CHAPTER 14
Entry Strategy and Strategic
Alliances
14-2
Learning Objectives
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Which foreign markets to enter?
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Evaluation the modes of entry
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McGraw-Hill/Irwin
Early or Late Entry?
Large scale or small scale entry?
Exporting
Licensing
Turnkey Projects
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Learning Objectives

Evaluation the modes of entry
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McGraw-Hill/Irwin
Franchising
Joint Ventures
Wholly Owned Subsidiary
Application to selected products
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Chapter Focus

Examine:
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McGraw-Hill/Irwin
The decision on which foreign markets to
enter, when to enter them, and on what
scale.
The choice of entry mode.
The role of strategic alliances.
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Which Foreign Markets
Favorable benefit-cost-risk trade-off
Politically stable nations.
No dramatic upsurge
in inflation or
private sector debt.
Free market systems
Politically unstable
developing nations.
Speculative financial
bubbles have led to
excess borrowing.
McGraw-Hill/Irwin
Mixed or command
economies.
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Timing of Entry
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First-mover advantage.
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Preempt rivals and capture demand.
Build sales volume.
Move down experience curve before rivals and
achieve cost advantage.
Costs early entrant
Create switching costs.
bears that later
Disadvantages:


entrant can avoid.
First mover disadvantage - pioneering costs.
Changes in government policy.
McGraw-Hill/Irwin
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Scale of Entry and Strategic
Commitments
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Strategic Commitments - a decision that has a longterm impact and is difficult to reverse.
Large scale entry:
Plus
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Commitment of significant resources.
Easier to attract customers (will remain in market).
May cause rivals to rethink market entry.
Minus
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McGraw-Hill/Irwin
Fewer resources to commit elsewhere.
May lead to indigenous competitive response.
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Scale of Entry and Strategic
Commitments

Small Scale Entry:
Plus

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Time to learn about the market.
Limits company exposure.
Minus
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McGraw-Hill/Irwin
May be difficult to build market share.
Difficult to capture first-mover advantages.
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Entry Modes
Joint
Ventures
Exporting
Licensing
Turnkey
Projects
Franchising
McGraw-Hill/Irwin
Wholly Owned
Subsidiaries
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Exporting
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Advantages:
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Avoids cost of establishing manufacturing
operations.
May help achieve experience curve and location
economies.
Disadvantages:
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May compete with low-cost location manufacturers.
Possible high transportation costs.
Tariff barriers.
Possible lack of control over marketing reps.
McGraw-Hill/Irwin
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Turnkey Projects

Advantages:
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Contractor agrees
to handle every
detail of project
for foreign client.
Can earn a return on knowledge asset.
Less risky than conventional FDI.
Disadvantages:
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
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No long-term interest in the foreign country.
May create a competitor.
Selling process technology may be selling
competitive advantage as well.
McGraw-Hill/Irwin
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Licensing

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Agreement where
licensor grants rights to
intangible property to another
entity for a specified period
of time in return
for royalties.
Advantages:
 Reduces development costs and risks of establishing foreign
enterprise.
 Lack capital for venture.
 Unfamiliar or politically volatile market.
 Overcomes restrictive investment barriers.
 Others can develop business applications of intangible
property.
Disadvantages:
Risk Reduction
 Cross-licensing
 Lack of control.
Joint venture
 Cross-border licensing may be difficult.
 Creating a competitor.
McGraw-Hill/Irwin
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Franchiser sells
intangible property
and insists on rules
for operating business.

Advantages:

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Reduces costs and risk of establishing
enterprise.
Disadvantages:
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
McGraw-Hill/Irwin
Franchising
May prohibit movement of profits from
one country to support operations in
another country.
Quality control.
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Joint Ventures

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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.
McGraw-Hill/Irwin
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Wholly Owned Subsidiary
Greenfield
Acquisition
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McGraw-Hill/Irwin
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
Entry Mode
Advantage
Disadvantage
Exporting
Ability to realize location and
experience curve economies
High transport costs
Trade barriers
Problems with local marketing
agents
Turnkey
contracts
Ability to earn returns from
process technology skills in
countries where FDI is
restricted
Creating efficient competitors
Lack of long-term market
presence
Licensing
Low development costs and
risks
Lack of control over technology
Inability to realize location and
experience curve economies
Inability to engage in
global strategic
coordination
Table 14.1a
McGraw-Hill/Irwin
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Advantages and Disadvantages of
Entry Modes
Entry Mode
Advantage
Disadvantage
Franchising
Low development costs
and risks
Lack of control over quality
Inability to engage in global strategic
coordination
Joint
ventures
Access to local partner’s
knowledge
Sharing development costs
and risks
Politically acceptable
Lack of control over technology
Inability to engage in global strategic
coordination
Inability to realize location and
experience economies
Wholly
owned
subsidiaries
Table 14.1b
McGraw-Hill/Irwin
Protection of technology
High costs and risks
Ability to engage in global
strategic coordination
Ability to realize location and
experience economies
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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
McGraw-Hill/Irwin
Franchising, subsidiaries
(wholly owned or joint
venture).
Combination of exporting and
wholly owned subsidiary.
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