MGMT414: Chapter 15

Reducing Risks of Failure

(1) does not pay too much for the acquired unit. (2) does not uncover any nasty surprises after the acquisition. (3) acquires a firm whose organization culture is not antagonistic to that of the acquiring enterprise.

Chapter

(1) the decision of which foreign markets to enter, when to enter them, and on what scale; (2) the choice of entry mode; (3) the role of strategic alliances.

First Mover Advantage

-Ability to preempt rivals and capture demand by establishing a strong brand name. -Ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants. Enable the early entrant to cut prices below that of later entrants, thereby driving them out of the market. -Ability of early entrants to create switching costs that tie customers into their products or services, make it difficult for later entrants to win business.

Exports

-Advantages: Avoids the often substantial costs of establishing manufacturing operations in the host country. -May help a firm achieve experience curve and location economies. -Disadvantages: Exporting from the firm's home base may not be appropriate if lower-cost locations for manufacturing the product can be found abroad (global or transnational strategy). -High transport costs uneconomical, particularly bulk products. -Tariff barriers. -The way around such problems is to set up wholly owned subsidiaries in foreign nations to handle local marketing, sales, and service.

Alliance Structure

-Alliances can be designed to make it difficult to transfer technology not meant to be transferred. -Contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner. - Both parties to an alliance can agree in advance to swap skills and technologies that the other covets, thereby ensuring a chance for equitable gain.

Licensing

-Arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee. -Advantages: does not have to bear the development costs and risks associated with opening a foreign market, attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market, frequently used when a firm possesses some intangible property that might have business applications, but it does not want to develop those applications itself. -Disadvantages: 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 at- tacks in another. Risk associated with licensing technological know-how to foreign companies.

Turnkey Projects

-Contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. -Advantages: earning great economic returns from that asset, less risky than conventional FDI. -Disadvantages: no long-term interest in the foreign country, may inadvertently create a competitor, if the firm's process technology is a source of competitive advantage, then selling technology is also selling competitive advantage to competitors.

Strategic Alliances

-Cooperative agreements between potential or actual competitors. -Advantages: facilitate entry into a foreign market, allow firms to share the fixed costs and risks of developing new products/processes, bring together complementary skills and assets that neither company could easily develop on its own. -Disadvantages: risks, can give away more than it receives.

Timing of Entry

-Early when an international business enters a foreign market before other foreign firms. -Late when it enters after other international businesses have already established themselves. -First move advantage

Scale of Entry

-Entering a market on large scale involves the commitment of significant resources and implies rapid entry. -Not all firms necessary resources to enter on a large scale -Some large firms prefer to enter on small scale and then build slowly as they become more familiar with the market. -Gives customers and distributors reasons that company will remain in market for long-run, give other foreign institutions considering entry into the United States pause. -Fewer resources available to support expansion in other desirable market.

Joint Venture

-Establishing a firm that is jointly owned by two or more otherwise independent firms. -Advantages: local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business. Sharing costs and or risks with a local partner. Political considerations make joint ventures the only feasible entry mode. -Disadvantages: Risks giving control of its technology to its partner. Does not give a firm the tight control over subsidiaries that it might need to realize experience curve or location economies. Lead to conflicts and battles for control between firms if their goals and objectives change/different views to strategy.

Strategic Commitments

-Ex: Rapid, large-scale market entry -Long-term impact and is difficult to reverse. -Important influence on the nature of competition in a market. -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.

Entry Modes

-Exporting. -Turnkey projects. -Licensing. -Franchising. -Establishing joint ventures with a host-country firm. -Setting up a new wholly owned subsidiary in the host country.

Wholly Owned Subsidy

-Firm owns 100% of stock. -Advantages: reduces the risk of losing control over that competence, tight control over operations in different countries. Required if a firm is trying to realize location and experience curve economies. -Disadvantages: most costly method

Pressures for Cost Reduction

-Greater the pressures for cost reductions, the more likely a firm will want to pursue some combination of exporting and wholly owned subsidiaries. -Firms pursuing global standardization or transnational strategies tend to prefer establishing wholly owned subsidiaries.

Partner Selection

-Helps the firm achieve its strategic goals, sharing the costs and risks of product development, or gaining access to critical core competencies. -Shares the firm's vision for the purpose of the alliance. -Unlikely to try to opportunistically exploit the alliance for its own ends, that is, to expropriate the firm's technological know-how while giving away little in return.

Core Competencies: Technology

-If a firm's competitive advantage is based on 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. -Wholly Owned Subsidy.

Which Market to Enter?

-Long run profit potential. -Attractiveness depends on balancing the benefits, costs, and risks associated with doing business in that country. -Size of market -Present wealth of consumers, and likely future wealth of consumers. -Value creation: depends on the suitability of product offering and nature of indigenous competition.

Managing an Alliance

-Maximize its benefits from the alliance. -Requires building interpersonal relationships be- tween the firms' managers, relational capital. -Ability to learn from its alliance partner.

First Move Disadvantage

-Pioneering costs: costs that an early entrant has to bear that a later entrant can avoid. Arise when the business system in a foreign country is so different from that in a firm's home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game. Include the costs of business failure if the firm, due to its ignorance of the foreign environment, makes major mistakes.

Pros and Cons of a Greenfield Investment

-Pros: Easier to build an organization culture from scratch than it is to change the culture of an acquired unit. -Cons: slower and more risky to establish. Possibility of being preempted by more aggressive global competitors who enter via acquisitions and build a big market presence that limits the market potential for the greenfield venture.

Pros and Cons of Acquisitions

-Pros: Quick to execute, to preempt their competitors, less risky than greenfield ventures. -Cons: often overpay for the assets of the acquired firm, clash between the cultures of the acquiring and acquired firms. Attempts to realize gains of acquired entities often run into roadblocks and take much longer than forecast. Inadequate preacquisition screening.

Core Competencies: Management

-Risk of losing control over the management skills to franchisees or joint-venture partners is not that great. -

Franchising

-Specialized form of licensing in which the franchiser sells intangible property to the franchisee but insists that the franchisee agree to abide by strict rules as to how it does business. -Advantages: build a global presence quickly and at a relatively low cost and risk, ex: McDonalds -Disadvantages: may inhibit the firm's ability to take profits out of one country to support competitive attacks in another. Quality control.

Small Scale vs Large Scale Entry

-Value of the commitments that flow from rapid large-scale entry into a foreign market must be balanced against the resulting risks and lack of flexibility associated with significant commitments. -Balanced against the value and risks of the commitments associated with large-scale entry are the benefits of a small-scale entry. -Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market. Small-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter. Reduce risks.

Strategic Alliance

-cooperative agreements between potential or actual competitors.