Market Entry Modes PDF

Firm Internationalisation Dr. Elaine Berkery 1 Lecture Objectives • To understand the Internationalisation decision making process • To understand factors influencing the choice of location • To explore factors influencing the timing of market entry • To compare and contrast the different market...

Firm Internationalisation Dr. Elaine Berkery 1 Lecture Objectives • To understand the Internationalisation decision making process • To understand factors influencing the choice of location • To explore factors influencing the timing of market entry • To compare and contrast the different market entry modes into international markets 2 Internationalisation • Organisations are increasingly conducting business internationally as they grow and increase their market presence. • International expansion is a far more complex task than simply replicating an existing national strategy and enlarging its existing structure. • Cultural differences need to be explored, understood and appropriately managed. • The political and legal environment of the international business location needs to be considered and managed. This Photo by Unknown author is licensed under CC BY. 3 1 The globalization of business is opening immense opportunities for ambitious companies to expand internationally beyond the borders of their country of origin. Born Global Born global firms are organisations that, from inception, seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries Born global firms are entirely unique from other major international organizations because they are born doing business abroad: something that many larger firms operate for years before even considering. Some of these companies have grown to thriving born global organizations like Uber and Airbnb 4 Why Internationalise • • • • • • • • • Increase sales and profits Increase innovation Economies of scale Government incentives Foreign investment opportunities New market opportunities Diversification opportunities Access to talent and labour Competitive advantage This Photo by Unknown author is licensed under CC BY-SA-NC. 5 Internationalisation: motives • We can identify certain patterns and characteristics associated with the process of international expansion: 1. Push and pull factors serve as initial triggers 2. Initial international expansion can be accidental or unplanned 3. Risk and return must be balanced 4. Internationalisation is an ongoing learning experience 5. Firms may evolve through stages of internationalisation 6 2 Internationalisation • The decision to expand abroad can be either proactive or reactive. • Proactive tends to be future directed and occurs when an organisation identifies an opportunity for expansion and making a profit. • Reactive means that the organisation is responding to a deterioration in its competitive position possibly from declining sales and market saturation. This Photo by Unknown author is licensed under CC BY-SA. 7 Motives ▪ Proactive 1. Profit advantage 2. Unique product 3. Technological advantage 4. Tax benefit 5. Economies of scale ▪ Reactive 1. Competitive pressures 2. Overproduction 3. Declining domestic sales 4. Excess capacity 5. Saturated domestic market 8 Location- Understand the market- market considerations- demand in the market, state of the economy, suitability of products, availability of substitutes Availability of resources- raw materials, talent, financial resources Factors to consider before Internationalisation Language and cultural differences Standardisation of products- Global vs Local Investment needed Know your market, know your location, have a strong business plan to back up your Internalisation Strategy 9 3 Internationalisation Process 1. LOCATION 2. TIMING 3. ENTRY MODE WHERE? WHEN? HOW? 10 Internationalisation Process 1. LOCATION 2. TIMING 3. ENTRY MODE WHERE? WHEN? HOW? 11 International Location Selection – WHERE! • An analysis of the general business environment will provide the firm with a basis from which further information can be gathered and decisions made. • Locations differ in their business environments and their receptiveness to trans-border businesses. • An analysis of any business environment begins with a PEST analysis • This however needs to be supplemented by other aspects of the host environment- such as markets 12 4 Factors Relevant to Selecting Locations for FDI 13 Cost / Tax Factors Examples • When Ford entered the United Arab Emirates it chose Dubai because of its convenience and low cost transport co nnections to the rest of the country and the world This Photo by Unknown author is licensed under CC BY-ND. 14 Production Potential - Example • Nike located 13 footwear & 14 apparel factories along the Pearl River delta in China due to low wage rates and high productivity This Photo by Unknown author is licensed under CC BY-SA. 15 5 Market Factors: Example Market size and growth – Toys R Us decision to expand into the Japanese market This Photo by Unknown author is licensed under CC BY-SA. 16 Internationalisation Process 1. LOCATION 2. TIMING 3. ENTRY MODE WHERE? WHEN? HOW? 17 This Photo by Unknown author is licensed under CC BY-NC-ND. Timing of entry - WHEN • Timing of entry into a market involves the sequence of an MNCs entry into an international market vis a vis other MNCs • The timing of a firms entry to a new market largely determines the risks, opportunities and environment that await it 18 6 Timing of entry WHEN • Market entry timing therefore affects the firms market power, strategic options and pre-emptive opportunities each of which influences a firms return on investment • We can distinguish between first movers and second / late movers depending on the size of the market • Also referred to as first movers and then others as early / late followers 19 Timing of entry - WHEN • Firms that are first to enter a market are termed ‘first movers’ and typically they enjoy ‘first mover advantage’ • This refers to the benefit enjoyed by a firm as a consequence of its early entry into a new market • Being a first mover is often attractive to entrepreneurs and investors because of the upside potential and the ability to capture and sustain market share 20 Timing of entry WHEN • Some examples of first movers that have enjoyed considerable success in their chosen markets include Amazon and Ebay Source: https://images.app.goo.gl/jUoL2NF99EwSpMpS8 21 7 First Movers Advantages 1. 2. 3. 4. 5. 6. 7. 8. Opportunity to build up strong market share Opportunity to create barriers to entry (economies of scale) Allows the firm to set the standards and norms of the market Little international competition facing the firm Allows cost advantages to develop such as access to resources, patents and employee expertise Potential for developing consumer loyalty is higher Greater pre-emptive opportunities More strategic options are open to first movers 22 First Movers Disadvantages However, being the first to market with a wildly innovative idea is also risky. 1. Its risky and full of uncertainty. 2. You don’t know a) if customers will view your product as valuable, b) if it’s something that customers can/will buy, c) how to acquire customers, d) And, potentially, if it’s even a problem worth solving in the first place. 3. Its expensive being the first mover 4. First mover opportunities can be hard to capture and require immediate action. 5. Protections over areas such as Intellectual Property can be weak. 6. Environmental uncertainty 23 Second Movers • There are many examples of highly successful firms that were not the first movers in their market • For example Facebook, Google, Amazon and Microsoft were all second movers and gained certain advantages as a result This Photo by Unknown author is licensed under CC BY-SA. This Photo by Unknown author is licensed under CC BY-SA. 24 8 Second Movers • The “second mover advantage” is the advantage a company gets from following others into a market or mimicking an existing product. 25 APPLE-Second Mover Advantage • The company had one massive advantage when launching products: they are not usually first. • Facts: Apple has been second at most stuff. They weren't the first into object-oriented computing (the mouse), they weren't the first mp3 player, they weren't the first mobile phone. • But they look at something, they improve upon it, they weigh it, and they come in and make it more user friendly.“ • In short, the idea that while conventional wisdom might say the first company to nail an idea gets to enjoy the spoils, it usually isn't the first but second company that gets an idea right that really enjoys that idea's success. 26 APPLE-Second Mover Advantage • BlackBerry was the dominant smartphone company in the mid-2000s, but since Apple has come along it has completely dominated the smartphone market, overthrown BlackBerry as the biggest player, and continued to squelch upstart competition from the likes of Samsung. This Photo by Unknown author is licensed under CC BY-SA. 27 9 Stock Price of Apple compared to Blackberry • Source: https://tradingninvestment.com/how-toinvest-in-stocks/apple-and-blackbery-movement-howto-invest-in-stocks/ 28 1. Firm can learn from the mistakes and experience of Mover No 1 2. Less risk is involved 3. More time to evaluate options 4. Possibility of ‘free rider’ or coat tails momentum Second Mover Advantage 5. Lower marketing and R&D costs 29 1. Potential to be late to market 2. Playing catch up Second Mover Disadvantage 3. Higher entry barriers 4. Gaining market share through imitation is difficult & can increase costs if money is spent on designing a new product. 30 10 First V Second Movers? On average first movers have higher market shares than early followers, who have higher market shares than later entrants. The question of whether on balance a first mover advantage exists in any specific context depends on characteristics of the emerging market and the entering firm 31 Internationalisation Process 1. LOCATION 2. TIMING 3. ENTRY MODE WHERE? WHEN? HOW? 32 Internationalisation • There are a variety of different entry modes open to organisation and much will depend on costs, risk, expected returns, control and level of commitment the organisation is willing to invest. 33 11 What to Consider • When entering a foreign market, the focal firm should consider the following: 1. The goals and objectives 2. Degree of control wanted 3. Resources and capabilities available 4. Risk/risk adverse 5. The characteristics of products or services offered 6. Conditions of the target country 7. Competition 8. Partners in the market 34 Entry Mode Selection –How! As we move from trade related to FDI related the levels of 1. Resource commitment 2. Organisational control 3. Risks 4. Expected returns This Photo by Unknown author is licensed under CC BY-SA. All increase for the firm 35 Modes of entry Trade Related- Exporting Transfer Related- Licensing or franchising FDI Related- Joint ventures/strategic alliances FDI Related- Wholly owned subsidiaries 36 12 This Photo by Unknown author is licensed under CC BY. Exporting • Exporting is the most common & straight forward way of conducting international business. • Firm continues to produce its product in the domestic market but exports a proportion of this output to foreign markets. • Leverages home country capabilities, innovations and products in foreign markets. • Used when pressure for both global integration and local responsiveness is low. • Suitable for companies with strong brands. 37 Export strategy • When considering a new international market, organisations need to decide whether they approach customers directly, or work indirectly through an in-market channel partner? • Both direct and indirect approaches have their own benefits and drawbacks - depending on what you’re selling, and how you plan to grow your business over time. • Direct exporting • Indirect exporting • Countertrade This Photo by Unknown author is licensed under CC BY-SA-NC. 38 Direct Exporting • Firm produces its product in the domestic market but distributes & sells its own products to the foreign market. • Involves a longer-term commitment to the foreign market with the firm choosing local agents & distributors. • In-house expertise needed to develop contacts, conduct marketing research, prepare documentation & establish local pricing. 39 13 This Photo by Unknown author is licensed under CC BY-SA. Some of Irelands Major Export Companies • • • • • • • • • • Accenture (computer services) Actavis (pharmaceuticals) Covidien (medical equipment, supplies) CRH (construction materials) Ingersoll-Rand (conglomerates) Kerry Group (food processing) Perrigo (pharmaceuticals) Seagate Technology (computer storage devices) Shire (pharmaceuticals) Smurfit Kappa Group (paper products) 40 Indirect Exporting • Exporting function is outsourced to intermediaries who prepare the export documentation, take responsibility for the physical distribution of good and set up sales and distribution channels in the foreign market. • As a first step to international business this strategy offers small cash outlay, low risk, gradual exposure and good use of existing facilities. • On the negative side it can incur high transportation costs and tariffs and duties may be imposed. 41 Indirect Exporting Types of Intermediaries: • Export house – buys products from a domestic firm & sells them abroad on its own account. • Confirming house – acts for foreign buyers & is paid on a commission basis, brings sellers & buyers into direct contact & guarantees payment for the exporter. • Buying house – similar to confirming house but more active in seeking out sellers to match the buyers particular needs. 42 14 • An international business transaction where all or partial payments are made in kind rather than in cash. • Popular approach in emerging markets. • When there is a shortage of foreign exchange reserves, the countertrade is the best option for importing countries. Countertrade • By adopting the policy of countertrade, a business has a competitive edge over its competitors. • Countertrade helps in the sales of surplus stocks produced or stored. For example: With the policy of countertrade, the businesses in developed countries can sell their stock, which have become outdated or obsolete at home due to the advancement in technology to the developing or poor countries of the world. 43 Other types • Barter- The Malaysian government purchased 20 diesel electric locomotives from General Electric against the supply of about 200,000 metric tons of palm oil over a period of 30 months. • Compensation- General Motors Corporation sold $ 12 million worth of locomotive and diesel engines to Yugoslavia and took cash and $4 million in Yugoslavian cutting tools as payment. • Buyback- National Textiles Corporation of India signed a buy back agreement of Indian Rupee 200 million with the Soviet Union to buy 200 sophisticated looms. The buyback ratio was 75% textile produce from these looms and the remaining was in cash. • Clearing agreement- Malaysia has clearing arrangement with twenty-three countries that is Albania, Algeria, Argentina, Bosnia-Herzegovina, Botswana, Chile, Fiji, Indonesia, Iran, Kyrgyz, Loa PDR, Mexico, Mozambique, Peru, Philippines, Romania, Seychelles, Thailand, Tunisia, Turkmenistan, Venezuela, Vietnam and Zimbabwe. It is called “Bilateral Payment Arrangement (BPA)” 44 • Counter purchase transaction- Pepsi Cola sold concentrates in the USSR and got paid in Rubles, which according to the agreement with Russia, these Rubles were spent for purchase of Russian products like Vodka and wine. • Offset is the type of countertrade, which is mostly related to very high value of exports and/or medium to high technology capital goods supplied by a multinational corporations or a major manufacturer. It may be in many forms such as coproduction, license production, subcontractor production, technology transfer, overseas investment, research and development, technical assistance and training, or patent agreements etc., This Photo by Unknown author is licensed under CC BY-SA. 45 15 Exporting Advantages • 1. Lowest possible investment • 2. Gradual exposure to international markets • 3. Speedy entry • 4. Maximises economies of scale of existing facility • 5. Internet can facilitate export marketing opportunities. 46 Exporting Disadvantages • 1. High transportation costs • 2. Prices increase due to price escalation • 3. Tariff barriers can make exporting difficult • 4. Need to use intermediaries • 5. Limits opportunity to learn • 6. Lose any location advantage in the host country 47 Modes of entry Trade Related- Exporting Transfer Related- Licensing or franchising FDI Related- Joint ventures/strategic alliances FDI Related- Wholly owned subsidiaries 48 16 Transfer Related Modes • Refers to transfer of ownership or use of specified property technology/assets, from one party to another in exchange for royalties • Most common forms include where organisations enter into contractual arrangements to facilitate market entry. •International Licensing •International Franchising 49 • A license is a legal contract authorising one business to use the confidential business practices \ assets of another business through an outsourcing arrangement for a fee. • The licensee takes the risks making the investment in facilities and managing other supply chain linkages to deliver and sell the goods/services to the final consumer • Production under license – process whereby the production of goods subject to patent, brand or other intellectual property rights is contracted out to another firm under terms & conditions agreed with the owner • The licensor is normally paid a fee termed a ‘royalty’ on each unit produced and sold. • As there is little investment for the licensor this method is often viewed as an easier way to internationalize 50 Nestle and Starbucks In May 2018, Nestle and Starbucks entered into a $7.15 billion coffee licensing deal. (https://corporatefinanceinstitute.com/resources/knowledge/other/licensingagreement/) / https://www.gra.world/nestle-to-take-on-500-starbucks-employees-in-coffee-alliance 51 17 Licensing Advantages 1. Provides a method of circumventing tariffs, quotas and other export barriers 2. Easy mode of entry 4. Low costs to implement 3. Instant and guaranteed revenue for the licensing company 5. Faster way to grow a market and achieve market-share dominance 52 1. Lack of Control 2. Limited Participation Licensing Disadvantages 3. Licensee may become a competitor 4. Licensee may exploit resources 5. Increases exposure of confidential, proprietary production process 53 Franchising • Franchising is similar to licensing but in addition the franchisor also offers know-how and access to a business system in addition to branding and products offered by the franchisor. • “A form of licensing in which one firm contracts with another to operate a certain type of business under an established name accordi ng to specific rules” (Ball et al, 2006) This Photo by Unknown author is licensed under CC BY. 54 18 Source: https://businessandlegal.ie/franchising-negotiating-a-franchise-agreement 55 Franchising Advantages 1. BRAND IDENTITY 2. LIMITED ECONOMIC AND FINANCIAL EXPOSURE. 3. CONTRACTUAL SOURCE OF INCOME 56 1. Lack of Control 2. Limited creativity Franchising Disadvantage 3. Lack of privacy and decreased profits 4. Increases exposure of confidential, proprietary production process 57 19 Modes of entry Trade Related- Exporting Transfer Related- Licensing or franchising FDI Related- Joint ventures/strategic alliances FDI Related- Wholly owned subsidiaries 58 Foreign Direct Investment • A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country • FDI is an internationalisation strategy where the firm establishes a physical presence abroad through direct ownership of productive assets such as capital technology, labour, plant and equipment. This Photo by Unknown author is licensed under CC BY. 59 1. Market related – proximity to markets actual & potential is a powerful ‘pull’ factor. Car manufacturing is a good FDI Related example where transport costs & Entry Modes delivery times are important 2. Production related – economies of scale or technological capabilities 3. Resource related – seeking proximity to resources or raw materials 4. Control of specific strategic assets – through the acquisition of brands or other assets 60 20 FDI Related Entry Modes Normally focus on two main types • Joint ventures or strategic alliance • Wholly owned subsidiarybiwnfield and greenfield sites and merger or acquisition 61 Joint Venture vs Strategic Alliances • A JV is a commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct • There are two main types of Joint Ventures 1. Equity Joint Ventures 2. Co-operative Joint Ventures • A strategic alliance is a legal agreement between two or more companies to share access to their technology, trademarks or other assets but does not result in a new company. • Basic idea is that 2 investors create a third entity 62 Joint Venture Company No.1 Company No.2 New JV Basic idea is that 2 investors create a third entity 63 21 • MillerCoors is a joint venture between SABMiller and Molson Coors Brewing Company to see all their beer brands in the U.S. and Puerto Rico. • Sony and Ericson’s example is also a good example of Joint Venture as they joined hands to manufacture smartphones and gadgets. After several operating years, Sony eventually acquired Ericson mobile manufacturing division. • In 2011, Ford and Toyota agreed to work together to develop hybrid trucks. • BMW and Toyota co-operate on research into hydrogen fuel cells, vehicle electrification and ultra- lightweight materials. • Virgin Rail & Stagecoach. • Google and NASA developing Google Earth. Examples of JVs 64 https://logos-download.com/30699-sony-ericsson-logo-download.html 1. Equity Joint Venture (EJV) • An EJV is where the companies start and invest in a new company that's jointly owned by both of the parent companies. • EJV is legally & economically separate entity created by 2 or more parent firms that collectively invest financial & other resources • This new company will "do business" with the founding entitiesusually as suppliers. 65 2. CoOperative Joint Ventures • CJVs are contractual arrangements whereby profits & responsibilities are assigned to each party according to stipulations in a contract without creation of new entity • In this sense they are more like an alliance • CJVs give flexibility and can be developed quickly to take advantage of short term business a) b) c) d) e) f) Joint Exploration R&D Consortium Co-production/ Service Agreement Co-marketing Agreement Long term supply Comanagement arrangement opportunities 66 22 Joint Venture Advantages • JVs allow a firm to enter into activities that might be too costly & risky for one • JVs allow a firm to acquire partner knowledge or resources to build competitive strength • JVs allow a firm to enhance economies of scale or scope to develop synergies • A JV allows a firm to prevent or reduce competition • JVs allow a firm to boost local acceptance as perceived by foreign consumers • JVs allow firms to bypass entry barriers into a foreign country 67 1. Difficult to find good partners Joint Venture Disadvantages 2. Relationship management issues 3. Loss of competitive advantage 4. Difficult to integrate and coordinate 68 Strategic Alliance Strategic Alliances • Defined as ‘Cross border partnerships between two or more firms from different countries with an attempt to pursue mutual interests through sharing their resources & capabilities’ • Strategic alliances happen when two or more businesses work together to create a win-win situation. • For example, Company A and Company B may decide to combine their distribution facilities so they can share mutual resources and cut the costs associated with shipping. • StStrategic alliances allow two organizations, individuals or other entities to work toward common or correlating goals. 69 23 Motives behind a strategic alliance 70 Motives behind a strategic alliance Copyright ©2014 Pearson Education, Inc. 71 • Spotify and Uber have partnered to provide stereo control to Uber customers. • Not every Spotify consumer uses Uber, nor does every Uber rider have a Spotify account. • The strategic alliance allows each company to pursue prospects from the other’s existing customer base, all while continuing to promote both products. • In both cases, it gives the company a leg up over its competition. • Spotify is offering something with the Premium package that other streaming services do not yet have. • Uber can provide the riders with an opportunity to listen to their own playlists as opposed to other rideshare services that cannot match them yet. 72 24 Strategic Alliances • The fact that neither party is in control, while alliances must be managed over time, highlights the importance of: 1. Co-evolution- underlines the way in which partners, strategies and capabilities need to evolve in harmony in order to reflect constantly changing environments 2. Trust- due to lack of partner control, trust is highly important 73 Strategic Alliances Advantages • Access to supplementary services • Opportunity to reach new markets • Increased brand awareness • Access to new customer base Disadvantages • Difficulties in choosing the right partner • Trust and honesty • Building a mutually beneficial alliance • Knowing when to reassess the partnership 74 Goal Capability congruence of strategic goals Selecting Local Partners Complementing Resources increases synergies and reduces coordination costs & improves the learning curve Commitment concerns extent to which resources & skills are given to joint operation Culture learning about each others Corporate Culture Compatibility Strategic capabilities include market power, marketing competence, technological skills, corporate image 75 25 Long Term Key Issues for SAs and JVs • 1. Firms must identify what knowledge they seek & how complementary it is to existing knowledge. To protect sensitive knowledge leakage firms can use walling off, contractual specification and cross licensing • 2. Firms can execute non equity based control – tools include appointment of key personnel, board meetings, resource and budget control This Photo by Unknown author is licensed under CC BY-SA-NC. 76 Long Term Key Issues for SAs and JVs • 3. Cooperation can be helped by personal attachment between key managers from the parties. • Firms should plan ahead for exit strategies with such options as termination by acquisition, dissolution or redefining the alliance 77 The Wholly Owned Subsidiary • 100% ownership of a facility in a new country. • Occurs when an overseas company decides to invest in another country by establishing a subsidiary. • This tactic is usually used to avail of cheaper labour and raw materials. • Organisations can choose to either establish their own facility (greenfield/brown field investment) or to acquire an existing one (merger/acquisition). 78 26 Greenfield/Brownfield investment • A greenfield investment occurs when a firm invests to build a new manufacturing or administrative facility as opposed to acquiring existing facilities. • Greenfield investments are a form of FDI where the foreign company builds its operations from the ground up in its new home. • Brownfield investment occurs when a firm invests in land/ building /infrastructure which was operational in the past but currently not in use or in idle condition- upgrading a facility to meet the needs of the organisation. 79 Wholly Owned Subsidiary – Greenfield/Brownfield Advantages 1. INCREASES CONTROL O VER OWNERSHIP OF ASSETS AND OPERATIONS 2. ALLOWS FLEXIBI LITY IN SERVING INTERNATIONAL MARKETS 3. QUICK & DIRECT FEEDBACK FROM THE MARKET 5. SIGNALS INTENT ION TO STAY IN THE MARKET LONG TERM 6. ABILITY TO START WITH A CLEAN SLATE 4. AVOIDS RISKS / COSTS ASSOCIATED WITH ACQUISITION 80 Wholly Owned Subsidiary – Greenfield/ Brownfield Disadvantages 1. MOST EXPENSIVE MODE 2. RISKIEST MODE 3. MAY BE CHALLENGING IN TERMS OF MANAGING LOCAL RESOURCES 81 27 Mergers and Acquisitions 82 This Photo by Unknown author is licensed under CC BY-SA. Motives for M&A’s • Extensions: can be used to extend the reach of a firm in terms of geography, products and markets. • Consolidation: Can be used to consolidate competition in a market or competitors in an industry. • Capabilities: to increase inhouse capabilities • Financial efficiency- A poor performing company with potential may be attractive to a larger profitable company- acquisition pay out may be lower • Tax efficiency- sometimes there may be tax advantages for bringing two companies together- profits or tax losses may be transferrable 83 Merger vs Acquisition A MERGER IS THE COMBINATION OF TWO PREVIOUSLY SEPARATE ORGANISATIONS IN ORDER TO FORM A NEW COMPANY AN ACQUISITION IS ACHIEVED BY PURCHASING A MAJORITY OF SHARES IN A TARGET COMPANY 84 28 Merger • A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. • This kind of action is more precisely referred to as a "merger of equals." • Both companies' stocks are surrendered, and new company stock is issued in its place. • Air France and KLM Royal Dutch Airlines- both still operate as separate airlines This Photo by Unknown author is licensed under CC BY-SA. 85 Advantages of a merger 1. It provides the ability to speedily acquire resources and competencies not held in houses 2. Risks and costs of new product development decrease 3. Excessive competition can be avoided by shut down of existing capacity 4. It overcomes market entry barriers by acquiring one already in existence 5. Risk of competitive reaction may decrease 6. Acquisition of resources and competencies not available i n house 86 Disadvantages of a merger Integration problems: The activities of new and old organizations may be difficult to integrate Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. Redundancies, especially at management levels - this may have an effect on motivation. Duplication of roles. Conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business. 87 29 • The purchase of an existing company or facility Acquisition • By acquiring an existing company, an organisation gains access to its accumulated assets- plant, equipment, human resources, suppliers, customers • When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition • From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded 88 • Smyths Toys acquired the bankrupt Toys R Us outlets in Germany, Austria and Switzerland. • It rebranded all stores, marking an important entry into the market in mainland Europe. • The main advantage is that the stores already exist, reducing set up costs. This Photo by Unknown author is licensed under CC BY-SA. This Photo by Unknown author is licensed under CC BY-SA. 89 Advantages of an Acquisition 1. It provides the ability to speedily acquire resources and competencies not held in houses 2. Risks and costs of new product development decrease 4. It overcomes market entry barriers by acquiring one already in existence 3. Excessive competition can be avoided by shut down of existing capacity 5. Risk of competitive react ion may decrease 90 30 Disadvantages of Acquisition 1. Integration problems: The activities of new and old organizations may be difficult to integrate 2. High cost :The acquirer may pay high cost, especially in cases of hostile take over bids. Value may not be added for the acquirer. 3. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. 4. Redundancies, especially at management levels - this may have an effect on motivation. 5. Conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business. 91 Fundamental decision making criteria for Internationalisation entry mode choice. • Level of Control? • Level of Risk? • Cost Issues? 92 Comparison of entry mode strategies Export Licencing/ Franchising Joint Ventures/Strategic Alliances Wholly owned subsidiaries Resource commitment (financial, human, equity etc) Low Low Medium High Control: Technology and quality High High Low/medium High Control: marketing and sales Low Low Medium High Risk: Financial, political etc Low Low Medium High Entry Speed High High Medium Low/Medium 93 31 Entry Mode Dynamics If the firm simply wants to sell their product or service in an overseas market. •Exporting 94 Entry Mode Dynamics If you wish to start a business and the idea of buying into a ready made business model, with marketing support appeals to you. •Franchising 95 Entry Mode Dynamics If the firm needs to facilitate product \ service improvements necessary to enter the overseas market. •Licensing 96 32 Entry Mode Dynamics If the firm needs to connect with an experienced partner already in the targeted market and reduce risk. •Joint Venture 97 Entry Mode Dynamics If the firm wishes to expand into a new market, improve its product line, or develop an edge over a competitor but lacks resources and local knowledge. •Strategic Alliance 98 Entry Mode Dynamics If the firms intellectual property rights in an emerging economy are not well protected, number of firms is growing fast and the need for global integration is high. •WOS Strategy 99 33 Conclusions • Decisions around location of internationalisation effort depend on a host of factors, all of which need due consideration • In terms of timing key decisions focus on whether to be a first v’s later mover when entering new markets • A first mover strategy while beneficial will only work in certain circumstances 100 Conclusions • One size does not fit all • Each entry mode has numerous advantages and disadvantages Need not be a step into the unknown This Photo by Unknown author is licensed under CC BY. 101 34