International Business take-home exam

Entry Modes

BUAD 841 Fall 2017

Kurt Norder, Ph.D.

Entry Modes and Maynooth

Agenda

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� Today we will… � Swatch highlights � Introduce entry modes � How to choose between entry modes � Apply the concepts to Maynooth Granite

Entry Modes and Maynooth

Building competitive advantage

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Entry Modes and Maynooth

Factors in entry mode decision

Look Familiar?

Target Country Enviro- mental factors

Foreign Market Entry Mode

Decision

Target Country Market Factors

Home Country Factors

Target Country Produc-

tion factors

Company Resource/

Commitment Factors

Company Product Factors

Internal Factors

External Factors

Entry Modes and Maynooth

Strategy Making Process External Analysis • Political, Social, Regulatory • Competitive conditions

Internal Analysis • Resources and capabilities • Sources of competitive adv.

Company’s Strategic Situation Strategic

Alternatives • TOWS

Strategy

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Opportunities and Threats

Key Success Factors

Strengths and Weaknesses

PRODUCTS & MODES ARE PART OF THE ALTERNATIVE

ACTIONS

Entry Modes and Maynooth

Factors in entry mode decision

- External similar to IGP, Diamond, VoC

- Internal is similar to

VRIN, Value Chain

Target Country Enviro- mental factors

Foreign Market Entry Mode

Decision

Target Country Market Factors

Home Country Factors

Target Country Produc-

tion factors

Company Resource/

Commitment Factors

Company Product Factors

Internal Factors

External Factors

Entry Modes and Maynooth

Industry Globalization Potential Market Factors

Competitive Factors

Governmental Factors

Cost Factors IGP

• Homogenous needs • Global customers • Global channels • Transferrable marketing

• Interdependence of countries

• Competitors globalize or might globalize

• Favorable trade policies • Compatible technical

standards • Common marketing

regulations

• Economies of scale and scope • Learning and experiences • Sourcing efficiencies • Favorable logistics Differences in

country costs & skills • Product development costs

Entry Modes and Maynooth

Yip’s Model for “Total Global Strategy”

Entry Modes and Maynooth

Porter’s Diamond of National Advantage Demand Conditions

Firm Strategy, Structure, Rivalry

Factor Conditions

Related & Supporting Industries

Change is Good

• Picky customers and difficult environments make you innovate to become better (price- quality relationship)

• Competition driving evolution through innovation

• Stocks of needed resources (land, labor, capital, raw materials) at reasonable prices

• Do we have sufficient support that enables us to specialize (can outsource for good quality)

• Global suppliers to help share knowledge and team up

• Even potential to integrate forward increases pressure to stay ahead

Entry Modes and Maynooth

Varieties of Capitalism … interactive institutions

� Liberal Market Economies (LMEs) � Short term � More equity financing � TMT makes decisions � Labor is fluid: weak unions,

labor protection � Layoffs enable more risk � Build general skills � Radical or tech changing

innovations

� Coordinated Market Economies (CMEs) � Long term � More debt financing � Cross-own; Insider info � Labor integrated in

decisions, strong unions, councils

� Resist layoffs mean less risk

� Build industry- or firm- specific skills

� Incremental innovations

Entry Modes and Maynooth

Resource-based (RBV) Model

Resources Physical, human, and organizational capital (tangible and intangible)

Capability An integrated set of resources

Core competence A source of competitive advantage

Entry Modes and Maynooth

Value Chain Analysis Support Activities

Primary Activities

Firm Infrastructure Human Resource Management

Systems & Solutions Materials & Equipment

Product Design

Operations Distrib. (Outbound Logistics)

Marketing

& Sales Service

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Entry Modes and Maynooth

OLI framework

� Ownership advantages � the firm’s core competencies

� Location advantages � the combination of sales opportunity and investment risk

that creates favorable locations in foreign markets � Internalization advantages

� reflect companies’ response to market imperfections that often create uncertainties

� frequency/trust (low), asset specificity (high), uncertainty (high) Æ internal

Entry Modes and Maynooth

Alternative operating modes

Entry Modes and Maynooth

Why export?

� When? � Incremental expansion (slower):

� Early and small … core advantage at home � Little adaptation … Low CAGE impacts

� Born global (immediate): � Exploit location advantages

� Home = ownership/core � Host = arbitrage/importing

� Founder with international outlook upfront � Who?

� Small being their internationalization process � Less staff and capital … likely indirect at first

� Large taking advantage of location advantage and arbitrage � Regular exporter … likely direct exporter

Entry Modes and Maynooth

Why export?

� Benefits � Ease and Speed

� Relatively easy and quick � Low investment costs (less risk)

� Market: � Growth, Increase sales/profit � Follow customers

� Resources: � Exploit scale � Fill “Diamond” gaps that drive innovation

� Risk: Stabilize fluctuations (diversification) � Minimize dependency on a single market � Offset business cycles

Entry Modes and Maynooth

Why export?

� Challenges and Risks � Working capital availability � Trade documentation � Identifying partners � Lack of control

Entry Modes and Maynooth

Why export?

� Challenges and Risks - IGP � Market

� Increasing service expectations � Marketing challenges and adaptation

� Cost � Management styles and global expertise

� Government � E.g. Trade barriers and regulation differences

� Competitive � Prevent competitor monopoly in their home country

Entry Modes and Maynooth

How … Building an Export Strategy

� Part 1: Company readiness � Ownership advantages? � What are the KSFs for export and are they core competences?

� Part 2: Product readiness � Global benchmarking … buyer surplus and IGP-Market/Adapt?

� Part 3: Scanning and detailed country selection � Specific to exporting mode

� Part 4: Specifics of the strategy � IGP-Costs (Transport), Customers and Partnerships � 3 other P’s: pricing, placement (key distribution channels,

volumes), promotion (advertising/marketing)

Entry Modes and Maynooth

More specific steps…

Entry Modes and Maynooth

Why not export?

� Production abroad is cheaper � Transportation costs are too expensive � Companies lack domestic capacity � Products and services need to be altered substantially � Governments inhibit the import of foreign products � Buyers prefer products from a particular country

Entry Modes and Maynooth

Alternative operating modes

Entry Modes and Maynooth

Other modes … invest?

� Investment � Wholly owned – M&A vs. Greenfield � Partial owned with remainder widely held (still major holder)

� Alliances/Collaboration � Joint Ventures (JVs) - new entity typically 50/50 � Equity alliance - cross-ownership by at least one partner � Licensing – exclusive vs. cross-/trading IP � Franchising – license plus management (e.g. marketing) � Management contract – ongoing expertise provided � Turnkey operation – fully ready operations site

Entry Modes and Maynooth

Why equity

� Market failure � Liability of foreignness Æ build a local presence � No local collaborators available � Need for control

� Internalization theory (optimize transaction costs) � Common corporate culture Æ communication � Company managers optimize global over local � Avoid long or repeated negotiations � Avoid enforcement costs

Entry Modes and Maynooth

Why equity

� Appropriability theory � Market closing – deny rivals access to resources � Patents, trademarks, know-how

� Freedom to pursue global objectives � Sub-optimize a given location to optimize overall � Book example: drop price in Brazil to win Germany

Entry Modes and Maynooth

Why collaborate

Entry Modes and Maynooth

Problems with collaboration

� Relative importance � Divergent objectives � Questions of control � Comparative contributions and appropriations � Culture clashes � Differences in corporate cultures

Entry Modes and Maynooth

Country attractiveness by Company strength matrix

Entry Modes and Maynooth

Decision Flow Chart (Root)

Take a look at Root’s flow chart

Entry Modes and Maynooth

Entry decisions (Root)…

� Choice of target product and market (combo) � Objectives and goals in target market � Choice of an entry mode for target market � Marketing plan to penetrate target market � Control system to monitor performance

Entry Modes and Maynooth

Mode dynamics (Root)

Assumes Learning and

Building Location

Advantages into Internal Advantages

Entry Modes and Maynooth

Team application exercise… � The Maynooth exercise:

� Why are they considering international expansion? � Are they ready? Why or why not? � Which entry mode should they take and why?

Entry Modes and Maynooth

Parting thoughts for the day

� For next class… � Textbook Ch 16 � Ghoshal & Nohria (Canvas) … p. 32 figure � Doz Bartlett Prahalad (Canvas) … p. 72 figure � Phillips Matsushita case (HBS)

� Quiz 5 should be open at 5 pm tomorrow… until start of class for Week 6 (i.e. before I see you again)

� I’m available by email or in Lerner 209