chapter 5 entry strategy in international business
TRANSCRIPT
![Page 1: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/1.jpg)
11
CHAPTER 5 : ENTRY STRATEGY IN INTERNATIONAL BUSINESS.
The goal of this chapter :
To study decisions of entry strategy in international business such as :
Which markets to enter.
Suitable time to enter.
Modes and scale of entry.
Several elements affect onto the decision of choosing entry strategies.
![Page 2: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/2.jpg)
2
I. BASIC DECISIONS OF ENTRY STRATEGY
1. Which markets to enter ?
- Some criteria to base on when making decisions:
• Current growth rate of economy.
• Size of the market.
• Purchasing power of the market.
• Perspective of the market.
• Stability of politics and laws.
![Page 3: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/3.jpg)
3
2. Time to enter a new market :
a. Pioneer:
- To win the market-share from the beginning.
- Increase benefits due to taking the leading status.
- Making changes which make followers difficult to adapt to .
a.1 Advantages :
There are 2 ways :
![Page 4: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/4.jpg)
4
a.2. Disadvantages:
- Pioneering costs: Cost that an early entrants has to bear that a later entrant can avoid. Include : business failure, promoting and establishing a new products, training fees to customers.
- Pioneer can not learn from experience as per followers do.
b. The followers :
- Advantage and disadvantage : opposite to the pioneers.
![Page 5: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/5.jpg)
5
3. Scale and entry strategy :a. Enter a new market with a small scale :
• Help to understand the market before making decisions of reasonable scale.
• Minimize risks in business. Difficult to keep the market - share
Restrict the opportunities of taking advantages as a pioneer.
b. Enter a new market with large scale :
→ Opposite to the small one.
![Page 6: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/6.jpg)
6
II. ENTRY MODES IN INTERNATIONAL BUSINESS.
There are 6 modes :
1. Exporting :
- Companies usually expand their business globally by the first mode: exporting.
- Use EMC – Export Management Companies to handle their business when they export at the first time.
![Page 7: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/7.jpg)
7
Advantages :
- Avoid the often substantial costs of establishing manufacturing operations in the host country.- Realize experience curve and locations economies.
1. Exporting :
Disadvantages :
- Not be appropriate if lower cost locations for manufacturing abroad.
![Page 8: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/8.jpg)
8
Disadvantages :
- High transport costs can make exporting uneconomical , particularly for bulk products.
- Tariff barriers of host countries can make exporting uneconomical.
- Must delegate , authorize its marketing, sales and services in the country where it does business to another company ( it looses the control to these activities.)
→ Set up wholly owned subsidiaries oversea to handle those activities.
![Page 9: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/9.jpg)
9
2. Turnkey projects :
- Design, establish, operate , training employee for the project from the beginning and then transfer it to the host country.
- Be a good means of exporting processes of technology to other countries.
- Used when the know-how of assembling , operating the technology too complicated : refine oil, metallurgy….
Advantages :
![Page 10: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/10.jpg)
10
Advantages :
- Less risky than FDI
- Have no long terms interest in the foreign countries.
- May create competitors
- Selling competitive advantage to potential and/or actual competitors.
- Applied in countries with unstable political and economic environment or FDI is restricted.
Disadvantages :
![Page 11: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/11.jpg)
11
3. Licensing :
- Be an 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.
- Intangible property includes : patents , invention , formulas , design , copy right, trade mark
- Not have to bear the development costs and risks associated with opening a foreign market.
Advantages :
![Page 12: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/12.jpg)
12
Advantages :
- Very attractive for firms lacking the capital to develop operations oversea.
- Used when a firm wishes to participate in a foreign market but is prohibited from doing so by barriers to investments.
- Frequently used when a firm possesses some intangible property that might have business applications, but it does not want to develop those applications it self.
![Page 13: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/13.jpg)
13
Disadvantages :
3 serious drawbacks :
- Not give a firm the tight control over manufacturing, marketing and strategy at oversea.
- Limit a firm’s ability to coordinate strategic moves across countries by using profits earn in one country to support competitive attacks in another to compete in a global market.
- Risk of loosing control of know-how to foreign companies.
![Page 14: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/14.jpg)
14
Ways of reducing the risk of loosing control know-how :
- Enter into a cross-licensing agreement with a foreign firm.
- Forming a joint venture in which the licensor and licensee take important equity stakes.
→ Applied in high technology industries.
![Page 15: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/15.jpg)
15
4. Franchising :
→ Similar to Licensing :
•The franchiser not only sells the intangible property ( normally a trade mark ) to the franchisee, but also insist the franchisee to abide by strict rules as to how it does business.
• The franchiser also assist the franchisee to run the business on an ongoing basis.
→ Usually applied by services firms while licensing is applied by manufacturing firms.
![Page 16: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/16.jpg)
16
Advantages :
- Similar to licensing
Disadvantages :
- The most significant disadvantages of franchising is quality control.
- Similar to licensing.
→ Should set up wholly owned subsidiaries or a a joint venture to avoid those disadvantages.
![Page 17: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/17.jpg)
17
5. Joint Venture :
- A firm that is jointly owned by two or more otherwise independent firms.
- A popular mode to enter a new market.
Advantages :
- Benefits from local partner’s knowledge of the host country’s competitive conditions , culture, languages, political systems and business systems.
![Page 18: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/18.jpg)
18
Advantages :
- Sharing the development costs and risks of opening a business in a foreign market with a local partner.
- Face a low risk of being subject to nationalization or other forms of adverse government interference.
Disadvantages :
- Risk of giving control of technology to its partner.
![Page 19: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/19.jpg)
19
Disadvantages :
→ Try to hold majority ownership in a joint venture.
→ To wall technology off from partner in running the business.
- Not give a tight control over subsidiaries that need to realize experience curve or location economies
- Not easy to coordinate global attacks against its rivals.
- Can lead to conflicts and battles for controlling the business.
![Page 20: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/20.jpg)
20
6. Wholly owned subsidiaries:
a. Set up a green-field venture ( 100% FDI Co. )
b. Acquisition or merging with local companies.
- Be a firm which owns 100% of the stock.
There are 2 ways :
Advantages :
- Reduce the risk of losing control over the know-how or core competence at oversea.
- Usually applied by high-tech firms.
![Page 21: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/21.jpg)
21
Advantages :
- Tight control over operations in different countries → Help to coordinate in global strategy .
- Realize location and experience curve economies.
Disadvantages :
- The most costly method of entry a new market.
- Different culture between 2 companies in a merge or acquisition may cause conflicts.
![Page 22: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/22.jpg)
22
Advanatges and Disadvatages of entry modes.
Entry modeEntry mode AdvanatgesAdvanatges DisadvantagesDisadvantages
1. Exporting1. Exporting Ability to Ability to realize location realize location and experience and experience curve curve economies.economies.
- High transport High transport cost.cost.- Trade barriersTrade barriers- Problems with Problems with marketing marketing agents.agents.
![Page 23: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/23.jpg)
23
Thuận Lợi Và Bất Lợi Của Các Phương Thức Thâm Nhập.
Entry modeEntry mode AdvantagesAdvantages DisadvantagesDisadvantages
2. Turnkey 2. Turnkey contractcontract
-Ability to earn -Ability to earn returns from returns from process process technology technology skills in skills in countries where countries where FDI is FDI is restricted.restricted.
- Creating Creating efficient efficient competitors.competitors.- Lack og long-Lack og long-terms market terms market presence.presence.
![Page 24: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/24.jpg)
24
Advanatges and Disadvatages of entry modes.
Entry ModeEntry Mode AdvantagesAdvantages DisadvantagesDisadvantages
3. Licensing3. Licensing - Low - Low development costs development costs and risks.and risks.
- Lack of control Lack of control over technology .over technology .-Inability to Inability to realize location realize location and experience and experience curve economies.curve economies.-Inability to Inability to engage in global engage in global strategic strategic coordination.coordination.
![Page 25: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/25.jpg)
25
Advanatges and Disadvatages of entry modes
Entry modeEntry mode AdvantagesAdvantages DisadvantagesDisadvantages
4. Franchising.4. Franchising. - Low - Low development development costs and risks.costs and risks.
- Lack of Lack of control over control over quality .quality .- Inability to Inability to engage in engage in global strategic global strategic coordination.coordination.
![Page 26: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/26.jpg)
26
Advanatges and Disadvatages of entry modes
Entry modeEntry mode AdvantagesAdvantages DisadvantagesDisadvantages
5. Joint 5. Joint venturesventures
- Access to local Access to local partner’s partner’s knowledge .knowledge .-Sharing Sharing development costs development costs and risks.and risks.- Politically Politically acceptable.acceptable.
- Lack of control over Lack of control over technology.technology.-Inability to engage in Inability to engage in global strategic global strategic coordination.coordination.-Inability to realize Inability to realize location and experience location and experience economies.economies.
![Page 27: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/27.jpg)
27
Advanatges and Disadvatages of entry modes
Entry modeEntry mode AdvantagesAdvantages DisadvantagesDisadvantages
6. Wholly owned 6. Wholly owned subsidiariessubsidiaries
-Protection of Protection of technology.technology.-Ability to engage Ability to engage in global strategic in global strategic coordination.coordination.-Ability to realize Ability to realize location and location and experience experience economies.economies.
- High costs and High costs and risks.risks.
![Page 28: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/28.jpg)
28
III. ELEMENTS AFFECT ONTO SELECTING AN ENTRY MODE:
1. Core competencies and entry mode:
a. Technological Know-how :
- Joint venture and Licensing should not be used in case company has core competencies of technological know how..
- FDI should be used in this case.
![Page 29: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/29.jpg)
29
b. Management Know-how :
- Risks of losing control over the management skills to franchisees or joint venture partners are not serious or acceptable.
→ Joint venture or franchising are usually applied.
2. Presure for cost reduction and entry mode:
- Firms pursuing global or transnational strategies tend to prefer establishing wholly owned subsidiaries.
![Page 30: CHAPTER 5 ENTRY STRATEGY IN INTERNATIONAL BUSINESS](https://reader035.vdocument.in/reader035/viewer/2022062223/551f93e94979592e5b8b4dbc/html5/thumbnails/30.jpg)
30
- Firms wants to expand their business at oversea but don’t want to invest much abroad may chose franchising or licensing.
2. Presure for cost reduction and entry mode:
- Firms following international strategy means that pressure for cost reduction is not serious, then they may use export as an entry mode.