Final Hill Hult GBT 10e IM Ch13 SG

Global Business Today Tenth Edition Chapter 13
Entering Foreign Markets

Chapter Outline
OPENING CASE: Cutco Corporation – Sharpening Your Market Entry
INTRODUCTION
BASIC ENTRY DECISIONS
Which Foreign Markets?

Timing of Entry
Management Focus: Tesco’s International Growth Strategy
Scale of Entry and Strategic Commitments
Market Entry Summary
ENTRY MODES
Exporting
Management Focus: The Jollibee Phenomenon
Turnkey Projects
Licensing
Franchising
Joint Ventures
Wholly Owned Subsidiaries
SELECTING AN ENTRY MODE
Core Competencies and Entry Mode

Pressures for Cost Reductions and Entry Mode
GREENFIELD VENTURE OR ACQUISITION?
Pros and Cons of Acquisitions

Management Focus: General Motors on the Upswing
Pros and Cons of Greenfield Ventures
Which Choice?
KEY TERMS
SUMMARY
CRITICAL THINKING AND DISCUSSION QUESTIONS
© 2018 by McGraw-Hill Education.

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globalEDGE RESEARCH TASK
CLOSING CASE: Starbucks Entering Foreign Markets
Learning Objectives
13.1 Explain the three basic decisions that firms contemplating foreign expansion must make:
which markets to enter, when to enter those markets, and on what scale.
13.2 Compare and contrast the different modes that firms use to enter foreign markets.
13.3 Identify the factors that influence a firm’s choice of entry mode.
13.4 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.
Chapter Summary
This chapter focuses on the basic market entry decisions for firms. The six most common foreign
entry strategies are discussed. These are: exporting, turnkey projects, licensing, franchising,
establishing a joint venture with a host country firm, and setting up a wholly owned subsidiary in
the host country. The advantages and disadvantages of each of these strategies are discussed.
Cutco Corporation – Sharpening Your Market Entry

opening case
Summary
The opening case examines the development and partners Cutco has established over the years.
Originally established as a joint venture between W.R. Case & Sons Cutlery Company and Alcoa,
Cutco Corporation also purchased Vector Marketing Corporation to act as the direct sales arm of
the company. Cutco operates today based on the management buyout which took place in 1982.
Cutco’s product line includes 100 different choices and the company has about $200 million in
annual sales worldwide. In addition to its standing in North America, independent offices are
operated in Australia, Costa Rica, Germany, South Korea, and the United Kingdom.
Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips
Introduction
A) This chapter is concerned with two closely related topics: the decision of which foreign markets
to enter, when to enter them, and on what scale; and the choice of entry mode.

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B) There are several different options open to a firm that wishes to enter a foreign market,
including exporting, licensing or franchising to host country firms, setting up a joint venture with a
host country firm, or setting up a wholly owned subsidiary in the host country to serve that market.
Each of these options has advantages and disadvantages.
C) The magnitude of the advantages and disadvantages associated with each entry mode are
determined by a number of different factors, including transport costs and trade barriers, political
and economic risks, and firm strategy. The optimal choice of entry mode varies from situation to
situation depending upon these various factors. Thus while it may make sense for some firms to
serve a given market by exporting, other firms might serve the same market by setting up a wholly
owned subsidiary in that market, or by utilizing some other entry mode.
Basic Entry Decisions

A) There are three basic decisions that a firm contemplating foreign expansion must make: which
markets to enter, when to enter those markets, and on what scale.
WHICH FOREIGN MARKETS?

B) The choice between different foreign markets must be made on an assessment of their long run
profit potential. This is a function of a large number of factors, many of which we have already
considered in depth in earlier chapters.
C) Other things being equal, the benefit-cost-risk tradeoff is likely to be most favorable in the case
of politically stable developed and developing nations that have free market systems, and where
there is not a dramatic upsurge in either inflation rates or private sector debt. It is likely to be least
favorable in the case of politically unstable developing nations that operate with a mixed or
command economy, or developing nations where speculative financial bubbles have led to excess
borrowing.
D) If an international business can offer a product that has not been widely available in a market
and that satisfies an unmet need, the value of that product to consumers is likely to be much
greater than if the international business simply offers the same type of product that indigenous
competitors and other foreign entrants are already offering.
TIMING OF ENTRY
E) Once a set of attractive markets has been identified, it is important to consider the timing of
entry. With regard to the timing of entry, we say that entry is early when an international business
enters a foreign market before other foreign firms, and late when it enters after other international
businesses have already established themselves in the market.
F) There are several advantages frequently associated with entering a market early. These are
commonly known as first mover advantages. One first mover advantage is the ability to pre-empt
rivals and capture demand by establishing a strong brand name. A second advantage is the ability
to build up sales volume in that country and ride down the experience curve ahead of rivals. To the
extent that this is possible, it gives the early entrant a cost advantage over later entrants. This cost

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advantage may enable the early entrant to respond to later entry by cutting prices below the
(higher) cost structure of later entrants, thereby driving them out of the market. A third advantage
is the ability of early entrants to create switching costs that tie customers into their products or
services. Such switching costs make it difficult for later entrants to win business.
G) It is important to realize that there can also be disadvantages associated with entering a foreign
market before other international businesses (these are often referred to as first mover
disadvantages).
H) Pioneering costs are costs that an early entrant has to bear that a later entrant can avoid.
Pioneering costs arise when a business system in a foreign country is so different from that in a
firm’s home market that the enterprise has to devote considerable time, effort and expense to
learning the rules of the game. Pioneering costs include the costs of business failure if the firm,
due to its ignorance of the foreign environment, makes some major mistakes. Pioneering costs also
include the costs of promoting and establishing a product offering, including the cost of educating
customers.
management FOCUS: Tesco’s International Growth Strategy

Summary
This feature describes Tesco’s international expansion strategy. Tesco, the British grocer, has
established operations in a number of foreign countries. Typically, the company seeks
underdeveloped markets in developing nations where it can avoid the head-to-head competition
that goes on in more crowded markets, and then enters those markets via joint ventures where the
local partner provides knowledge of the market while Tesco provides retailing expertise.
Discussion of the feature can revolve around the following questions.
SCALE OF ENTRY AND STRATEGIC COMMITMENTS

I) Another issue that an international business needs to consider when contemplating market entry
is the scale of entry. Entering a market on a large scale involves the commitment of resources to
that venture. The consequences of entering on a significant scale are associated with the value of
the resulting strategic commitments. A strategic commitment is a decision that has a long term
impact and is difficult to reverse. Deciding to enter a foreign market on a significant scale is a
major strategic commitment. Significant strategic commitments are neither unambiguously good
nor bad. Rather, they tend to change the competitive playing field and unleash a number of
changes, some of which may be desirable and some of which will not be.
J) 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.
MARKET ENTRY SUMMARY

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K) It is important to realize that there are no “right” decisions here, just decisions that are
associated with different levels of risk and reward.
Entry Modes
A) These are six different ways to enter a foreign market: exporting, turnkey projects, licensing,
franchising, establishing joint ventures with host country firms, or setting up a new wholly owned
subsidiary in the host country. Each method has its advantages and disadvantages.
EXPORTING
B) Most manufacturing firms begin their global expansion as exporters and only later switch to
another mode for servicing a foreign market.
management FOCUS: The Jollibee Phenomenon

Summary
This feature describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the
Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but also
managed to find the weaknesses in the larger company’s global strategy and capitalize on them.
Jollibee, unlike McDonald’s, tailored its menu to the local market. The company built on this
localization strategy as it expanded into neighboring Asian countries and the Middle East. Today,
Jollibee has managed to find success in the United States where it is being hailed as a strong niche
player, and has begun to focus on options in mainland China and India. Discussion of the feature
can begin with the following questions.
Advantages
C) Exporting avoids the often substantial cost of establishing manufacturing operations in the host
country. Exporting may also help a firm achieve experience curve and location economies.
Disadvantages
D) Exporting from the firm’s home base may not be appropriate if there are lower-cost locations
for manufacturing the product abroad. High transport costs can also make exporting uneconomical,
as can tariff barriers. Agents in a foreign country may not act in exporter’s best interest.
TURNKEY PROJECTS
E) In a turnkey project, the contractor agrees to handle every detail of the project for a foreign
client, including the training of operating personnel. At completion of the contract, the foreign
client is handed the “key” to a plant that is ready for full operation, hence the term turnkey. This is
actually a means of exporting process technology to another country.
Advantages

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F) The main advantage of turnkey projects is that they are a way of earning great economic returns
from the know-how required to assemble and run a technologically complex process. Turnkey
projects may also make sense in a country where the political and economic environment is such
that a longer-term investment might expose the firm to unacceptable political and/or economic
risk.
Disadvantages
G) First, the firm that enters into a turnkey deal will have no long-term interest in the foreign
country. Second, the firm that enters into a turnkey project may create a competitor. Third, if the
firm’s process technology is a source of competitive advantage, then selling this technology
through a turnkey project is also selling competitive advantage to potential and/or actual
competitors.
LICENSING
H) A licensing agreement is an arrangement whereby a licensor grants the rights to intangible
property to another entity (the licensee) for a specified time period, and in return, the licensor
receives a royalty fee from the licensee. Intangible property includes patents, inventions, formulas,
processes, designs, copyrights, and trademarks.
Advantages
I) In the typical international licensing deal, the licensee puts up most of the capital necessary to
get the overseas operations going. Thus, a primary advantage of licensing is that the firm does not
have to bear the development costs and risks associated with opening a foreign market. Licensing
is often used when a firm wishes to participate in a foreign market, but is prohibited from doing so
by barriers to investment. Licensing is frequently used when a firm possesses some intangible
property that might have business applications, but the firm does not want to develop those
applications itself.
Disadvantages
J) Licensing does not give a firm the tight control over manufacturing, marketing, and strategy that
is required for realizing experience curve and location economies. Competing in a global market
may require a firm to coordinate strategic moves across countries by using profits earned in one
country to support competitive attacks in another. Licensing severely limits a firm’s ability to do
this. A third problem involves the potential loss of proprietary (or intangible) technology or
property. One way of reducing the risk of losing proprietary trade secrets is through the use of
cross-licensing agreements. Under a cross-licensing agreement, a firm might license some valuable
intangible property to a foreign partner, but in addition to a royalty payment, the firm might also
request that the foreign partner license some of its valuable know-how to the firm.
FRANCHISING
K) Franchising is basically a specialized form of licensing in which the franchisor not only sells
intangible property to the franchisee, but also insists that the franchisee agree to abide by strict
rules as to how it does business.
Advantages

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L) The advantages of franchising as an entry mode are very similar to those of licensing.
Specifically the firm is relieved of many costs and risks of opening up a foreign market, and can
quickly build a foreign market presence.
Disadvantages
M) Franchising may inhibit the firm’s ability to take profits out of one country to support
competitive attacks in another. A more significant disadvantage of franchising is quality control.
The geographic distance of the firm from its foreign franchisees can make poor quality difficult for
the franchisor to detect.
JOINT VENTURES
N) A joint venture entails establishment of a firm that is jointly owned by two or more otherwise
independent firms. Fuji-Xerox, for example, was set up as a joint venture between Xerox and Fuji
Photo.
Advantages
O) Joint ventures offer several advantages. A firm can benefit from a local partner’s knowledge of
the host country’s competitive conditions, culture, language, political systems, and business
systems. When the development costs and/or risks of opening a foreign market are high, a firm
might gain by sharing these costs and/or risks with a local partner. In many countries, political
considerations make joint ventures the only feasible entry mode.
Disadvantages
P) Joint ventures also have some significant disadvantages. As with licensing, a firm that enters
into a joint venture risks giving control of its technology to its partner. A joint venture does not
give a firm the tight control over subsidiaries that it might need to realize experience curve or
location economies. Shared ownership arrangements can lead to conflicts and battles for control
between the investing firms if their goals and objectives change over time, or if they take different
views as to what the venture’s strategy should be.
WHOLLY OWNED SUBSIDIARIES

Q) In a wholly owned subsidiary, the firm owns 100 percent of the stock. Establishing a wholly
owned subsidiary in a foreign market can be done two ways. The firm can set up a new operation
in that country, or it can acquire an established firm and use that firm to promote its products in the
country’s market.
Advantages
R) Wholly owned subsidiaries offer three key advantages. First, when a firm’s competitive
advantage is based on technological competence, a wholly owned subsidiary will often be the
preferred entry mode, since it reduces the risk of losing control over that competence. A wholly
owned subsidiary gives a firm the tight control over operations in different countries necessary for
engaging in global strategic coordination (i.e., using profits from one country to support
competitive attacks in another). A wholly owned subsidiary may be required if a firm is trying to
realize location and experience curve economies.

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Disadvantages
S) Establishing a wholly owned subsidiary is generally the most costly method of serving a foreign
market. Firms doing this must bear full costs and risks of setting up overseas operations.
Selecting an Entry Mode

A) Trade-offs are inevitable when selecting an entry mode. However, it is possible to generalize
about the optimal choice of entry mode.
CORE COMPETENCIES AND ENTRY MODE

B) The optimal entry mode for these firms depends to some degree on the nature of their core
competencies. In particular, a distinction can be drawn between firms whose core competency is in
technological know-how and firms whose core competency is in management know-how.
Technological Know-How
C) If a firm’s competitive advantage (its core competence) is based upon control over proprietary
technological know-how, licensing and joint venture arrangements should be avoided if possible to
minimize the risk of losing control over that technology, unless the arrangement can be structured
in such a way that these risks can be reduced significantly.
D) When a firm perceives its technological advantage as being only transitory, or the firm may be
able to establish its technology as the dominant design in the industry, then licensing may be
appropriate even if it does involve the loss of know-how. By licensing its technology to
competitors, a firm may also deter them from developing their own, possibly superior, technology.
Management Know-How
E) The competitive advantage of many service firms is based upon management know-how. For
such firms, the risk of losing control over their management skills to franchisees or joint venture
partners is not that great, and the benefits from getting greater use of their brand names can be
significant.
PRESSURES FOR COST REDUCTIONS AND ENTRY MODE

F) The greater the pressures for cost reductions, the more likely it is that a firm will want to pursue
some combination of exporting and wholly owned subsidiaries. This will allow it to achieve
location and scale economies as well as retain some degree of control over its worldwide product
manufacturing and distribution.
Greenfield Venture or Acquisition?

A) A firm can establish a wholly owned subsidiary in a country by building a subsidiary from the
ground up (greenfield strategy), or by acquiring an established enterprise in the target market
(acquisition strategy).
PROS AND CONS OF ACQUISITIONS

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B) Acquisitions have three major points in their favor. First, they are quick to execute. Second, in
many cases firms make acquisitions to preempt their competitors. Third, managers may believe
acquisitions to be less risky than greenfield ventures.
management FOCUS: General Motors on the Upswing

Summary
This Management Focus feature focuses on the presence of General Motors (GM) in the China
market. Beginning with a joint venture with Shanghai Automotive Industry Corporation (SAIC) in
1997 with a $1.6 billion investment, this presence matched only Volkswagen among the major
automobile manufacturers in China. The relationship GM developed with SAIC has been very
fruitful as the China market is continuing to expand and the joint venture established provides GM
a critical position. As there is a low vehicle penetration rate to date in China, continued success is
expected.
Why Do Acquisitions Fail?

C) Acquisitions fail for several reasons. First, the acquiring firms often overpay for the assets of
the acquired firm. Second, many acquisitions fail because there is a clash between the cultures of
the acquiring and acquired firm. Third, many acquisitions fail because attempts to realize synergies
by integrating the operations of the acquired and acquiring entities often run into roadblocks and
take much longer than expected. Finally, many acquisitions fail because of inadequate pre-
acquisition screening.
Reducing the Risks of Failure

D) These problems can all be overcome through careful screening of the firm to be acquired, and
moving rapidly once the firm is acquired to implement an integration plan.
PROS AND CONS OF GREENFIELD VENTURES

E) The big advantage of establishing a greenfield venture in a foreign country is that it gives the
firm a much greater ability to build the kind of subsidiary company that it wants. However,
greenfield ventures are slower to establish. They are also risky.
WHICH CHOICE?
F) In general, the choice between acquisitions and greenfield ventures will depend on the
circumstances confronting the firm.

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Global Business Today Tenth Edition Chapter 13

Entering Foreign Markets

BASIC ENTRY DECISIONS

Which Foreign Markets?

SELECTING AN ENTRY MODE

Core Competencies and Entry Mode

GREENFIELD VENTURE OR ACQUISITION?

Pros and Cons of Acquisitions

CRITICAL THINKING AND DISCUSSION QUESTIONS

© 2018 by McGraw-Hill Education.

globalEDGE RESEARCH TASK

CLOSING CASE: Starbucks Entering Foreign Markets

Cutco Corporation – Sharpening Your Market Entry

© 2018 by McGraw-Hill Education.

Basic Entry Decisions

WHICH FOREIGN MARKETS?

© 2018 by McGraw-Hill Education.

management FOCUS: Tesco’s International Growth Strategy

SCALE OF ENTRY AND STRATEGIC COMMITMENTS

MARKET ENTRY SUMMARY

© 2018 by McGraw-Hill Education.

management FOCUS: The Jollibee Phenomenon

© 2018 by McGraw-Hill Education.

© 2018 by McGraw-Hill Education.

WHOLLY OWNED SUBSIDIARIES

© 2018 by McGraw-Hill Education.

Selecting an Entry Mode

CORE COMPETENCIES AND ENTRY MODE

PRESSURES FOR COST REDUCTIONS AND ENTRY MODE

Greenfield Venture or Acquisition?

PROS AND CONS OF ACQUISITIONS

© 2018 by McGraw-Hill Education.

management FOCUS: General Motors on the Upswing

Why Do Acquisitions Fail?

Reducing the Risks of Failure

PROS AND CONS OF GREENFIELD VENTURES

© 2018 by McGraw-Hill Education.

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