Chapter 14
Entry Strategy and
Strategic Alliances
INTERNATIONAL BUSINESS
Woo Ji-hye
Jo Jun-woo
Case: Diebold
 Began to sell ATM machines in foreign
markets in 1980’s
 1980’s Distribution agreement with Philips
 1990 Diebold establishes joint venture with
IBM
 1997 foreign sales 20% of Diebold’s 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 private-sector
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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Entry modes
 Exporting
 Turnkey Projects
 Licensing
 Franchising
 Joint Ventures
 Wholly Owned Subsidiaries
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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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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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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
 Others can develop
another entity for a
business applications of specified period of time
in return for royalties.
intangible property.
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Licensing
 Disadvantages:
 Lack of control over technology
 Inability to realize location and experience
curve economies
 Inability to engage in global strategic
coordination
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Franchising
 Advantages:
 Reduces costs and risk of establishing
enterprise
 Disadvantages:
 May prohibit movement of profits from
one country to support operations in
another country
Franchiser sells
 Quality control
intangible 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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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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Advantages and disadvantages
of entry modes
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Selecting an entry mode
Technological KnowHow
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 KnowHow
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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Acquisition and Green-field
- pros & cons
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
Chap. 14 Entry Strategy and Strategic Alliances
Greenfield
 Pro:
 Can build subsidiary it
wants
 Easy to establish
operating routines
 Con:
 Slow to establish
 Risky
 Preemption by
aggressive
competitors
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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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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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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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Structuring the alliance to
reduce opportunism
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Managing the alliance
 Build trust
 Relational capital
 Learning from partners
 Diffusion of knowledge
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