Chapter 10: Entering Developed and Emerging Markets PDF

Note CHAPTER 10: ENTERING DEVELOPED AND EMERGING MARKETS By Dr. Siti Nor Adawiyah Azzahra Kamaruddin Learning Objectives 1) Explain the three basic decisions firms must make when they decide on foreign expansion: which...

Note CHAPTER 10: ENTERING DEVELOPED AND EMERGING MARKETS By Dr. Siti Nor Adawiyah Azzahra Kamaruddin Learning Objectives 1) Explain the three basic decisions firms must make when they decide on foreign expansion: which markets to enter, when to enter those markets, and on what scale. 2) Compare the different modes firms use to enter foreign markets. 3) Identify the factors that influence a firm’s choice of entry mode. 4) Recognize the pros and cons of acquisitions versus greenfield ventures as an international market entry strategy. 5) Evaluate the pros and cons of entering into strategic alliances when going international. Introduction Developing international strategies is not one-dimensional process. Firms generally carry the international strategic management in two broad stages which are strategy formulation and strategy implementation. Simply put, formulation is deciding what to do and strategy implementation is actually doing it. Although strategic planning process is in many ways there is still a set of general steps that managers usually follow as they set about developing their strategies. Step in international strategy formulation are develop a mission statement (define the firm’s value, purpose, and direction), perform a SWOT analysis (assess the internal & external environment by identify the strength, weakness, opportunity and threat), set strategic goals (exploit the firm strength and opportunities, neutralize threat and firm weakness), develop tactical goals and plans, and develop control framework (formulate managerial and organizational system and process). There are three level of international strategies which are: 1) Corporate strategy (form of corporate strategy; the single-business strategy (ex: racket), related diversification (ex: camera, LCD and projector) and unrelated diversification (book, drink & golf), 2) Business level strategy; (differentiation, cost-leadership and focus strategy), 3) Functional strategy; finance, marketing, operations, human resource management and R& D. So, to enter foreign market the international firms must consider: 1) The decision of which foreign markets to enter, when to enter them, and on what scale. 2) The choice of entry mode. 3) The role of strategic alliances. Strategic alliances include: 1) Cross-shareholding deals. 2) Licensing arrangements. 3) Formal joint ventures. 4) Informal cooperative arrangements. Basic Entry Decision Identify or analysing which Foreign Markets? - Choice based on assessment of a nation’s long-run profit potential. - Size of the market (how large is the market today?).  - Present and likely future wealth of consumers. - Costs and risks. The value an international business can create in a foreign market depends on suitability of its products to that market and the nature of indigenous competition. Timing of Entry: Scale of Entry and Strategic Commitments - A strategic commitment has a long-term impact and is difficult to reverse. - Rapid large-scale market entry can have an important influence on the nature of competition in a market. - Must be balanced against the resulting risks and lack of flexibility associated with significant commitments. - Small-scale entry allows a firm to learn about a foreign market while limiting the firm’s exposure to that market. Market Entry Summary - No “right” decisions, just depends on risks and rewards. - Businesses based in developing nations also have to enter foreign markets and become global players. Choosing an Entry Modes Having decided to which market to enter, the firm is now faced with another decision. Which mode of entry should it use? Decision factors choosing a mode entry include ownership advantage, location advantage, internalization advantages and other factors (need for control, resources availability and global strategy). Modes of entry: 1) Exporting to foreign markets - Perhaps the simplest mode of internationalizing a domestic business is exporting. - The most common form of international business activity. - Sale of products produced in one country to residents of another country. - It advantages and disadvantages shows in the table below: 2) Turnkey Project - Turnkey project is a one of the entry modes for participating in international business. - Turnkey project refers to a contract under a firm agrees to fully design, construct, and equip a facility, then turn the project over to the purchaser when it is ready for operation. - The Turnkey contract maybe for a fixed price, in which case the firm makes its profits by keeping its costs below the fixed price. - International turnkey contracts often involve large, complex, multiyear project such as construction of a nuclear power plant, an airport, or an oil refinery. - Managing such complex construction project requires special expertise. - For example, Betchel, Hyundai Group, New Zealand’s Flecther Challenge Ltd., and Germany’s Friedrich Krupp GhmH. - It advantages and disadvantages shows in the table below: 3) International Licensing - Another means of entering a foreign market is licensing. - Involved licensor leases the right to use its intellectual property including technology, work methods, patters, copyright, brand names, or trademarks to another firm, called licensee, in return for a fee. - For example, Zippo company put the Rock-and-Roll king, Elvis Presly on lighter so they need to pay licensing fee and royalty to Elvis Presly company. - Licensing is a popular mode for entering foreign market because its involves little out-of- pocket cost. - It advantages and disadvantages shows in the table below: 4) Franchising - Still another popular strategy for internationalizing a business is franchising. - Franchising is a special form of licensing. - Franchising allows the franchisor more control over the franchisee and provides for more support form the franchisor to the franchisee than is the case in the licensor-licensee relationship. - For example, McDonald’s, there were hundreds of franchised McDonald’s restaurants in the U.S before the first build broadly. - Now, many franchised McDonalds restaurants in the world (Malaysia, India, Indonesia and etc). - Like licencing agreements, franchise agreements are spelled out in formal contracts, with a typical set of term. - It advantages and disadvantages shows in the table below: 5) Joint Ventures - JV is a one of foreign direct investment forms. - JV are created when two or more firms agree to work together and create jointly owned separate firm to promote their mutual interests. - 50-50 ventures are most common. - It advantages and disadvantages shows in the table below: 6) Wholly Owned Subsidiaries - Firm owns 100 percent of the subsidiary including: 1) Greenfield venture – set up a new operation in host country. 2) Acquisition – acquire an established firm in a host nation. - It advantages and disadvantages shows in the table below: Selecting an Entry Mode When selecting an entry mode, need to look at; 1) Core Competencies and Entry Mode - Technological Know-How. o Often shared through a wholly owned subsidiary. o Licensing and joint-venture arrangements should be avoided unless the technological advantage is transitory. - Management Know-How. o Less risk for franchises or joint ventures. 2) Pressures for Cost Reductions and Entry Mode - The greater the pressures for cost reductions, the more likely a firm will want to pursue some combination of exporting and wholly owned subsidiaries. - Wholly owned marketing subsidiaries give the firm tight control that might be required for coordinating a globally dispersed value chain. - Also gives firm the ability to use profits generated in one market to improve its competitive position in another market. Table 15.1 Summary of Advantages and disadvantages of entry modes: Greenfield Venture or Acquisition? 1) Acquisition Pros and Cons of Acquisitions - Quick to execute. - May help pre-empt competitors. - May be less risky than greenfield ventures. - Acquisitions often produce disappointing results. Why Do Acquisitions Fail? - Overpaying. o Hubris hypothesis of why acquisitions fail. - Culture clash. - Integrating the operations of the acquired and acquiring entities often run into roadblocks and take much longer than forecast. - Inadequate pre-acquisition screening. Reducing the Risks of Failure. - Detailed audit of operations, financial position, and management culture. - Reduce unwanted management attrition. - Put integration plan quickly in place. 2) Greenfield Venture Pros and Cons of Greenfield Ventures - Gives the firm a much greater ability to build the kind of subsidiary company it wants. - Slower to establish. - Risky, but less risky than acquisitions. - Preemption by more aggressive global competitors. Which Choice between Acquisition or Greenfield? 1) Acquisition when: - The firm is seeking to enter a market where there are already well-established incumbent enterprises. - Global competitors are also interested in establishing a presence. 2) Greenfield when: - There are no incumbent competitors to be acquired. - The competitive advantage of the firm is based on the transfer of organizationally embedded competencies, skills, routines, and culture. Strategic Alliances An arrangement between two companies to undertake mutually beneficial project while each retains its independence.  For example, Uber and sportify, Starbucks and Target, Starbucks and Barnes & Noble, Disney and Chevrolet, Louis Vuitton and BMW. Making Alliances Work - Partner Selection. o A good partner: : Helps the firm achieve its strategic goals. : Has capabilities the firm lacks. : Is unlikely to try to opportunistically exploit its partner. - Choosing a partner: o Collect as much pertinent, publicly available information on potential allies as possible. o Gather data from informed third parties. o Get to know potential partner as well as possible before committing to an alliance. - Alliance Structure. o Reduce the risk of giving away too much to the partner. o Contractual safeguards guard against risk of opportunism by a partner. o Agree in advance to swap skills and technologies that the other covets, thereby ensuring a chance for equitable gain. : Cross-licensing agreements. o Extract a significant credible commitment from the partner in advance. - Managing the Alliance. o Be sensitive to cultural differences. o Build trust. o Build relational capital. o Learn from the alliance partner and apply the knowledge within one’s own organization.