Description
Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property.
Entry Strategy and Strategic Alliances
Vorravee Pattaravongvisut
The Focus
Examine:
The decision on which foreign markets to enter, when to enter them, and on what scale. The choice of entry mode. The role of strategic alliances.
Which Foreign Markets
Favorable benefit-cost-risk trade-off No dramatic upsurge in inflation or private sector debt.
Politically stable nations.
Free market systems Politically unstable developing nations. Speculative financial bubbles have led to excess borrowing. Mixed or command economies.
Timing of Entry
First-mover advantage.
Preempt rivals and capture demand. Build sales volume. Move down experience curve before rivals and achieve cost advantage. Create switching costs.
Disadvantages:
First mover disadvantage - pioneering costs. Changes in government policy.
Costs early entrant bears that later entrant can avoid.
Scale of Entry and Strategic Commitments
long-term impact and is difficult to reverse. Large scale entry:
Plus
Strategic Commitments - a decision that has a
Commitment of significant resources. Easier to attract customers (will remain in market). May cause rivals to rethink market entry.
Minus
Fewer resources to commit elsewhere. May lead to indigenous competitive response.
Scale of Entry and Strategic Commitments
Small Scale Entry:
Plus
Time to learn about the market. Limits company exposure. May be difficult to build market share. Difficult to capture first-mover advantages.
Minus
Entry Modes
Joint Ventures Licensing Turnkey Projects Franchising
Exporting
Wholly Owned Subsidiaries
Exporting
Advantages:
Avoids cost of establishing manufacturing operations. May help achieve experience curve and location economies. May compete with low-cost location manufacturers. Possible high transportation costs. Tariff barriers. Possible lack of control over marketing reps.
Disadvantages:
Turnkey Projects
Advantages:
Contractor agrees to handle every detail of project for foreign client.
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.
Licensing
Advantages:
Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties.
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.
Disadvantages:
Lack of control. Cross-border licensing may be difficult. Creating a competitor.
Risk Reduction Ï Cross-licensing ÏJoint venture
Franchiser sells intangible property and insists on rules for operating business.
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.
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.
Wholly Owned Subsidiary
Greenfield Acquisition
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.
Advantages and Disadvantages of Entry Modes
Entry Mode Advantage Exporting Ability to realize location and experience curve economies Turnkey contracts Ability to earn returns from process technology skills in countries where FDI is restricted Low development costs and risks Disadvantage High transport costs Trade barriers Problems with local marketing agents Creating efficient competitors Lack of long-term market presence Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination
Licensing
Advantages and Disadvantages of Entry Modes
Entry Mode Advantage Franchising Low development costs and risks Joint ventures Disadvantage Lack of control over quality Inability to engage in global strategic coordination
Access to local partner’s Lack of control over technology Inability to engage in global strategic knowledge Sharing development costs coordination and risks Inability to realize location and Politically acceptable experience economies
Protection of technology High costs and risks Wholly Ability to engage in global owned subsidiaries strategic coordination Ability to realize location and experience economies
Selecting an Entry Mode
Technological 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.
Management Know-How
Franchising, subsidiaries (wholly owned or joint venture). Combination of exporting and wholly owned subsidiary.
Pressure for Cost Reduction
Establishing a Wholly Owned Subsidiary
Green-field or Acquisition?
Acquisition Green-field
Pro:
Pro:
Quick to execute. Preempt competitors. Possibly less risky.
Con:
1. Don’t pay too much. 2. Avoid surprises. 3. Pick compatible culture.
Can build subsidiary it wants. Easy to establish operating routines.
Often produce disappointing results.
Overpay for firm. Too optimistic about value creation (hubris). Culture clash. Problems with proposed synergies.
Con:
Slow to establish. Risky. Preemption by aggressive competitors.
Acquisition or Green-field?
Well-established, incumbent firms. Competitors interested in entry.
Acquisition No competitors.
Organizationally embedded skills, routines, culture.
Green-field
Strategic Alliances
Cooperative agreements between potential or actual competitors.
Advantages:
Disadvantage:
Facilitate entry into market. Share fixed costs. Bring together skills and assets that neither company has or can develop. Establish industry technology standards. Competitors get low cost route to technology and markets.
Partner Selection
Making Alliances Work
Alliance Structure
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
Structuring the Alliance to Reduce Opportunism
Walling off critical technology
Establishing contractual safeguards
Opportunism by partner reduced by:
Agreeing to swap valuable skills and technologies
Seeking credible commitments
Managing the Alliance
Building Trust
Learning from Partners
doc_570453081.pdf
Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property.
Entry Strategy and Strategic Alliances
Vorravee Pattaravongvisut
The Focus
Examine:
The decision on which foreign markets to enter, when to enter them, and on what scale. The choice of entry mode. The role of strategic alliances.
Which Foreign Markets
Favorable benefit-cost-risk trade-off No dramatic upsurge in inflation or private sector debt.
Politically stable nations.
Free market systems Politically unstable developing nations. Speculative financial bubbles have led to excess borrowing. Mixed or command economies.
Timing of Entry
First-mover advantage.
Preempt rivals and capture demand. Build sales volume. Move down experience curve before rivals and achieve cost advantage. Create switching costs.
Disadvantages:
First mover disadvantage - pioneering costs. Changes in government policy.
Costs early entrant bears that later entrant can avoid.
Scale of Entry and Strategic Commitments
long-term impact and is difficult to reverse. Large scale entry:
Plus
Strategic Commitments - a decision that has a
Commitment of significant resources. Easier to attract customers (will remain in market). May cause rivals to rethink market entry.
Minus
Fewer resources to commit elsewhere. May lead to indigenous competitive response.
Scale of Entry and Strategic Commitments
Small Scale Entry:
Plus
Time to learn about the market. Limits company exposure. May be difficult to build market share. Difficult to capture first-mover advantages.
Minus
Entry Modes
Joint Ventures Licensing Turnkey Projects Franchising
Exporting
Wholly Owned Subsidiaries
Exporting
Advantages:
Avoids cost of establishing manufacturing operations. May help achieve experience curve and location economies. May compete with low-cost location manufacturers. Possible high transportation costs. Tariff barriers. Possible lack of control over marketing reps.
Disadvantages:
Turnkey Projects
Advantages:
Contractor agrees to handle every detail of project for foreign client.
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.
Licensing
Advantages:
Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties.
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.
Disadvantages:
Lack of control. Cross-border licensing may be difficult. Creating a competitor.
Risk Reduction Ï Cross-licensing ÏJoint venture
Franchiser sells intangible property and insists on rules for operating business.
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.
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.
Wholly Owned Subsidiary
Greenfield Acquisition
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.
Advantages and Disadvantages of Entry Modes
Entry Mode Advantage Exporting Ability to realize location and experience curve economies Turnkey contracts Ability to earn returns from process technology skills in countries where FDI is restricted Low development costs and risks Disadvantage High transport costs Trade barriers Problems with local marketing agents Creating efficient competitors Lack of long-term market presence Lack of control over technology Inability to realize location and experience curve economies Inability to engage in global strategic coordination
Licensing
Advantages and Disadvantages of Entry Modes
Entry Mode Advantage Franchising Low development costs and risks Joint ventures Disadvantage Lack of control over quality Inability to engage in global strategic coordination
Access to local partner’s Lack of control over technology Inability to engage in global strategic knowledge Sharing development costs coordination and risks Inability to realize location and Politically acceptable experience economies
Protection of technology High costs and risks Wholly Ability to engage in global owned subsidiaries strategic coordination Ability to realize location and experience economies
Selecting an Entry Mode
Technological 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.
Management Know-How
Franchising, subsidiaries (wholly owned or joint venture). Combination of exporting and wholly owned subsidiary.
Pressure for Cost Reduction
Establishing a Wholly Owned Subsidiary
Green-field or Acquisition?
Acquisition Green-field
Pro:
Pro:
Quick to execute. Preempt competitors. Possibly less risky.
Con:
1. Don’t pay too much. 2. Avoid surprises. 3. Pick compatible culture.
Can build subsidiary it wants. Easy to establish operating routines.
Often produce disappointing results.
Overpay for firm. Too optimistic about value creation (hubris). Culture clash. Problems with proposed synergies.
Con:
Slow to establish. Risky. Preemption by aggressive competitors.
Acquisition or Green-field?
Well-established, incumbent firms. Competitors interested in entry.
Acquisition No competitors.
Organizationally embedded skills, routines, culture.
Green-field
Strategic Alliances
Cooperative agreements between potential or actual competitors.
Advantages:
Disadvantage:
Facilitate entry into market. Share fixed costs. Bring together skills and assets that neither company has or can develop. Establish industry technology standards. Competitors get low cost route to technology and markets.
Partner Selection
Making Alliances Work
Alliance Structure
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
Structuring the Alliance to Reduce Opportunism
Walling off critical technology
Establishing contractual safeguards
Opportunism by partner reduced by:
Agreeing to swap valuable skills and technologies
Seeking credible commitments
Managing the Alliance
Building Trust
Learning from Partners
doc_570453081.pdf