1
Entry Strategy and Strategic Alliances
2
Agenda
1. Opening case
2. The market(s) to enter (WHERE) 3. The time of entry (WHEN)4. The scale of entry (HOW MUCH)5. The mode of entry to be utilized (HOW)
6. Acquisitions and Alliances 7. Closing case
2
3
1. Opening case: TESCO
• Tesco is the largest grocery retailer in UK, with a 30% market share
• In the early 90s it was generating strong cash flows that wasinvested in internationalization
• They decided to invest in emerging markets
Eastern Europe (1994-1996): Hungary, Poland, CzeckRepublic, Slovakia
Asia (1998-2004): Thailand, South Korea, Taiwan, Malaysia, China
4
Opening case
• Entrances were done by acquiring shares from local retailers
• In the case of China, the company developed a 50/50 JV with Hymall
• At the end of this process, Tesco had some 1900 stores in UK (£25.000 billion in revenues), 260 in the rest of Europe (£4.000 billion) and 180 in Asia (£2.700 billion)
3
5
Opening case
• Core competence tranfer (marketing, store selection, logistics and inventory management, own labelling)
• Choosing good companies, with a deep knowledge of local markets, although lacking Tesco’s financial strenghts and core competencies.
6
2. Market choice
Country Attractiveness
RISKSPolitical (stability)Economic (stability; market freedom)Legal (property right protection)
COSTSCorruptionLack of infrastructureLegal costs
BENEFITSSize of EconomyLikely economic growth
Where?
6
11
Example of market choice
12
Example of market choice
• ING grew thanks to a rapid international expansion through acquisitions
• In the first half of the 90s they targeted central Europe (Germany and Belgium); in the second half the USA
- The world largest financial service market- Low legal barriers to entry and to compete- More and more americans were responsible for their own
retirement- Less difficulties in acquisitions (national pride in France
avoided entrance)- Better infrastructure to develop on-line banking
7
13
3. Timing of Entry
• “First-mover advantages”- preempting rivals and capturing demand by establishing a strong
brand name- building sales volume (and riding down the experience curve)- creating switching costs
• “First-mover disadvantages”- Pioneering costs
(understanding new customers; educating them)- Possibility that regulations may change
When?
14
4. Scale of Entry
Small-scale entry Large-scale entry
•Resource committment
•Strategic committment (low reversibility)
•Risk
•Rewards (economies of scale and experience)
How much?
8
15
A large scale of Entry
• By entering on a significant scale, ING has signaled its committment to the market: the company will remain for long, thus raising customers’ trust.
• Hernan Cortez, in 1519, arrived in Mexico to conquer it. He decided to burn its ships to induce his men to fight hard and win against the Aztec (no way to get back to Spain!)
How much?
16
An example: Jollibee
• While large corporations expand internationally, local players have the possibility to learn from them, as in the case of Jollibee.
• The company started in Quezon City in 1975 as a 2-branch ice cream parlor. It then expanded the menu including sandwiches and other meals.
•When it had 11 stores, in 1981, McDonalds arrived in the Philippines and Jollibee used McDonalds as a benchmark to improve process efficiency.
9
17
In the meanwhile…
• Jollibee identified a weakness in McDonald’s global strategy: no adaptation to local tastes.
• The company decided to design the ideal fast food for the Philippine taste and to offer it not only in the home country (today 300 stores) but also abroad, where Filipino workers are strongly present (27 stores)
- Indonesia- Middle East- USA
18
5. Entry Modes
• Firms can use 5 different methods to enter a market- Exporting- Licensing- Franchising- Joint Ventures- Wholly Owned Subsidiaries
How?
10
19
Exporting
• Advantages:- It avoids the costs of establishing manufacturing
operations- It may help achieve experience and location economies
• Disadvantages:- May compete with low-cost location manufacturers- Possible high transportation costs- Tariff barriers- Possible lack of control over marketing reps (especially if
multi-brand)
20
Licensing
• An agreement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specific period, and in return receives royalties
• Intangible properties include patents, inventions, formulas, copyrights and trademarks.
Advantages• Reduces development costs
and risks of establishing a subsidiary • Overcomes restrictive investment barriers• Suitable if markets are unfamiliar
How?
11
21
Licensing
Disadvantages• Loss of control over activities
- No experience- Less international coordination
• Loss of control over technology
• In order to overcome the last disadvantage
- Build up CROSS-LICENCING- Develop a JV
How?
22
Franchising
• The franchisor - Sells intangible
properties - Assists the franchisee in
doing business - Insists that the franchisee
agree to abide strict rules- Receives royalties
How?
12
23
Franchising
Advantages: see licensingDisadvantages: see licensing, but less
pronounced- The main one is quality control: a
bad consumer experience in State A, has an effect in State B…
- Ways to cope with this issue are • to establish a subsidiary in each
country/region in which the firm expand
• To place own managers to monitor quality
How?
24
Joint Ventures
• It entails establishing a firm that is jointly owned by two or more independent firms
Advantages• Local partner knowledge of
the host country market• Sharing costs and risks• Avoiding local government
aversion
How?
13
25
Joint Ventures
Disadvantages• Loosing control of its own
technology- Hold majority- “Wall off” from a partner
technology• No total control (it is less
dependent than an owned subsidiary)
• Potential (cultural) conflicts
How?
26
Wholly Owned Subsidiary
• Advantages:- No risk of loosing competence control
(used in high-tech industries)- Tight control of operations- Realizing learning economies
• Disadvantage:- Bear full cost and risk
How?
14
27
Selecting the entry strategy
EL
F
WOSJVCosts and complexity
Risk of loosing control over core competencies
How?
28
6. WOS by acquisitions?
• Subsidiaries could be greenfield investments or can be acquired
• Over the last decade, 50%-80% of all FDI have been in the form of M&A.
• Advantages: - Quicker (good for rapidly
globalizing industries, where competitors preemption is needed)
- Less risky than greenfield WOS (ceteris paribus)
Acquisitions Alliances
15
29
However…
• Mercer Management Consulting examineted 150 acquisitions between ’90-’95: only the 17% was judjed successfull…
• KPMG examinated 700 acquisitions between 1996-1998: only 30% created value…
WHY? • Price overestimation (e.g. Chrysler was acquired for $40
Billions, with a premium of 40% of real market value)• Cultural clashes (e.g. many Chrysler managers left because of
Daimler management directive style)
Acquisitions Alliances
30
So…
• Either companies deal with these risks in advance….
- Screening (auditing of operations, financials, management)
- Integration plans
• ….or it is better to establish a greenfield venture! (e.g. LE in the mid 90s was not able to transfer its organizational architecture)
Acquisitions Alliances
16
31
A rule of choice
1. Are well-established incumbents present?2. Are global competitors interested
in establishing a presence soon?
Is the competitive advantage based on the transfer of organizationally embedded competencies or culture?
Y NY
N A
GF
Acquisitions Alliances
32
International Strategic Alliances
• Cooperative agreements between potential or actual competitors (from JV to short-term agreements)
- Facilitate entry into market- Share fixed costs
Acquisitions Alliances
17
33
Strategic Alliances
- Bring together complementary skills and assets that neither company could easily develop on its own
- Help the firm to establish technological standards
Acquisitions Alliances
34
Making Alliances work
Alliance Success
Partner Selection
Alliance Structure
Managing Alliance
Acquisitions Alliances
18
35
Partner Selection
The ideal partner share the goals of the company and is unlikely to try to opportunistically exploit the alliance for its own ends
1. Get as much information as possible on the potential partner2. Collect data from informed third parties
- Former partners- Investment bankers- Former employees
3. Get to know the potential partner before committing
Acquisitions Alliances
36
Selecting partners is not easy..
• MG Rover was spun out by BMW in 2000
• For 3 years the company wasnot successful, thus looking for a partner to develop the business (in terms of productsand markets)..
• Since 2008 MG Rover is ownedby SAIC, Chinese multinationalautomotive manufacturercompany headquartered in Shanghai.
Acquisitions Alliances
19
37
Alliance Structure
• Walling off critical technologies: modularize the business and exclude partners to access critical areas
• Establish contractual safeguards
• Agreeing to swap valuable skills and technology: e.g. cross licencing
• Seeking credible committment in advance (investing money for long run in a JV)
Acquisitions Alliances
38
Managing the Alliance
• Sensitivity to cultural differences• Building the so called “relational capital”
• Learning from partners and apply the knowledgewithin the company
Acquisitions Alliances