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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.

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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.

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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 :

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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.

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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.

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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.

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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.

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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.

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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 :

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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 :

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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 :

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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- 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.