Entry Strategy
Chapter 12
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Key issues of entry strategy
• Any firm contemplating foreign expansion must
struggle with several decisions
- Which foreign market(s) to enter
• choose based on long-run profit potential
-
Market size
Growth rate
Political stability
Competition
- When
- On what scale
- Which mode of entry
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When to enter?
• Advantages associated with entering early are
“first-mover advantages”
- Ability to preempt rivals, establishing a strong brand name
quickly
- Ability to build sales volume
- Ability of early entrants to create switching costs
• Disadvantages are “first-mover disadvantages”
- Pioneering costs - costs only an early entrant has to bear
- Possibility that regulations may change
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Scale of Entry
• Large scale entry
- Strategic Commitments - decisions that have long-term
impact and are difficult to reverse
• Local distributors, partners will take you seriously
- May cause rivals to rethink market entry
- But may lead local firms to attack aggressively
• Small scale entry
- Time to learn about market
- Reduces exposure risk
- But fast-moving competitor may beat you
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Entry Modes
• Firms can use six different methods to enter a market
- Exporting
- Wholly Owned Subsidiaries (the most common kind of
foreign direct investment)
-
Licensing
Franchising
Joint Ventures
Turnkey Projects
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Wholly Owned Subsidiary
(i.e., Foreign Direct Investment)
• Advantages:
- No risk of losing technical competence to a competitor
- Tight control of operations
- Realize learning curve and location economies
• Disadvantage:
- Very expensive
- Bear full cost and risk
• Subsidiaries could be greenfield investments or
acquisitions
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Exporting
• Advantages:
- Avoids cost of establishing manufacturing operations
- May help achieve experience curve and location
economies
• Disadvantages:
- Possible high transportation costs
- Tariff barriers
- Possible lack of control over marketing reps
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Licensing and franchising
• Licensing
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
- Works in unfamiliar or politically
volatile market
- Overcomes investment barriers
- Others can develop business applications of your know-how
• Franchising
- Reduces costs and risk
- May prohibit movement of profits from
one country to support operations in another
- Quality control
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Franchiser sells
intagible property
and insists on rules
for operating business
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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
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Turnkey projects
• Advantages:
- Can earn a return on knowledge asset
- Less risky than conventional FDI
• Disadvantages:
Contractor agrees
to handle every
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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Core Competencies and
Entry Mode
If what you are good at is…
• Technological Know-How
- Avoid licensing and jointventure arrangements
- Probably use a wholly
owned subsidiary
• Exception: If the
technological advantage is
only transitory
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• Management Know-How
- The firm’s valuable assets
include a brand name
- Either franchising or
wholly owned
subsidiaries may work
well
- Often times a joint venture
is politically more
acceptable
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