Entry Strategy and Strategic Alliances

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Entry Strategy and Strategic Alliances

• Dr. Carol Reade
• Bus 187

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Introduction

• Firms expanding internationally must decide
• which markets to enter
• when to enter them and on what scale
• which entry mode to use
• Entry modes include
• exporting
• licensing/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

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Which Foreign Markets

• The choice is based on an assessment of a
  nations long-run profit potential
• Size of market
• Present wealth of the consumers in the market
• Likely future wealth of consumers
• Economic growth rates
• Markets are attractive when
• the nation is politically stable with free a
  market system and relatively low rates of
  inflation and private sector debt
• the product in question is not widely available
  and satisfies an unmet need

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Timing of Entry

• Once attractive markets are identified, the firm
  must consider the timing of entry
• Early versus late 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 other foreign firms have already
  established themselves in the market

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Timing of Entry

• First mover advantages are the advantages
  associated with entering a market early
• First mover advantages include
• the ability to pre-empt rivals and capture demand
  by establishing a strong brand name
• the ability to build up sales volume in that
  country 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

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Timing of Entry

• First mover disadvantages are disadvantages
  associated with entering a foreign market early,
  and include pioneering costs
• Pioneering costs - arise when the foreign
  business system is so different from that in a
  firms 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

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Scale of Entry

• After choosing which market to enter and the
  timing of entry, firms need to decide on the
  scale of market 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
• Small scale entry
• Time to learn about market
• Reduces exposure risk

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Entry Modes

• Firms can use six different methods to enter a
  market
• Exporting
• Turnkey Projects
• Licensing
• Franchising
• Joint Ventures
• Wholly Owned Subsidiaries

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Entry Modes

• There are six ways to enter a foreign market
• 1. exporting
• 2. turnkey projects
• 3. licensing
• 4. franchising
• 5. establishing joint ventures with a host
  country firm
• 6. setting up a new wholly owned subsidiary in
  the host country
• Managers need to consider the advantages and
  disadvantages of each entry mode

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Selecting an Entry Mode
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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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Making Alliances Work

• The success of an alliance is a function of
• partner selection
• alliance structure
• the manner in which the alliance is managed

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Making Alliances Work

• A good partner
• helps the firm achieve its strategic goals and
  has the capabilities the firm lacks and that it
  values
• shares the firms vision for the purpose of the
  alliance
• is unlikely to try to opportunistically exploit
  the alliance for its own ends that is, to
  expropriate the firms technological know-how
  while giving away little in return

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Structuring the Alliance to Reduce Opportunism
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Managing the Alliance

• Requires building interpersonal relationships
  between the firms managers
• Relational Capital
• Involves
• Sensitivity to cultural differences
• Building trust
• Learning from partner