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international business chapter 12 modes of entry

opening case
JCB
– to overstep government regulations, jointed a joint venture with Escorts in India to be able to enter the Indian market
– JCB believed indian construction market was ripe for growth and would become very large
– didn’t want to transfer know-how to manufacturing venue in case they’d get leaked and create competition
– so it gained full control of Escorts and turned into a Wholly owned subsidiary
If Company A is considering to expands its operation to Country B This involves two International Marketing decisions:
IMS- decision of which foreign market to enter
MOE- choice of entry mode
which foreign market
– long term profit potential: emerging market, growing middle class etc.
– cultural distance
– geographic distance: home market, production plants
– political stability
entering a market early, first mover advantages
– ability to establish a strong brand name
– ability to build up sales volume
– ability to learn more about product- market fit- cost efficient
– ability to create switching costs* that tie customers into their products or services
* negative costs that a consumer incurs as a result of changing suppliers, brands or products (ex: cell phone contracts)
entering a market early, first mover disadvantages
(pioneer costs)
pioneer costs: any cost that an early entrant bears that a later entrant can avoid:
– extra time, effort and expense devoted to learn new foreign business system
– costs of business failure due to ignorance of the foreign environment
ex: selling idea of photo capturing to promote a camera brand, Nestle introducing coffee/cereals in Japan
on what scale of entry to foreign market?
small scale- allowing a company to both learn about the foreign market while limiting exposure to that market

large scale- full commitment of resources to that venture, major strategic commitment

strategic commitment
a decision that has a long term impact and is difficult to reverse
is there a right way to enter foreign markets?
– no “right” answers
– just decisions associated with levels of risk and reward
ex: Target vs. Muji (go all out vs. open one store at a time)
– large scale entry of huge markets like China and India is associated with high levels of risk + rewards (first mover advantage)
Tesco’s international market strategy
– multinational grocery and general merchandise English retailer
– expanded to Poland, Ireland, S Korea, Thailand and the US
Tesco’s 2014 strategic priorities
1) investment in the UK business
2) establishing multichannel leadership
3) pursuing disciplined international growth
Tesco in S Korea
– launched 1999, 520 stores, 5.3 billion euros
– second largest grocer in S Korea, Tesco’s most successful international business
– innovative Homeplus chain (subway wall shopping with cellphones)
– S. korean government restricted sunday trading hours to protect small stores, cost 100 m euro of profits last year to tesco
Tesco in US
– launched 2007, 199 stores, revenues: 700 m
– loss of 1.2b euros on the business, has confirmed it’s plan to quit the country
Tesco conclusion
– Tesco’s waited too long to enter the US market
– stores were placed at working-class areas but aimed at upper middle-class shoppers
– strong Walmart competition
– didn’t customize to diverse US market
– small-format stores catering to frequent grocery trips
– self-checkout and minimal costumer service too impersonal
how do firms enter foreign markets?
1) exporting
2) turnkey projects
3) licensing
4) franchising
5) joint ventures
6) wholly owned subsidiaries
exporting
can be simplest form of MOE
indirect- the company sells to a buyer in its own home country who then exports product
direct- company sells to a customer in another country

– usually only MOE in early stages of expansion
– may be adopted to test the waters
– may be advisable in face of political risk

however;
– implies longer channels, depends on distribution system
– involves transportation costs
– implies less control- foreign agents may not act in exporter’s best interest
– tariffs and non-tariff barriers

turnkey projects
– contractor handles every detail of foreign client’s project, including personnel training
– foreign client gets the “key” to the plant that is ready for full operation after contract completion (hence the term turnkey)
– means of exporting process technology to another country
– common in chemical, pharmaceutical, petroleum refining and metal refining industries who use complex and expensive production technologies
turnkey advantages
– earning great economic returns from the know-how required to assemble and run a technologically complex process

ex: governments of oil-rich countries restrict FDI to build their petroleum industries, but at the same time many of these countries lack petroleum refining technologies-> they gain it by entering into turnkey project with foreign firms

– make sense for a firm avoiding long-term investment in a country due to unacceptable political/ economic risk

turnkey disadvantages
– firm entering a turnkey project may create a competitor if the firm’s technology has competitive advantage
licensing agreement
– licensor grants rights to an intangible property to another entity (grands a license) for a specific time period
– in return licensor receives a royalty fee from the licensee
– (ex: drug licensing)
– Fuji- Xerox joint venture allowing Fuji to sell Xerox’s photocopiers for 5% of revenue b/c of patented know-how
intangible property
– patents
– inventions
– formulas
– processes
– designs
– copyrights
– trademarks
licensing advantages
– no development costs and risks with opening a foreign market (to re-invent the wheel)
– good for firms (licensors) who don’t want to develop applications of intangible property they own
licensing disadvantages
– less control of manufacturing, marketing and strategy
– potential loss of proprietary (or intangible) technology or property
ex: RCA licensed it’s colored TV technology to Japanese firms who then took it apart, improved it, then used it to enter the US and now has a bigger share than RCA in US
franchising
special form of licensing in which a franchisor both sells intangible property and insists franchisee to agree to abide by strict rules as to how it does business
ex: Mcdonald’s, starbucks- franchisor provides standard package of products, systems and management services and franchisee provides market knowledge, capital and personal involvement in management
joint ventures
– enables establishment of a firm that is jointly owned by 2+ otherwise independent firms (KFC+Taco Bell)
– partnerships between legally incorporated entities such as companies, chartered organizations or governments, not individuals
– partners share in management of JV
– equity positions are held by each partners
– JVs are established, separate, legal entities
joint ventures advantages
– firm can benifit from a local partner’s knowledge of host country’s competitive conditions, culture, language, political systems and business systems
– can share high development costs and risks of opening a foreign market with a local partner
joint ventures disadvantages
– risk of giving control to its technology to its partner just like in licensing
– JV doesn’t give a firm the right control
– different strategy and control conflict risk between the investing firms
JV example
– General motors formed a JV with S. Korea’s Daewoo to achieve significant position in the asian market
– Daewoo used the alliance to enhance it’s own automobile technology, GM thereby created a new global competitor for itself
Wholly owned subsidaries
– firm owns 100% of the stock
– wholly owned subsidiary establishment in foreign market can be done in two ways:
1) set up a new operation in that country
2) acquire established firm and use that firm to promote its products in the country’s market

greenfield strategy- building a subsidiary from the ground up
acquisition strategy- acquiring an established enterprise in the target market

greenfield venture pros and cons
pro- gives firm a much greater ability to build the kind of subsidiary company that it wants
cons- slower to establish and risky
acquisition venture pros and cons
pro- quick to execute, managers may believe acquisitions to be less risky than greenfield ventures
cons-
– overpay for the assets of the acquired
– culture clash between acquiring and acquired firm
– fail to integrate the operations of the acquired and acquiring entities
– inadequate pre-acquisition screening
selecting an entry mode
1) core competencies and entry mode
– distinction between firms with technological know-how core competencies and management know-how competencies
– optimal level of entry depends to some degree on the firm’s core competencies

2) pressures for cost reductions and entry mode
– when cost reductions pressure is high, firms tend to go with exporting as an initial entry mode

core competence
competitive advantage
technological know-how
licensing and JV should be avoided if possible to minimize risk of losing control over that technology for firms with a core competence based on technological know-how
management know-how
– core competence of many service firms (McDonald’s)
– less risk to lose control of management skills to franchisees or JV partners
– the firm’s greatest asset is usually brand name which is protected by international trademark laws
General Electric (GE) MOE strategy
– for years GA entered markets with wholly woned operations (i.e: subsidiaries) either acquired or built from the group up (greenfield)
– today GA has moved to a JV approach
spain entry: JV with banks giving consumers loans and credit cards
S korea: JV with Hyundai
– majority of revenue from international JVs in 2007
why the switch in MOE?
1) high acquisition prices
2) high risk in buying out a company and discovery of problems post-acquisition
3) great exposure (dip its toe) in foreign markets GA has little knowledge
4) form of political contacts, local enterprise and business relationships
5) avoiding laws prohibiting other MOE
6) gain of positive reputation that makes GA a desirable JV partner
closing case
Scotiabank
– canadian bank regulation problematic for canadian banks
– drove banks like Scotiabank to expand to 55 countries
– strategy built around customer segment diversification and geographic divesification
– keeps buying other bank companies around the world or partially owning them, joint ventures as well (beijing)

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