International Business Strategy Strategy implementation entry modes Lecture April 2018

Transcription

1 International Business Strategy Strategy implementation entry modes Lecture April 2018 Learning Objectives Review the basic decisions that firms must make when expanding globally Explore the main approaches for entering foreign markets Consider the advantages and disadvantages of each mode of market entry Consider the importance of core competencies and competitive advantage in entry decisions Discuss the attractiveness of international strategic alliances and their pitfalls 2 Basic Decisions Firms Make When Expanding Globally? 1. Which markets to enter 2. When to enter them and on what scale 3. Which entry mode to use Several factors affect the choice of entry mode including transport costs trade barriers political risks economic risks costs firm strategy The optimal mode varies by situation what makes sense for one company might not make sense for another 3 1

2 Which Foreign Markets to Enter? Long-term profit potential: balance among benefits, costs and risks A country s business environment Political/regulatory environment Geographic location - regional versus country-by-country positioning Benefits Function of market size (demographics) Present and future consumer s wealth (PPP) Current stage of a country s economic development and political stability vs. future economic growth rate 4 When to Enter the Market? Early versus late entry First-mover advantages and disadvantages Advantages Preemption of rivals, ability to build sales volume (move down experience curve), buyer switching costs Disadvantages Pioneering costs, shifts in technology or customer needs, incumbent inertia Source: Lieberman, M. & D. Montgomery, First-Mover Advantages, Strategic Management Journal, Vol. 9, Special Issue: Strategy Content Research, pp What Scale of Entry? Choice of scale: strategic commitment and strategic flexibility Level of resources firm can afford to commit Large-scale entry and first-mover advantages Risks associated with significant commitments Long-term impact Some resources are location-specific Small-scale entry: learning process 6 2

3 Which Entry Mode to Use? 1. Foreign trade Exporting 2. Contractual entry modes Licensing Franchising Management contracts Turnkey projects Contractual manufacturing 3. Investment entry modes Joint-venture (JV) Wholly-owned subsidiary Entry may proceed in a gradual manner Exporting contractual mode investment mode 7 Approaches to Foreign Market Entry Level of control over foreign activities Franchising Licensing Direct export Export through agent or distributor Joint-venture with local partner Wholly owned subsidiary Amount of resources committed to foreign market Source: Bartlett, C. A., S. Ghoshal & J. Birkinshaw, Transnational Management, Text, Cases, and Readings in Cross-Border Management. 8 Exporting A common first step for many manufacturing firms later, firms may switch to another mode Manufacturing in a centralised location Economies of scale Location economies Example: Georgia Chopsticks Exporting is attractive because: it avoids the costs of establishing local manufacturing operations it helps the firm achieve experience curve and location economies Exporting is unattractive because: there may be lower-cost manufacturing locations high transport costs and tariffs can make it uneconomical agents in a foreign country may not act in exporter s best interest 9 3

4 Turnkey Projects The contractor handles 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 Turnkey projects are attractive because: they are a way of earning economic returns from the know-how required to assemble and run a technologically complex process they can be less risky than conventional FDI Turnkey projects are unattractive because: the firm has no long-term interest in the foreign country the firm may create a competitor if the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors 10 Licensing A licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee patents, inventions, formulas, processes, designs, copyrights, trademarks Licensing is attractive because: the firm avoids development costs and risks associated with opening a foreign market the firm avoids barriers to investment the firm can capitalize on market opportunities without developing those applications itself Licensing is unattractive because: the firm doesn t have the tight control required for realizing experience curve and location economies the firm s ability to coordinate strategic moves across countries is limited proprietary (or intangible) assets could be lost to reduce this risk, use cross-licensing agreements 11 Coca Cola, Disney, McDonalds Licensing trademarks to glassware, t-shirts, beach towels Coca Cola has > 300 licensees with $1 billion of licensed product every year $70 million in royalty revenue Benefits? Advertising and promotion Image enhancement Increased exposure 12 4

5 Franchising A specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business used primarily by service firms Franchising is attractive because: it avoids the costs and risks of opening up a foreign market firms can quickly build a global presence Franchising is unattractive because: it inhibits 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 franchisees can make it difficult to detect poor quality 13 American Restaurants in Gulf Countries Major new frontier for foreign restaurant chains Attractive market environment Growing populations, recovering economies, modern infrastructure and low corporate tax rates Consumers become more sophisticated, health-conscious and want more variety Expats and tourist influx Entry strategy: Franchising Pros? Cons? Source: Wall Street Journal (January 2014) 14 Other Contractual Arrangements Management contracts: Supply of managerial expertise Often involves government-owned companies Common in industries such as hotel management Low investment risk Potential future competition Contract manufacturing: Production or product assembly Challenges of reliability and capabilities of partner 15 5

6 Joint-venture (JV) A firm that is jointly owned by two or more otherwise independent firms most joint ventures are 50:50 partnerships Joint ventures are attractive because: firms benefit from a local partner's knowledge of the local market, culture, language, political systems, and business systems the costs and risks of opening a foreign market are shared they satisfy political considerations for market entry Joint ventures are unattractive because: the firm risks giving control of its technology to its partner the firm may not have the tight control 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 16 Wholly-owned Subsidiary Setting up new operation (Greenfield) or Merger & Acquisition (M&A) 100% control by parent company Two directions: horizontal or vertical Wholly owned subsidiaries are attractive because: they reduce the risk of losing control over core competencies they give a firm the tight control in different countries necessary for global strategic coordination they may be required in order to realize location and experience curve economies Wholly owned subsidiaries are unattractive because: the firm bears the full cost and risk of setting up overseas operations 17 Greenfield or Acquisition? The choice depends on the situation confronting the firm: 1. A greenfield strategy build a subsidiary from the ground up a greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture 2. An acquisition strategy acquire an existing company acquisition may be better when there are well-established competitors or global competitors interested in expanding The number of cross-border acquisitions has been rising for the last two decades 18 6

7 Why Foreign Firms Invest in Australia Consistent economic growth Highly skilled workforce Strategic location Strong governance Good infrastructure Business-friendly environment AND.access to strategic resources 19 Kidman Estate Cattle Stations totalling 101,000 Square Kilometres Sold in Dec 2016 to Hancock Prospecting (Aust) and Shanghai Cred (China) Larger than Belgium and Austria combined! 20 Huawei blocked from bidding for the National Broadband Network (NBN) due to national security concerns Some FDI projects have not been welcomed into Australia Adani significant public opposition due to environmental concerns (Great Barrier Reef degradation, carbon emissions) and public subsidies 21 7

8 IKEA welcomed to Canberra in 2014 more than 12,000 attend the store s opening in November 2015 while other FDI projects are embraced Amazon launches in Australia in December 2017 consumers celebrate while local retailers brace for the impact 22 Five FDI Lessons that CEOs Need to Learn 1. Research host government policy on FDI understand the degree of regulatory openness and the approval mechanisms 2. Think like a government when planning FDI projects investment by MNCs is not always welcome 3. Governments don t always play fairly foreign firms may encounter distributive risks 4. Your firm has bargaining power especially if the government values what you have to offer, you have comparable alternatives, and time to complete negotiations 5. Manage FDI projects intelligently e.g. obey host country laws, hire host-country nationals, monitor public opinion, re-invest in the host country 23 Merits of Different Entry Modes Entry mode Advantages Disadvantages Exporting Ability to realise location and experience-curve economies High transport costs Trade barriers Problems with local marketing agents Licensing Low development costs and risks Inability to realise location and experience-curve economies Inability to engage in global strategic coordination Lack of control over technology Franchising Low development costs and risks Inability to engage in global strategic coordination Lack of control over quality Joint ventures Wholly-owned subsidiaries Access to local partner s knowledge Shared development costs and risks Political dependency Protection of technology Ability to engage in global strategic coordination Ability to realise location and experience-curve economies Inability to engage in global strategic coordination Inability to realise location and experience-curve economies Lack of control over technology High costs and risks Source: Hill, C., G. Jones & P. Galvin, Strategic Management: An Integrated Approach 24 8

9 Other Factors that Influence Entry Modes The optimal entry mode depends on the nature of a firm s core competencies and competitive advantage: Based on proprietary technological know-how avoid licensing and joint ventures unless the technological advantage is only transitory, or can be established as the dominant design Based on management know-how the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant When pressure for cost reductions is high, firms are more likely to pursue some combination of exporting and wholly owned subsidiaries allows the firm to achieve location and scale economies and retain some control over product manufacturing and distribution firms pursuing global standardisation or transnational strategies prefer wholly owned subsidiaries 25 Cooperative Strategies Cooperative Strategies Used to gain a competitive advantage within an industry by working with other firms Key types of cooperative strategies: Collusion the active cooperation of firms within an industry to reduce output and raise prices to avoid economic law of supply and demand Strategic Alliances a long-term cooperative arrangement between two or more independent firms or business units that engage in business activities for mutual economic gain Figure 6.2: Continuum of strategic alliances 26 Why Companies Enter into Cross-border Strategic Alliances? New Markets Existing Markets To take existing products to foreign markets To strengthen the existing business To diversify into a new business To bring foreign products to local markets Existing Products New Products Source: Beamish, P., A. Morrison, A. Inkpen & P. Rosenzweig, International Management, Text & Cases. 27 9

10 What Makes Strategic Alliances Successful? 1. Partner selection: a good partner helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values shares the firm s vision for the purpose of the alliance will not exploit the alliance for its own ends 2. Alliance structure: The alliance should make it difficult to transfer technology not meant to be transferred have contractual safeguards to guard against the risk of opportunism by a partner allow for skills and technology swaps with equitable gains minimise the risk of opportunism by an alliance partner 3. The manner in which the alliance is managed interpersonal relationships between managers learning from alliance partners 28 Problems with Collaborative Arrangements Differences in the relative importance of the arrangement Divergent objectives Questions of control Disputes about contributions and appropriations Culture clashes Differences in corporate cultures 29 Re-cap of Key Concepts Basic decisions when expanding globally: (1) which markets to enter, (2) when to enter; and (3) which mode of entry to use Modes of entry: exporting; contractual modes (licencing, franchising, management contracts, turnkey projects, contractual manufacturing; and investment modes (joint venture, whollyowned subsidiary) but the more control the firm requires, the greater the resources needed Senior managers need to read the political and social climate in the host country when developing FDI strategies Strategic alliances: success factors are the right partner selection, the manner is which the alliance is structured, and the way in which it is managed but problems commonly occur 30 10