chapter entry strategy and strategic alliances 14
TRANSCRIPT
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Case: Diebold
Began to sell ATM machines in foreign markets in 1980’s
1980’s Distribution agreement with Philips 1990 Diebold establishes joint venture with IBM 1997 foreign sales 20% of Diebold’s total
revenues Diebold decides to go it alone with local
manufacturing presence for local customization Through acquisitions joint ventures
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Basic foreign expansion entry decisions
A firm contemplating foreign expansion must make three decisions
Which markets to enter When to enter these markets What is the scale of entry
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Which foreign markets
Favorable Politically stable developed and developing
nations Free market systems No dramatic upsurge in inflation or private-
sector debt Unfavorable
Politically unstable developing nations with a mixed or command economy or where speculative financial bubbles have led to excess borrowing
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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.
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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. May lead to indigenous competitive response.
Small scale entry: Time to learn about market. Reduces exposure risk.
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Entry modes
Exporting Turnkey Projects Licensing Franchising Joint Ventures Wholly Owned Subsidiaries
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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
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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
Contractor agreesto handle everydetail of projectfor foreign client
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Licensing: Advantages
Reduces development costs and risks of establishing foreign enterprise.
Lack capital for venture. Unfamiliar or politically volatile market. Overcomes restrictive
investment barriers. Others can develop business
applications of intangible property.
Agreement wherelicensor grants rights to
intangible property to another entity for a specified period
of time in returnfor royalties.
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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
Franchiser sellsintangible propertyand insists on rules
for operating business
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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
economies. Shared ownership can lead to conflict
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Wholly owned subsidiary
Subsidiaries could be Greenfield investments or acquisitions
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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Advantages and disadvantages of entry modes
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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
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Acquisition and Green-field- pros & cons
Pro: Quick to execute Preempt competitors Possibly less risky
Con:
Disappointing results
Overpay for firm
optimism about value creation (hubris)
Culture clash.
Problems with proposed synergies
Pro: Can build subsidiary it
wants Easy to establish
operating routines Con:
Slow to establish Risky Preemption by
aggressive competitors
Acquisition Greenfield
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Acquisition or Green-field?
Well-established,incumbent firms.
Competitors interested in
entry.
embedded skills,routines, culture.
No competitors
Acquisition
Green-field
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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
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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
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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
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Partner selection
Get as much information as possible on the potential partner
Collect data from informed third parties Former partners Investment bankers Former employees
Get to know the potential partner before committing
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Structuring the alliance to reduce opportunism
Fig 14.1
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Characteristics of a strategic alliance
Independence ofParticipants
SharedBenefits
Ongoing Contributions
MarketsCooperation
Benefits
Control Products
Technology
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