BMP-MBA 504

Session 6
International Business Entry
Mode
Session Speaker
Jayashree K

Asst. Professor
M.S Ramaiah School of Advanced Studies - Bangalore

BMP-MBA 504

Decision of modes of entry

To decide the mode of entry the following
factor is to be considered : Ownership advantages
Location advantages
Internationalization Advantages

BMP-MBA 504

ownership advantages
Ownership advantages are those benefits that
the company may have by owning the
resources.
TISCO Ltd. Owned its iron ore mines and
collieries. This advantage makes it the least
cost producer of molten iron.

BMP-MBA 504

Location advantage
Certain location factors grant benefit to the company
when the manufacturing facilities are located in the host
country.
Customer needs , preferences and tastes
Logistic requirements
Cheap land and acquisition costs
Political stability
Cheap labour
Low cost of raw materials
Climatic Conditions.
4

BMP-MBA 504

Pressures for Global Integration and

National Differentiation
High

Global
Organization
Transnational
Organization

Forces for
Global
Integration

International
Organization

Lo
Lo

Forces for
National
Differentiation

Multinational
Organization
High
see C. Bartlett (1986)
5

BMP-MBA 504

Advantages and Disadvantages

Strategy

Advantages

Disadvantages

International

transfer distinct competencies

Multi-domestic
(multi-national)

customize offerings &

marketing

lack location ecys

cant exploit exp. curve
cant transfer distinct
competencies

Global

exploit experience curve

exploit location economies

lack local responsiveness

Transnational

exploit exp. Curve & location

economies, customize, global
learning benefits

lack local responsiveness

lack location economies
cant exploit exp. curve

implementation- orgnl
problems

BMP-MBA 504

Basic Entry Decisions

Which markets to enter?
When to enter the markets?
What scale of entry?

14-2
7

BMP-MBA 504

Which Foreign Markets?

Favorable benefit-cost-risk-trade-off:

Politically stable developed and developing nations.

Free market systems
No dramatic upsurge in inflation or private-sector debt.

Unfavorable
Politically unstable developing nations with a mixed or
command economy or where speculative financial bubbles
have led to excess borrowing..

14-3
8

Timing of Entry

BMP-MBA 504

Advantages in early market entry:

First-mover advantage.
Build sales volume.
Move down experience curve and achieve cost
advantage.
Create switching costs.

Disadvantages:
First mover disadvantage - pioneering costs.
Changes in government policy.

14-4
9

Scale of Entry

BMP-MBA 504

Large scale entry

Strategic Commitments - a decision that has a
long-term impact and is difficult to reverse.
May cause rivals to rethink market entry.
May lead to indigenous competitive response.

Small scale entry:

Time to learn about market.
Reduces exposure risk.

14-5
10

Entry Modes

BMP-MBA 504

Exporting
Turnkey Projects
Licensing
Franchising
Joint Ventures
Wholly Owned Subsidiaries
Mergers and Acquisitions

14-7
11

Exporting

BMP-MBA 504

Advantages:
Avoids cost of establishing manufacturing operations.
May help achieve experience curve and location economies.

Disadvantages:

May compete with low-cost location manufacturers.

Possible high transportation costs.
Tariff barriers.
Possible lack of control over marketing reps.

14-8
12

BMP-MBA 504

Licensing
In this mode of entry, the domestic
manufacturer leases the right to use its
intellectual property, i.e., technology,
work methods, patents, copy rights, brand
names, trade marks etc. to a manufacturer
in a foreign country for a fee.

13

BMP-MBA 504

Basic issues

Boundaries of the agreement

Determination of Royalty
Determining rights, privileges and constraints
Dispute settlement Mechanism
Agreement Duration

14

BMP-MBA 504

Licensing: Advantages
Reduces development costs and risks of
establishing foreign enterprise.
Lack capital for venture.
Unfamiliar or politically volatile market.
Overcomes restrictive entry barriers
Others can develop business
applications of intangible
property.

15

BMP-MBA 504

Licensing agreements reduce the market

opportunities
One party can effect the other through
improper acts.
Costly and tedious litigation may crop up.
Problem of leakage of the trade secrets of the
licensor.

16

Licensing

BMP-MBA 504

Advantages:
Reduces costs and risks of establishing enterprise.
Overcomes restrictive investment barriers.
Others can develop business applications of
intangible property.

Disadvantages:
Lack of control.
Cross-border licensing may be difficult.
Creating a competitor

14-10
17

BMP-MBA 504

Franchising
Under franchising, an independent organisation called
the franchisee operates the business under the name
of another company called the franchisor. In such an
arrangement the franchisee pays a fee to the
franchisor.
Franchising is a form of Licensing but the Franchisor
can exercise more control over the Franchisee as
compared to that in Licensing.

18

BMP-MBA 504

Franchising agreements
Franchisee has to pay a fixed amount and
royalty based on sales.
Franchisee should agree to adhere to follow
the franchisors requirements
Franchisor helps the franchisee in
establishing the manufacturing facilities
Franchisor allows the franchisee some degree
of flexibility.
19

Franchising

BMP-MBA 504

Advantages:
Reduces costs and risk of establishing enterprise.

Disadvantages:
May prohibit movement of profits from one
country to support operations in another country.
Quality control.

14-11
20

BMP-MBA 504

Contract manufacturing
Contract manufacturing is outsourcing entire or
part of manufacturing operations.
E.g.: pharmaceuticals, textiles etc

21

BMP-MBA 504

BPO
Business Process Outsourcing is the long term
contracting out of non core business processes
to an outside provider to help achieve increased
shareholder value.
WHY BPO
To enable executives to concentrate on strategy.
To improve processes and save money
Increase organisational capabilities.
22

BMP-MBA 504

Management contract
A management contract is an agreement
between two companies whereby one
company provides managerial assistance,
technical expertise and specialised services
to the second company for a certain period
of time in return for monetary
compensation.

23

BMP-MBA 504

Turnkey project
A turnkey project is a contract under which a
firm agrees to fully design, construct and equip a
manufacturing/business/service facility and turn
the project over to the purchaser when its ready
for operation, for a remuneration.

24

Turnkey Projects

BMP-MBA 504

Advantages:
Can earn a return on knowledge asset.
Less risky than conventional FDI.

Disadvantages:
No long-term interest in the foreign country.
May create a competitor.
Selling process technology may be selling
competitive advantage as well.

14-9
25

BMP-MBA 504

FDI without alliances

Companies enter the international market
through FDI , invest their money, establish
manufacturing and marketing facilities
through ownership and control.
Greenfield strategy- the term Greenfield refers
to starting of the operations of a company
from scratch in a foreign market.
26

BMP-MBA 504

Fdi with strategic alliances

Strategic alliance is a cooperative and
collaborative approach to achieve the larger
goals.
Role of alliances
Many complicated issues are solved through
alliances
They provide the parties each others strengths
Helps in developing new products with the
interaction of 2 or more industries
Meet the challenges of technological revolution.
27

 Managing heavy outlay

Become strong to compete with a
multinational company.

BMP-MBA 504

28

BMP-MBA 504

Modes of FDI through alliances are:

Mergers and acquisitions
Joint ventures

29

BMP-MBA 504

Mergers and Acquisitions

What Does Merger Mean?
The combining of two or more companies, generally
by offering the stockholders of one company
securities in the acquiring company in exchange for
the surrender of their stock.
Pixar-Disney Merger
Acquisition
When one company takes over another and clearly established
itself as the new owner, the purchase is called an acquisition.

HDFC Bank acquisition of Centurion Bank of Punjab

for $2.4 billion
30

BMP-MBA 504

Joint Ventures
A joint venture is an entity formed between
two or more parties to undertake economic
activity together. The parties agree to create
a new entity by both contributing equity,
and then they share in the revenues,
expenses, and control of the enterprise
Sony-Ericsson is a joint venture by the
Japanese consumer electronics company
Sony Corporation and the Swedish
telecommunications company Ericsson to
make mobile phones
31

BMP-MBA 504

FUNCTIONAL ALLIANCES

PRODUCTION ALLIANCES
MARKETING ALLIANCES
FINANCIAL ALLIANCES
RESEARCH AND DEVELOPMENT
ALLIANCES

32

Joint Ventures

BMP-MBA 504

Advantages:
Benefit from local partners knowledge.
Shared costs/risks with partner.
Reduced political risk.

Disadvantages:
Risk giving control of technology to partner.
May not realize experience curve or location
economies
Shared ownership can lead to conflict.

14-12
33

BMP-MBA 504

Wholly Owned Subsidiary

Advantages:

No risk of losing technical competence to a

competitor.
Tight control of operations.
Realize learning curve and location economies.

Disadvantage:
Bear full cost and risk.

14-13
34

BMP-MBA 504

BREAKING UP OF ALLIANCES

Incompatibility of partners
Access to information
Distribution of income
Changes in business environment
Acquiring the strengths of the partner
Legal factors

35

BMP-MBA 504

Advantages and Disadvantages of

Entry Modes
Entry Mode

Advantage

Exporting

Ability to realize location and

experience curve economies

Turnkey
contracts

Ability to earn returns from

process technology skills in
countries where FDI is
restricted

Licensing

Low development costs and

risks

Disadvantage
High transport costs
Trade barriers
Problems with local marketing
agents
Creating efficient competitors
Lack of long-term market
presence
Lack of control over technology
Inability to realize location and
experience curve economies
Inability to engage in
global strategic
coordination

14-14
36

BMP-MBA
Advantages and Disadvantages
of504
Entry Modes
Entry Mode

Advantage

Disadvantage

Franchising Low development costs and Lack of control over quality

risks
Inability to engage in global strategic
coordination
Joint
ventures

Access to local partners

Lack of control over technology
knowledge
Inability to engage in global strategic
Sharing development costs
coordination
and risks
Inability to realize location and
Politically acceptable
experience economies

Wholly
Protection of technology
High costs and risks
owned
Ability to engage in global
subsidiaries strategic coordination
Ability to realize location and
experience economies
Table 14.1b

14-15
37

BMP-MBA 504

Selecting an Entry Mode

Technological
Know-How

Wholly owned subsidiary, except:

1. Venture is structured to reduce
risk of loss of technology.
2. Technology advantage is
transitory.
Then licensing or joint venture OK.

Management
Know-How
Pressure for
Cost Reduction

Franchising, subsidiaries
(wholly owned or joint
venture).
Combination of exporting and
wholly owned subsidiary.

14-16
38

BMP-MBA 504

Entry Mode and Competitive

Advantage

Advantage Based on Technological Know-How

Exporting, Licensing, or Wholly-owned subsidiaries
Examples: Honda, Intel

Advantage Based on Management Know-How

Franchising, Joint Ventures, or subsidiaries
Examples: McDonalds, Marriott

39

Strategic Alliances

BMP-MBA 504

Cooperative agreements between potential or actual

competitors.
Advantages:
Facilitate entry into market.
Share fixed costs.
Bring together skills and assets that neither company has or
can develop.
Establish industry technology standards.

Disadvantage:
Competitors get low cost route to technology and markets.

14-17
40

Alliances Are Popular

BMP-MBA 504

High cost of technology development

Company may not have skill, money or
people to go it alone
Good way to learn
Good way to secure access to foreign
markets
Host country may require some local
ownership
14-18
41

BMP-MBA 504

Global Alliances, however, are different

Companies join to attain world leadership
Each partner has significant strength to
bring to the alliance
A true global vision
Relationship is horizontal not vertical
When competing in markets not part of
alliance, they retain their own identity
14-19
42

Partner Selection

BMP-MBA 504

Get as much information as possible on the

potential partner
Collect data from informed third parties
former partners
investment bankers
former employees

Get to know the potential partner before

committing
14-20
43

BMP-MBA 504

Structuring the Alliance to Reduce

Opportunism

Walling off
critical technology

Establishing
contractual
safeguards

Opportunism by partner
reduced by:

Figure 14.1

Agreeing to swap
valuable skills
and technologies

Seeking credible
commitments

44
14-21

BMP-MBA 504

Characteristics of a Global Alliance

Players are independent prior to the creating
of the alliance
Players share
benefits of the alliance
control over operations

Players continue to contribute

technology
products

14-22
45

BMP-MBA 504

Characteristics of a Strategic Alliance

Benefi
ts
Contr

Independence of
Participants

Technolo
gy
Produ
cts

ol

Shared
Benefits

Ongoing
Contributions

Markets
Cooperat

46
14-23

BMP-MBA 504

Problems with Strategic Alliances

Have to give up some authority/control
Could be strengthening a future competitor
Technology transfer
Management practices
Operating procedures

14-24
47