute
Preempt competitors
Possibly less risky
Con:
Disappointing results
Overpay for firm due
to optimism about value
creation (hubris)
Culture clash
Problems with proposed
synergies
Greenfield
Pro:
Can build subsidiary it
wants
Easy to establish
operating routines
Con:
Slow to establish
Risky
Preemption by
aggressive competitors
12-15
Acquisition or Greenfield?
Well-established,
incumbent firms.
Competitors
interested in
entry.
Acquisition
embedded skills,
routines, culture.
Greenfield
No competitors
12-16
Case: Diebold
Manufacturer of ATM machines
1980’s Distribution agreement with Philips to supply foreign
markets
1990 Diebold establishes joint venture with IBM
70% Diebold: supplied machines
30% IBM: supplied global marketing, sales, and service
1997: foreign sales 20% of Diebold’s total revenues
Diebold forecast growing demand in China, India, Brazil
Diebold bought out IBM
Diebold expanded rapidly through acquisitions
12-17
Case: ING Group
Top ten worldwide financial service firm
Based in the Netherlands
Insurance, banking, and investment products
International expansion through acquisition
Prompted by WTO
Prompted by relaxed banking rules in the US
Left acquired asset untouched, but required sales of
ING products
12-18
Case: Jollibee Foods
Philippine based fast-food chain
Dominant market share in Philippines
Cater to local Filipino taste
Which markets should it enter?
How should it enter?
What should be its scale of entry?
12-19
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
Disadvantages:
Competitors get low cost route to technology and
markets
12-20
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
12-21
Global Alliances, however, are different
Firms 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
12-22
Xerox and Fuji Xerox
What role has Fuji Xerox played in Xerox’s global
strategy? How do you expect this role to change
in the future?
Is Fuji Xerox a successful joint venture in 1990?
How do you measure its performance? Please be
as concrete and specific as possible.
What were the key success factors in this
alliance in the past? Do you expect these factors
to change in the future?