week 6 case study

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

Chapter 15
Entry Strategy and Strategic Alliances

©McGraw-Hill Education.

What Are the Basic Decisions Firms Make When Expanding Globally?

Firms expanding internationally must decide

Which markets to enter

When to enter them and on what scale

Which entry mode to use

• exporting
• licensing or franchising to a company in the host nation
• establishing a joint venture with a local company
• establishing a new wholly owned subsidiary
• acquiring an established enterprise

©McGraw-Hill Education.

What Influences
the Choice of Entry Mode?

• Several factors affect the choice of entry mode including
• transport costs
• trade barriers
• political risks
• economic risks
• costs
• firm strategy
• The optimal mode varies by situation – what makes sense for one company might not make sense for another

©McGraw-Hill Education.

Which Foreign Markets
Should Firms Enter? (1 of 2)

The choice of foreign markets will depend on their long-run profit potential

• Favorable markets
• are politically stable
• have free market systems
• have relatively low inflation rates
• have low private sector debt

©McGraw-Hill Education.

Which Foreign Markets
Should Firms Enter? (2 of 2)

• Less desirable markets
• are politically unstable
• have mixed or command economies
• have excessive levels of borrowing
• Markets are also more attractive when the product in question is not widely available and satisfies an unmet need

©McGraw-Hill Education.

When Should a Firm
Enter a Foreign Market?

Once attractive markets are identified, the firm must consider the timing of entry

Entry is early when the firm enters a foreign market before other foreign firms

Entry is late when the firm enters the market after firms have already established themselves in the market

©McGraw-Hill Education.

Why Enter a
Foreign Market Early?

First-mover advantages include

• the ability to preempt rivals by establishing a strong brand name
• the ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants
• the ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business

©McGraw-Hill Education.

Why Enter a
Foreign Market Late?

First-mover disadvantages include

• pioneering costs - arise when the foreign business system is so different from that in the home market that the firm must devote considerable time, effort, and expense to learning the rules of the game
• the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes
• the costs of promoting and establishing a product offering, including the cost of educating customers

©McGraw-Hill Education.

On What Scale Should a Firm Enter Foreign Markets?

After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry

• firms that enter a market on a significant scale make a strategic commitment to the market
• the decision has a long term impact and is difficult to reverse
• small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market

©McGraw-Hill Education.

Is There a “Right” Way to Enter Foreign Markets?

No, there are no “right” decisions when deciding which markets to enter and the timing and scale of entry – the are just decisions that are associated with different levels of risk and reward

©McGraw-Hill Education.

15-12

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

The Jollibee Foods Corporation was able to withstand competition from McDonald’s in the Philippines and later found success in an already-saturated U.S. fast food market by localizing its menu to Filipino tastes and entering foreign markets with a large number of Filipino expatriates.

What are the risks and potential rewards of such a strategy? If you were the head of a successful apparel company based in a developing nation, would you choose a similar strategy to enter into the U.S. market, or would you pursue a different option, such as licensing or forming a joint venture with an established U.S. brand?

©McGraw-Hill Education.

How Can Firms
Enter Foreign Markets? (1 of 3)

©McGraw-Hill Education.

How Can Firms
Enter Foreign Markets? (2 of 3)

©McGraw-Hill Education.

How Can Firms
Enter Foreign Markets? (3 of 3)

©McGraw-Hill Education.

Why Choose Exporting?

©McGraw-Hill Education.

Why Choose a Turnkey Arrangement?

©McGraw-Hill Education.

Why Choose Licensing?

©McGraw-Hill Education.

Why Choose Franchising?

©McGraw-Hill Education.

Why Choose Joint Ventures? (1 of 2)

©McGraw-Hill Education.

Why Choose Joint Ventures? (2 of 2)

©McGraw-Hill Education.

Why Choose a
Wholly Owned Subsidiary?

©McGraw-Hill Education.

Which Entry Mode Is Best?

Advantages and Disadvantages of Entry Modes

Jump to Appendix 1 long image description.

©McGraw-Hill Education.

How Do Core Competencies Influence Entry Mode?

• The optimal entry mode depends on the nature of a firm’s core competencies
• When competitive advantage is based on proprietary technological know-how
• avoid licensing and joint ventures unless the technological advantage is only transitory, or can be established as the dominant design
• When competitive advantage is based on management know-how
• the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant

©McGraw-Hill Education.

How Do Pressures for Cost Reductions Influence Entry Mode?

When pressure for cost reductions is high, firms are more likely to pursue 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 standardization or transnational strategies prefer wholly owned subsidiaries

©McGraw-Hill Education.

Which Is Better –
Greenfield or Acquisition? (1 of 2)

The choice depends on the situation confronting the firm

A greenfield strategy - build a subsidiary from the ground up

• a greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture

©McGraw-Hill Education.

Which Is Better –
Greenfield or Acquisition? (2 of 2)

An acquisition strategy – acquire an existing company

• acquisition may be better when there are well-established competitors or global competitors interested in expanding
• The volume of cross-border acquisitions has been rising for the last two decades

©McGraw-Hill Education.

Why Choose Acquisition?

• Acquisitions are attractive because
• they are quick to execute
• they enable firms to preempt their competitors
• they may be less risky than greenfield ventures
• Acquisitions can fail when
• the acquiring firm overpays for the acquired firm
• the cultures of the acquiring and acquired firm clash
• anticipated synergies are slow and difficult to achieve
• there is inadequate pre-acquisition screening
• To avoid these problems, firms should
• carefully screen the firm to be acquired
• move rapidly to implement an integration plan

©McGraw-Hill Education.

Why Choose Greenfield?

• The main advantage of a greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants
• But, greenfield ventures take longer to establish
• Greenfield ventures are also risky

©McGraw-Hill Education.

What Are Strategic Alliances?

Strategic alliances refer to cooperative agreements between potential or actual competitors

• range from formal joint ventures to short-term contractual agreements
• the number of strategic alliances has exploded in recent decades

©McGraw-Hill Education.

Why Choose Strategic Alliances?

• Strategic alliances are attractive because they
• facilitate entry into a foreign market
• allow firms to share the fixed costs and risks of developing new products or processes
• bring together complementary skills and assets that neither partner could easily develop on its own
• help a firm establish technological standards for the industry that will benefit the firm
• But, the firm needs to be careful not to give away more than it receives

©McGraw-Hill Education.

What Makes Strategic Alliances
Successful? (1 of 3)

The success of an alliance is a function of

Partner selection

• A good partner
• helps the firm achieve its strategic goals 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

©McGraw-Hill Education.

What Makes Strategic Alliances
Successful? (2 of 3)

Alliance structure

• The alliance should
• make it difficult to transfer technology not meant to be transferred
• have contractual safeguards to guard against the risk of opportunism by a partner
• allow for skills and technology swaps with equitable gains
• minimize the risk of opportunism by an alliance partner

©McGraw-Hill Education.

What Makes Strategic Alliances
Successful? (3 of 3)

The manner in which the alliance is managed

• Requires
• interpersonal relationships between managers
• cultural sensitivity is important
• learning from alliance partners
• knowledge must then be diffused through the organization

©McGraw-Hill Education.

Case Study: Starbucks in Italy

• Roastery in Milan, Italy
• https://www.bloomberg.com/news/videos/2017-02-28/starbucks-ceo-howard-schultz-on-first-roastery-in-italy
• Which entry mode do you think best fits with Starbuck’s entry into the Italian Market?
• Video on the Milan Roastery
• https://www.youtube.com/watch?v=W4QdlVpTMWo