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International Strategy
Entry Modes
Pressures for Global Integration and National Differentiation
see C. Bartlett (1986)
GlobalOrganization
MultinationalOrganization
Forces for Global
Integration
Forces for National
Differentiation
Lo
Lo
High
High
TransnationalOrganization
InternationalOrganization
Advantages and Disadvantages
Strategy Advantages DisadvantagesInternational transfer distinct competencies lack local
responsiveness lack location economies can’t exploit exp. curve
Multi-domestic customize offerings & lack location ecy’s(multi-national) marketing can’t exploit exp. curve
cant’ transfer distinct competencies
Global exploit experience curve lack local responsiveness exploit location economies
Transnational exploit exp. Curve & location implementation- org’nl
economies, customize, global problems learning benefits
Basic Entry Decisions
Which markets to enter?When to enter the markets?What scale of entry?
14-2
Which Foreign Markets?
Favorable benefit-cost-risk-trade-off:Politically stable developed and developing nations.Free market systemsNo dramatic upsurge in inflation or private-sector debt.
UnfavorablePolitically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing..
14-3
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.
14-4
Scale of Entry
Large scale entryStrategic 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 competitive response.
Small scale entry:Time to learn about market.Reduces exposure risk.
14-5
Entry Modes
ExportingTurnkey ProjectsLicensingFranchisingJoint VenturesWholly Owned Subsidiaries
14-7
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.
14-8
Turnkey Projects
Advantages:Can earn a return on knowledge asset.Less risky than conventional FDI.
Disadvantages:No long-term interest in the foreign country.May create a competitor.Selling process technology may be selling competitive advantage as well.
14-9
Licensing
Advantages:Reduces costs and risks of establishing enterprise.Overcomes restrictive investment barriers.Others can develop business applications of intangible property.
Disadvantages:Lack of control.Cross-border licensing may be difficult.Creating a competitor
14-10
Franchising
Advantages:Reduces costs and risk of establishing enterprise.
Disadvantages:May prohibit movement of profits from one country to support operations in another country.Quality control.
14-11
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.May not realize experience curve or location economiesShared ownership can lead to conflict.
14-12
Wholly Owned Subsidiary
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.
14-13
Advantages and Disadvantages of Entry Modes
Entry Mode Advantage Disadvantage
Exporting Ability to realize location andexperience curve economies
High transport costsTrade barriersProblems with local marketing agents
Turnkeycontracts
Ability to earn returns fromprocess technology skills incountries where FDI isrestricted
Creating efficient competitorsLack of long-term market presence
Licensing Low development costs andrisks
Lack of control over technologyInability to realize location and
experience curve economiesInability to engage in global strategic coordination
14-14
Advantages and Disadvantages of Entry Modes
Entry Mode Advantage Disadvantage
FranchisingLow development costs andrisks
Lack of control over qualityInability to engage in global strategic
coordination
Jointventures
Access to local partner’sknowledge
Sharing development costs and risks
Politically acceptable
Lack of control over technologyInability to engage in global strategic
coordinationInability to realize location andexperience economies
Whollyownedsubsidiaries
Protection of technologyAbility to engage in global
strategic coordinationAbility to realize location andexperience economies
High costs and risks
Table 14.1b14-15
Selecting an Entry Mode
Technological Know-How
Management 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. Franchising, subsidiaries (wholly owned or joint venture).
Pressure for Cost Reduction
Combination of exporting and wholly owned subsidiary.
14-16
Entry Mode and Competitive Advantage
Advantage Based on Technological Know-How
Exporting, Licensing, or Wholly-owned subsidiariesExamples: Honda, Intel
Advantage Based on Management Know-How
Franchising, Joint Ventures, or subsidiariesExamples: McDonalds, Marriott
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.
Disadvantage:Competitors get low cost route to technology and markets.
14-17
Alliances Are Popular
High cost of technology developmentCompany may not have skill, money or people to go it aloneGood way to learnGood way to secure access to foreign marketsHost country may require some local ownership 14-18
Global Alliances, however, are different
Companies join to attain world leadershipEach partner has significant strength to bring to the allianceA true global visionRelationship is horizontal not verticalWhen competing in markets not part of alliance, they retain their own identity
14-19
Partner Selection
Get as much information as possible on the potential partnerCollect data from informed third parties
former partnersinvestment bankersformer employees
Get to know the potential partner before committing
14-20
Structuring the Alliance to Reduce Opportunism
Opportunism by partnerreduced by:
Seeking crediblecommitments
Agreeing to swapvaluable skills
and technologies
Establishingcontractual safeguards
Walling offcritical technology
Figure 14.1
14-21
Characteristics of a Global Alliance
Players are independent prior to the creating of the alliancePlayers share
benefits of the alliancecontrol over operations
Players continue to contributetechnologyproducts
14-22
Characteristics of a Strategic Alliance
Independence ofParticipants
SharedBenefits
Ongoing Contributions
MarketsCooperation
Benefits
Control Products
Technology
14-23
Problems with Strategic Alliances
Have to give up some authority/controlCould be strengthening a future competitor
Technology transferManagement practicesOperating procedures
14-24