Full page - in-text citations and works cited-outside research required. The topic is Entry mode of Bring Kroger to Aruba. Background: The idea is that we plan to set up a Kroger supermarket in the Aruba (island). We have done two paper before this, t

MGT 3446

International Business and Management

Selecting the Entry Mode

Francesca Grippa

Outline

• Which markets to enter (Where)

• When to enter – Timing (When)

• Which entry mode to use (How)

– exporting

– licensing or franchising

– establishing a joint venture

– establishing a new subsidiary

– acquiring an established enterprise

Where?

Nation Profit Potential (in the long term) = f(….)…

• Economic incentives

• Political stability

• Wealth and market size (Economies of scale)

• Living standards

• Free market approach (government attitude and history)

Timing of Entry

First mover advantages

– Establishing a strong brand name (e.g., VHS)

– Leveraging economies of scale and gain a cost advantage over latecomers

– Creating switching costs (for customers, distributors and suppliers)

Timing of Entry

First mover disadvantages

Pioneering costs to learn the new “rules of the game”:

• the costs of business failure if the firm makes mistakes, due to its ignorance of the foreign environment

• the costs of promoting and establishing a product offering

• the cost of educating customers

KFC educated Chinese to fast food and McDonald’s capitalized on that!

Scale of Entry

Large Scale Investment (e.g. ING in US in 2000):

• signals a strategic commitment to the market, to competitors, suppliers, government (“we will remain for the long run”)

• difficult to reverse and less resources to invest in other countries (opportunity cost)

Small Scale Investment: • A firm can collect info and learn about the foreign

market (good if there is no pressure from competitors) • A firm learns through hands-on experience in host

countries, but this might prevent from capturing first mover advantages

Is there a right or wrong

way to enter foreign markets?

Six Entry Modes (1 of 2)

1. Exporting

2. Turnkey projects

3. Licensing

The contractor handles all details of the project for a foreign client, including training personnel

It is the first entry mode for many manufacturing firms (later, firms may switch to another mode)

Granting the rights to intangible property to a foreign company for a specified time period, and in return, receives a royalty fee

Six Entry Modes (2 of 2)

4. Franchising

5. Joint ventures

6. Wholly owned subsidiary

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 (service firms)

a firm that is jointly owned by two or more otherwise independent firms most JVs are 50:50 partnerships

a firm owns 100 % of the stock - set up a new operation - M&A

How to enter a foreign market? A Decision Model

Source: Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business Studies, 31, pp.535–554.

Entry Mode Advantages Disadvantages

Exporting Ability to realize location and

experience curve economies

High transport costs Trade barriers Problems with local marketing agents

Turnkey

projects

Ability to earn returns

in countries where FDI is

restricted. Less risky than FDI in unstable regions..(short commitment)

Creating efficient competitors Lack of long-term market presence

Licensing Low development costs and risks Lack of control over technology (RCA)

Inability to engage in global strategic coordination

Advantages and Disadvantages (1 of 2)

Fuji put up most of the required capital and paid 5% of revenues royalty fee to Xerox  plus JV Good if peripheral business (Coca Cola trademark to clothing manufacturers)

 Cross licensing agreements to held each other hostage (Amgen-Kirin)

Entry Mode Advantages Disadvantages

Franchising Low development costs and risks Lack of control over quality, unless

create a subsidiary to control franchisee Inability to engage in global strategic

coordination

Joint

ventures

Access to local partner’s

knowledge

Sharing development costs

and risks

Politically acceptable

Lack of control over technology (unless wall off)

Wholly

owned

Subsidiaries (100% of the stock)

Protection of technology

Ability to engage in global

strategic coordination

Ability to realize location and

experience economies

High costs and risks

Advantages and Disadvantages (2 of 2)

Stricter rules than Licensing McD.: control over menu, cooking methods, staffing policies, location

Conflicts over strategy and increasing bargaining power of one over time (as foreign firm learns more about mkt)

Solution: SMALL SCALE enter through pilot projects and learn as you go (avoid losing brand image). Tesco / Fresh and Easy

Greenfield Investments or Acquisition? Greenfield strategy

Better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture (McDonald’s Franchising +Subsidiary) Slower and riskier, but max control

M&A strategy – Used by firms to compete with global competitors interested in expanding

– High Failure Rate  – Over-payment, Daimler-Chrysler 1998 to 2007 – Clash of organizational cultures (German managers too autocratic and US managers overpaid! high turnover)

– Differences in national cultures – Inadequate pre-acquisition screening (to pre-empt competitors, you end up buying a troubled organization)

Strategic Alliances Cooperative agreements between potential or actual competitors (JV where firms have equity stakes or short-term contractual agreement to develop a new product)

+ Advantages

– Facilitate entry into market (e.g. to create guanxi with Chinese partners)

– Share fixed costs (Boeing and Japanese firms for $8bil Investment B787).

– Bring together skills and assets that neither company has or can develop (Symbian: Nokia, Motorola, Matsushita, Siemens, Sony/Ericsson, Psion)  coopetition

– Establish industry technology standards.  Symbian

- Disadvantages

– Competitors get easy access to technology and markets (US vs Japan)

– Careful to Trojan Horse…

How to make Alliances work? 1. Carefully Selecting the Partner

– helps each other to achieve strategic goals

– has the capabilities the other firm lacks

– shares the firm’s vision and culture

– will not exploit the alliance for its own benefit (fair play)

2. Build a strong Alliance Structure

– Wall-Off technology, which means make it difficult to transfer technology not meant to be transferred

– have contractual safeguards against the risk of opportunism (cross-licensing agreements, e.g. Kirin-Amgen)

3. Strengthening interpersonal relationships between managers (build relational capital) and Learning from each other

Thanks for the attention