Chapter

14

Entry Strategy and

Strategic Alliances

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Case: Diebold

Began to sell ATM machines in foreign markets

in 1980s
1980s Distribution agreement with Philips
1990 Diebold establishes joint venture with IBM
1997 foreign sales 20% of Diebolds total
revenues
Diebold decides to go it alone with local
manufacturing presence for local customization

Through acquisitions
joint ventures

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Basic foreign expansion entry decisions

A firm contemplating foreign expansion must

make three decisions
Which markets to enter
When to enter these markets
What is the scale of entry

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Which foreign markets

Favorable

Politically stable developed and developing

nations
Free market systems
No dramatic upsurge in inflation or privatesector debt

Unfavorable

Politically unstable developing nations with a

mixed or command economy or where
speculative financial bubbles have led to excess
borrowing

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Timing of entry

Advantages in early market entry:

First-mover advantage.
Build sales volume.
Move down experience curve and achieve cost
advantage.
Create switching costs.

Disadvantages:

First mover disadvantage - pioneering costs.

Changes in government policy.

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Scale of 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.
May lead to indigenous competitive response.

Small scale entry:

Time to learn about market.

Reduces exposure risk.

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14-7

Entry modes

Exporting
Turnkey Projects
Licensing
Franchising
Joint Ventures
Wholly Owned Subsidiaries

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14-8

Exporting

Advantages:

Avoids cost of establishing manufacturing

operations
May help achieve experience curve and location
economies

Disadvantages:

May compete with low-cost location manufacturers

Possible high transportation costs
Tariff barriers
Possible lack of control over marketing reps

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14-9

Turnkey projects

Advantages:

Can earn a return on knowledge asset

Contractor agrees
Less risky than conventional FDI
to handle every

Disadvantages:

detail of project
for foreign client

No long-term interest in the foreign country

May create a competitor
Selling process technology may be selling
competitive advantage as well

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14-10

Licensing: Advantages
Reduces development costs and risks of establishing
foreign enterprise.
Lack capital for venture.
Unfamiliar or politically volatile market.
Overcomes restrictive
Agreement where
licensor grants rights to
investment barriers.
intangible property to another
Others can develop business
entity for a specified period
of time in return
applications of intangible
for royalties.
property.

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14-11

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
Franchiser sells
intangible property
and insists on rules
for operating business

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14-12

Joint Ventures

Advantages:

Benefit from local partners 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

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14-13

Wholly owned subsidiary

Subsidiaries could be Greenfield investments

or acquisitions
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

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14-14

Advantages and disadvantages of entry modes

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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

Pressure for Cost

Reduction
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Franchising, subsidiaries (wholly

owned or joint venture)
Combination of exporting and wholly
owned subsidiary

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14-16

Acquisition and Green-field- pros & cons

Greenfield

Acquisition

Pro:
Quick to execute
Preempt competitors
Possibly less risky
Con:
Disappointing results
Overpay for firm
optimism about value
creation (hubris)
Culture clash.
Problems with proposed
synergies

Pro:

Can build subsidiary it

wants
Easy to establish
operating routines
Con:
Slow to establish
Risky
Preemption by
aggressive competitors

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14-17

Acquisition or Green-field?
Well-established,
incumbent firms.
Competitors
interested in
entry.

Acquisition

embedded skills,
routines, culture.

Green-field
No competitors

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14-18

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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14-19

Alliances are popular

High cost of technology development

Company may not have skill, money or
people to go it alone
Good way to learn
Good way to secure access to foreign markets
Host country may require some local
ownership

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14-20

Global Alliances, however, are different

Firms join to attain world leadership

Each partner has significant strength to bring
to the alliance
A true global vision
Relationship is horizontal not vertical
When competing in markets not part of
alliance, they retain their own identity

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14-21

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

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14-22

Structuring the alliance to reduce opportunism

Fig 14.1

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14-23

Characteristics of a strategic alliance

Benefits

Independence of
Participants

Technology
Products

Control

Shared
Benefits

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Ongoing
Contributions

Markets
Cooperation

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14-24

Managing the alliance

Build trust

Relational capital

Learning from partners

Diffusion of knowledge

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