Chapter 15: Entry Modes and Strategic Alliances

Critical Thinking and Discussion Questions

1. Review the Management Focus on Tesco.
a) Why did Tesco’s initial international expansion strategy focus on developing
nations?
Tesco was generating strong free cash flows by the early 1990s, and senior
management had to decide using part of that cash on overseas expansion. As
they looked at international markets, they found out the best opportunities
were in the emerging markets of Eastern Europe and Asia where there were few
capable competitors but strong underlying growth trends. Besides, the potential
of rapid revenue growth and supporting host government policies designed to
attract foreign companies are also reasons Tesco’s initial international expansion
strategy focus on developing nations
b) How does Tesco create value in its international operations?
There are factors that create value for Tesco:
- The company devotes considerable attention to transferring its core
capabilities in retailing to its new ventures,
- The company hires local managers and support them with a few operational
experts from the United Kingdom,
- The company’s partnering strategy in Asia has been a great asset because the
companies Tesco has teamed up with are good and have a deep
understanding of the markets in which they are participating,
- The company and its partners bring equally useful assets to the venture
which increases in the probability of success,
- The company focuses on markets with good growth potential but that lacks
strong indigenous competitors.
c) In Asia, Tesco has a long history of entering into joint venture agreements with
local partners. What are the benefits of doing this for Tesco? What are the
risks? How are those risks mitigated?
The benefits for the Tesco are:
- using local knowledge of the Asia’s competitive conditions, culture, language,
political systems, and business systems and;
- sharing the development cost and/or risks of opening foreign market with a
Asia partner;
- facing a low risk of being subject to nationalization or other forms of adverse
government interference.
The risks:
- The technology of Tesco might be stolen because of giving control of its
technology to its partner,
 - Tesco does not have the tight control over subsidiaries,
- The share ownership arrangement can lead to conflicts and battles for
control if Tesco’s goal or objectives change or if they take different views as
to what the strategy should be,
- The companies involved could pull out, steal Tesco ideas, of fail and leave
Tesco with debt.
Those risks are mitigated by Tesco just involve 50/50.
d) In March 2006, Tesco announced that it would enter the United States. This
represents a departure from its historic strategy of focusing on developing
nations. Why do you think Tesco made this decision? How is the U.S. market
different from others Tesco has entered? What are the risks here? How do you
think Tesco will do?
- US is a big market. In UK, Tesco has consistently outperformed the Asda chain that
is own by Walmart. Tesco had done lots of pre-enter research before they decided
to enter in US market. Tesco believes that each market is unique and requires a
different approach. They found out that no single format can wholly penetrate a
market, after gaining experience in UK market. That is the reason the company has
developed a range of formats from convenience stores to hypermarkets that it
deploys to meet the needs and opportunities. Besides, they initially enter to US
market to increase market share and brand recognition in North America.
- Differences between developing countries and US market:
o United State is the developed country. So, the developed capital market in
US is higher than in others Tesco has entered. US also have high levels of
liquidity.
o Many strong competitors in all of its markets
o Different culture and customers’ tastes
- The risks that they might to face that the United States competitors could be
stronger than Tesco and kick Tesco out of its market.
2. Licensing propriety technology to foreign competitors is the best way to give up a
firm's competitive advantage. Discuss
A licensing agreement is an arrangement whereby a licensor grants the rights to
intangible property, such as patents, inventions, formulas, processes, designs,
copyrights, and trademarks, to another entity (the licensee) for a specified time
period, and in return, the licensor receives a royalty fee from the licensee. Firms are
attracted to licensing because licensing allows them to open a foreign market
without the costs and risks that are associated with the development. Licensing also
allows firms that have intangible property with business applications, in which the
firm itself does not to develop, to take advantage of market opportunities. Licensing
propriety technology to foreign competitors is the best way to give up a firm's
competitive advantage. For the most part, licensing proprietary technology to
 foreign competitors raises the risk of a firm losing that technology. Therefore,
licensing should generally be avoided in these situations. Licensing may be a good
thing when the licensing arrangement can be structured in such a way to reduce the
risks of a firm's technological know-how being taken by licensees. A further example
is when a firm perceives its technological advantage as being only transitory, and it
considers rapid imitation of its core technology by competitors to be likely. In such
a case, the firm might want to license its technology as rapidly as possible to foreign
firms in order to gain global acceptance for its technology before imitation occurs.
By licensing its technology to competitors, the firm may deter them from developing
their own, possibly superior, technology, and they may be able to establish its
technology as the dominant design in the industry. However, the attractions of
licensing are probably outweighed by the risks of losing control over technology, and
licensing should be avoided.
3. Discuss how the need for control over foreign operations varies with firms’
strategies and core competencies. What are the implications of the choice of entry
mode?
A company’s core competencies can dictate how they choose to operate overseas
in foreign markets. For instance, no other foreign companies have control over its
exporting entry mode, but wholly owned subsidiaries have 100% control over its
foreign companies. On the other hand, the distinctive competencies will have effect
on which strategies to opt for. For example, if a company's distinctive competency
is based on proprietary technology, entering into a joint venture could be risky due
to losing control over that technology. This type of firm should seek expanding into
foreign countries through wholly owned subsidiary to maintain control over that
technology. In the same way, companies with distinctive management
competencies shouldn’t face a risk of losing their management skills to franchisees
or joint-venture partners. However, it is better for the firms to go for global strategy
at that situation.