Flashcards in Entry Strategies and Strategic Alliances Deck (38):
What are the basic decision firms make when expanding globally?
* Which markets to enter
* When to enter the market
* What scale of entry
* Which entry mode to use
When deciding which markets to enter, what factors does a firm look at regarding long term profit potential?
- A country’s business environment
- Political/regulatory environment
- Geographic location - regional vs country-by-country positioning
- Current stage of a country’s economic development and political stability vs future economic growth rate
What is a firms decision about which markets to enter a function of?
- Function of market size (demographics)
- Present and future consumer’s wealth (PPP)
What are the concepts related to the firms decision when to enter a market?
- Early vs late entry
- First mover advantages and disadvantages
What are the advantages and disadvantages of entering a market early?
- Preemption of rivals, ability to build sales volume (move down experience curve), develop buyer switching costs
- Pioneering costs, shifts in tech or customer needs, incumbent inertia
What are the firms options in choosing what scale of entry when expanding globally?
Choice of scale: strategic commitment and strategic flexibility
What are the benefits of strategic commitment entry scale?
Large-scale entry (implies rapid) and first-mover advantages and will demonstrate commitment to competitors and customers
What are the risks associated with strategic commitment entry scale?
- Long term impact
- Some resources are location specific
What is the most important aspect of strategic flexibility entry scale?
Small scale entry: learning process
What factors affect a firms choice of entry mode into a global market?
- Transport costs
- Trade barriers
- Poltical risks
- Economis risks
- Firm strategy
What is true of entry mode into a global market?
Entry may proceed in a gradual manner
What modes of entry are there into global markets?
* Foreign trade
* Contractual entry modes
* Investment entry modes
What can manufacturing at a centralised location through exporting provide?
- Economies of scale
- Location economies
What are the pros and cons of exporting?
- Avoids the costs of establishing local manufacturing operations
- Helps the firm to achieve experience curve and location economies
- There may be lower cost manufacturing locations
- High transport costs and tariffs can make it uneconomical
- Agents in a foreign county may not act in exporter’s best interest
What contractual entry modes are there?
* Turnkey projects
* Management contracts
* Contractual manufacturing
What are turnkey projects?
- The contractor handles every detail of the project for a foreign client, including the training of operating personnel
- At completion of the contract, the foreign client if handed the ‘key’ to a plant that is ready for full operation
What are the pros and cons of turnkey projects?
- There are a way of earning economic returns from the know-how required to assemble and run a technologically complex process
- Can be less risky than conventional FDI
- Firm has no long-term interest in the foreign country
- Firm may create a competitor
- If the firms’ process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors
What is licensing?
- A licensor grants the rights to intangible property to the license for a specified time period, and in return, receives a royalty fee form the licensee
- Patents, inventions, formulas, processes, designs, copyrights, trademarks
What are the pros/cons of licensing?
- Firm avoids development costs and risks assocaited with opening a foreign market
- Firm avoids barriers to investment
- Firm can capitalise on market opportunities without developing those applications itself
- Firm doesn’t have the tight control required for realising
experience curve and location economies
- Firm’s abilty to coordiante strategy moves across countries is limited
- Proprietary (or intangible) assets could be lost
- To reduce this risk, use cross-licensing agreements
What is franchising?
- A specialised 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 hot it does business
- Used primarily by service firms
What are the pros/cons of franchising?
- Avoids costs and risks of opening up a foreign market
- Firms can quickly build a global presence
- Inhibits firm’s ability to take profits out of one country to
support competitive attacks in another
- The geographic distance of the firm from its franchisees can make it difficult to detect poor quality
What are management contracts and what are the pros/cons?
- Supply of managerial expertise
- Often involves government-owned companies
- Common in industries such as hotel management
- Low investment risk
- Potential future competition
What is contractual manufacturing and what are the pros/cons?
- Production of product assembly
- Challenges of reliability and capabilities of partner
What are the investment entry modes?
* Joint venture
* Wholly-owned subsidiary
What are joint ventures?
- A firm that is jointly owned by two or more otherwise independent firms
- Most are 50:50
What are the pros/cons of joint ventures?
- Benefits from a local partner’s knowledge of the local market, culture, language, political systems, and business systems
- Costs and risks of opening a foreign market are shared
- Satisfy political considerations for market entry
- Firm risks giving control of its tech to its partner
- Firm may not have tight control to raise experience curve or location economies
- Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time
What is a wholly owned subsidiary?
- Setting up a greenfield operation or M&A
- 100% owned by parent
- Either horizontal or vertical
What are the pros/cons of wholly owned subsidiaries?
- Reduce risk of losing control over core competencies
- Give a firm tight control in different countries necessary for global strategic coordination
- May be required in order to realise location and experience curve economies
- Firm bears the full cost and risk of setting up overseas
What are the aspects of the decision to either do a greenfield or M&A when doing a wholly owned subsidiary?
- Build a subsidiary from the ground up
- May be better when the firm needs to transfer organisationally embedded competencies, skills, routines and culture
- Acquire an existing company
- May be better when there are well-established competitors or global competitors interested in expanding
What additional factors influence a firms entry mode?
- 1. The optimal entry mode depends on the nature of a firms core competencies and competitive advantage
- 2. When pressures for cost reductions is high, firms are more likely to puruse 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 standardisation or transnational strategies prefer wholly owned subsidiaries
What are strategic alliances?
- Cooperative agreements between potential or actual compeitiors
- Not putting up capital, but entering into some contractual agreement
- Range from formal joint ventures to short term contractual agreements
How does the nature of a firms core competencies and competitive advantage influence its entry mode?
- Based on proprietary tech know-how
- Avoid licensing and joint ventures unless the tech advantages is only transitory, or can be established as the dominant design
- Based on management know-how
- Risk of losing control over management skills is not high, and the benefits form getting greater use of brand names is significant
What are the advantages of strategic alliances?
- Facilitate entry into a foreign market
- Allow firms to share fixed costs and associated risks of developing new products or processes
- Can bring together complementary skills and assets
- Can help establish technological standards for the industry that will benefit the firm
What makes a strategic alliance successful?
* Partner selection: A good partner…
* Alliance structure: The alliance should…
* The manner in which the alliance is managed
What are the problems with strategic alliances?
- Differences in the relative importance of the arrangement
- Divergent objectives
- Questions of control
- Disputes about contributions and appropriations
- Culture clashes
- Differnces in corporate cultures
What are the aspects of partner selection in strategic alliances?
- Helps the firm archive its strategy gloss 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
What are the aspects of alliance selection in strategic alliances?
- Make it difficult to transfer tech not meant to be transfered
- Have contractual safeguards to guard against the risk of opportunism by a partner
- Allow for skills and tech swaps with equitable gains
- Minimise the risk of opportunism by an alliance partner