Chapter 13

pioneering costs

Costs an early entrant bears that later entrants avoid, such as the time and effort in learning the rules, failure due to ignorance, and the liability of being a foreigner.

Which foreign market?

Country's potential market for an international business Size of the market - demographics Present wealth - purchasing power Economic Growth

Licensing Agreement

arrangement in which a licensor grants the rights to intangible property to the licensee for a specified period and receives a royalty fee in return.

Timing entry

entry is early when a firm enters a foreign market before other foreign firms and late when a firm enters after other international businesses have established themselves

Modes to enter foreign markets

1) Exporting 2) Turnkey projects 3) Licensing 4) Franchising 5) Joint ventures 6) Wholly owned subsidiaries

Wholly Owned Subsidiaries

100% ownership of the subsidiary Set up a new operation in that country Acquire an established firm Advantages: -They reduce the risk of losing control over core competencies -They allow for the tight control over operations in different countries that is necessary for engaging in global strategic coordination -They may be required if a firm is trying to realize location and experience curve economies Disadvantages: -Firms bear the full costs and risks of setting up overseas operations

Joint Venture

A cooperative undertaking between two or more firms

Franchising

A form of licensing in which the franchisor sells intangible property and requires the franchisee agree to abide by strict rules as to how it does business Advantages : -It can avoid costs and risks of opening up a foreign market Disadvantages: -It may inhibit the firm's ability to take profits out of one country to support competitive attacks in another -The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect

Turnkey Project

A project in which a firm agrees to set up an operating plant for a foreign client and hand over the "key" when the plant is fully operational.

Franchising

A specialized form of licensing in which the franchiser sells intangible property to the franchisee and insists on rules to conduct the business

Wholly Owned Subsidiary

A subsidiary in which the firm owns 100 percent of the stock

The chapter made the following points: 14

Acquisitions are quick to execute, may enable a firm to preempt its global competitors, and involve buying a known revenue and profit stream. Acquisitions may fail: -when the acquiring firm overpays for the target, -when the cultures of the acquiring and acquired firms clash, -when there is a high level of management attrition after the acquisition, and -when there is a failure to integrate the operations of the acquiring and acquired firm.

Timing your entry: First-mover

Advantages: -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: cost advantage. -ability to create switching costs that tie customers into their products and services. Disadvantages: -may give rise to pioneering costs -regulations can change in a way that diminishes the value of an early entrant's investments

Timing of Entry

After a firm identifies which market to enter, it must determine the timing of entry -Entry is early when a firm enters a foreign market before other foreign firms -Entry is late when a firm enters after other firms have already established themselves in the market

Licensing

An arrangement whereby a licensor grants the rights to intangible property to another entity for a specified time period, and in return, receives a royalty fee Intellectual property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks Advantages : -The firm does not have to bear the development costs and risks associated with opening a foreign market -The firm avoids barriers to investment -It allows a firm with intangible property that might have business applications, but which doesn't want to develop those applications itself, to capitalize on market opportunities Disadvantages: -The firm doesn't have the tight control over manufacturing, marketing, and strategy necessary to realize experience curve and location economies -The firm's ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another is compromised -There is the potential for loss of proprietary (or intangible) technology or property -To reduce this risk, firms can use cross-licensing agreements or link the agreement with the decision to form a joint venture

Pros and cons of acquisitions

Are quick to execute. Enable firms to preempt their competitors. Can be less risky than greenfield ventures. However, many acquisition are not successful. Why Do Acquisitions Fail? -The firm overpays for the assets of the acquired firm -There is a clash between the cultures of the acquiring and acquired firm -Attempts to realize synergies by integrating the operations of the acquired and acquiring entities run into roadblocks and take much longer than forecast -There is inadequate pre-acquisition screening Reducing the Risks of Failure -Through careful screening of the firm to be acquired -By moving rapidly once the firm is acquired to implement an integration plan

The chapter made the following points: 1

Basic entry decisions include identifying which markets to enter, when to enter those markets, and on what scale.

Greenfield or Acquisition? Which Choice?

Dependent on circumstances confronting the firm Well-established incumbents might be best for an acquisition as greenfield too slow If no incumbents, then greenfield might be best

First Mover Disadvantages

Disadvantages associated with entering a foreign market before other international businesses.

Summary: In this chapter we have

Explained the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale. Compared and contrasted the different modes that firms use to enter foreign markets. Identified the factors that influence a firm's choice of entry mode. Recognized the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

Firms can enter foreign markets through

Exporting Licensing or franchising to host country firms A joint venture with a host country firm A wholly owned subsidiary in the host country

The chapter made the following points: 6

Exporting has the advantages of facilitating the realization of experience curve economies and of avoiding the costs of setting up manufacturing operations in another country. Disadvantages include -high transport costs, -trade barriers, and -problems with local marketing agents.

Timing of Entry: First-Mover Advantages

Firms entering a market early can gain first mover advantages -The ability to pre-empt rivals and capture demand by establishing a strong brand name -The ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants -The ability to create switching costs that tie customers into their products or services making it difficult for later entrants to win business

Pressures for Cost Reductions and Entry Mode

Firms facing strong pressures for cost reductions are likely to pursue some combination of exporting and wholly owned subsidiaries -Allows the firm to achieve location and scale economies as well as retain some degree of control over worldwide product manufacturing and distribution -Firms pursuing global standardization or transnational strategies tend to prefer establishing wholly owned subsidiaries

Which Foreign Markets?

Firms need to assess the long run profit potential of each market -The most favorable markets are politically stable developed and developing nations with free market systems, low inflation, and low private sector debt -The less desirable markets are politically unstable developing nations with mixed or command economies, or developing nations where speculative financial bubbles have led to excess borrowing -The value an international business can create in a foreign market depends on the suitability of its product offering to that market and the nature of indigenous competition

Scale of Entry and Strategic Commitments

Firms that enter foreign markets on a significant scale make a major strategic commitment that changes the competitive playing field -Involves decisions that have a long-term impact and are difficult to reverse Small-scale entry can be attractive because it allows the firm to learn about a foreign market, but at the same time it limits the firm's exposure to that market

Timing of Entry: First-Mover Disadvantages

First mover disadvantages: the disadvantages associated with entering a foreign market before other international businesses These may result in pioneering costs (costs that an early entrant has to bear that a later entrant can avoid) such as: -The costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes -The costs of promoting and establishing a product offering, including the cost of educating the customers

Pros and Cons of Greenfield Ventures

Greenfield ventures are attractive because they allow the firm to build the kind of subsidiary company that it wants -Are slower to establish -Are risky because they have no proven track record -Can be problematic if a competitor enters via acquisition and quickly builds market share

Turnkey projects

Involve a contractor that agrees to handle every detail of the project for a foreign client, including the training of operating personnel At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation Advantages: -Allow firms to earn great economic returns from the know-how required to assemble and run a technologically complex process -Less risky in countries where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk Disadvantages: -The firm has no long-term interest in the country -The firm can create a competitor -The firm's process technology is a source of competitive advantage

The chapter made the following points: 10

Joint ventures have the advantages of sharing the costs and risks of opening a foreign market and of gaining local knowledge and political influence. Disadvantages include the risk of losing control over technology and a lack of tight control.

Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale

LO 13-1

Compare and contrast the different modes that firms use to enter foreign markets.

LO 13-2

Identify the factor that influence a firm's choice of entry mode.

LO 13-3

Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

LO 13-4

The chapter made the following points: 4

Large-scale entry into a national market constitutes a major strategic commitment that is likely to change the nature of competition in that market and limit the entrant;s future strategic flexibility. Although making major strategic commitments can yield many benefits, there are also risks associated with such a strategy.

Opening case: Cutco Corporation - Sharpening Your Market Entry

Largest manufacturer of high-quality kitchen cutlery in the U.S. and Canada Originally created as a product for Wear-Ever Aluminum, a division of Alcoa Commitment to fine craftsmanship and Forever Guarantee Formed following a management buyout that took the company private - a leap of faith Sales force of mainly college students use "direct selling" The sales pitch to students is good pay, flexible schedules, personal growth, no experience needed, great training, and engagement with quality products. -In fact, 85% of the sales force at Cutco is college-aged individuals.

Exporting

Often the first method firms use to enter foreign market Advantages -It is relatively low cost -Firms may achieve experience curve economies Disadvantages -Lower-cost manufacturing locations exist -Transport costs can be high -Tariff barriers can make it uneconomical -Foreign agents fail to act in the exporter's best interest

The chapter made the following points: 15

The advantages of a greenfield venture in a foreign country it gives the firm a much greater ability to build the kind of subsidiary company that it wants. For example, it is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit.

The chapter made the following points: 11

The advantages of wholly owned subsidiaries include tight control over technological know-how. The disadvantage is that the firm must bear all the costs and risks of opening a foreign market.

Core Competencies and Entry Mode: Management Know-How

The competitive advantage of many service firms is based upon management know-how International trademark laws are generally effective for protecting trademarks Since the risk of losing control over management skills to franchisees or joint venture partners is not high, the benefits from getting greater use of brand names is significant

Joint Ventures

The establishment of a firm that is jointly owned by two or more otherwise independent firms Advantages: -A firm can benefit from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems -The costs and risks of opening a foreign market are shared with the partner -They can help firms avoid the risk of nationalization or other adverse government interference Disadvantages: -The firm risks giving control of its technology to its partner -The firm may not have the tight control over subsidiaries that it might need to realize experience curve or location economies -Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

The chapter made the following points: 9

The main advantage of franchising is that the franchisee bears the costs and risks of opening a foreign market. Disadvantages center on problems of quality control of distant franchisees.

The chapter made the following points: 8

The main advantage of licensing is that the licensee bears the costs and risks of opening a foreign market. Disadvantages include he risk of losing technological know-how to the licensee and the lack of a tight control over licensees.

The chapter made the following points: 2

The most attractive foreign markets tend to be found in politically stable developed and developing nations that have free market systems and where there is no dramatic upsurge in either inflation rates or private-sector debt.

The chapter made the following points: 12

The optimal choice of entry mode depends on the firm's strategy. When technological know-how constitutes a firm's core competence, wholly-owned subsidiaries are preferred, since they best control technology. When management know-how constitutes a fir,'s core competence, foreign franchises controlled by joint ventures seem to be optimal. When the firm is pursuing a global standardization or transnational strategy, the need for tight control over operations to realize location and experience curve economies suggest wholly-owned subsidiaries are the best entry mode.

The chapter made the following points: 5

There are 6 modes of entering a foreign market: 1) exporting, 2) creating turnkey projects, 3) licensing, 4) franchising, 5) establishing joint ventures, and 6) setting up a wholly owned subsidiary.

Market Entry Summary

There are no "right" decisions with foreign market entry, just decisions that are associated with different levels of risk and reward Firms in developing countries can learn from the experiences of firms in developed countries

The chapter made the following points: 3

There are several advantages associated with entering a national market early, before other international businesses have established themselves. These advantages must be balanced against the pioneering costs that early entrants often have to bear, including the greater risk of business failure.

The advantages and disadvantages of each entry mode is determined by

Transport costs and trade barriers Political and economic risks Costs Firm strategy

The chapter made the following points: 7

Turnkey projects allow firms to export their process know-how to countries where foreign direct investment (FDI) might be prohibited, thereby enabling the firm to earn a greater return from this asset. The disadvantage is that the firm may inadvertently create efficient global competitors in the process.

Core Competencies and Entry Mode: Technological Know-How

When competitive advantage is based on proprietary technological know-how, firms should avoid licensing and joint venture arrangements in order to minimize the risk of losing control over the technology If a technological advantage is only transitory, or the firm can establish its technology as the dominant design in the industry, then licensing may be attractive

The chapter made the following points: 13

When establishing a wholly owned subsidiary in a country, a firm must decide whether to do so by a greenfield venture or by acquiring an established enterprise in the target market.

A firm expanding internationally must decide

Which markets to enter When to enter them Scale of entry

First-Mover Advantages

advantages accruing to the first to enter a market

Exporting

sale of products produced in one country to residents of another country