EXPANSION

STRATEGIES AND
ENTRY

LIU - IM

In this session
Explain the three (3) basic reasons
that firms contemplate before foreign
expansion
Compare and contrast the different
modes that firms use to enter foreign
mkts
Pros and Cons of various Entry modes
Other forms of International Strategic
Alliances
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ENTRY DECISIONS
A
firm
contemplating
foreign
expansion must make 3 basic
decisions;
1.Which mkts to enter?
2.When to enter?
3.On what scale?

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Which foreign mkts?

The choice of the mkt must be based on an assessment of a

nations long-run profit potential. This potential is a function
of several factors such as economic and political factors that
influence the potential attractiveness of a foreign mkt
Economic benefits such as the size of the mkt
(demographics), the present wealth (purchasing power) of
consumers in that mkt and the likely future wealth which
depends upon economic growth rates.
The attractiveness of a country as a potential mkt for an
international business depends on balancing the benefits,
costs and risks associated with doing business in that
country.
Some mkts are very large when measured by no. of
consumers (China, India) but also need to look at the
standards of living. Although relatively poor, they are
growing so rapidly that they are attractive targets for inward
investment.
Suitability of the product offering to a target mkt.- value of
prdt; greater value translates into higher prices or to build
sales volumes.
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Timing of Entry

Once attractive mkts have been identified, it is vital

to consider the timing of entry
Entry is early when an international business enters a
foreign mkt before other foreign firms and late when
it enters after others have already established
themselves.

Advantages (first-mover advantages)

The advantages frequently associated with early entry
are commonly referred to as first-mover advantage
the ability to preempt rivals and capture demand by
establishing a strong brand name.
Second advantage is the ability to build sales volumes
in that country and ride down the experience curve
ahead of rivals- giving the early entrant a cost
advantage over later entrants.
Third advantage is the ability of early entrants to create
switching costs that tie crs into their prdts or services
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 Disadvantages

(first-mover disadvantages)

Pioneering costs- costs that an early entrant has to

bear that a later entrant can avoid. These arise
mostly when a foreign countrys environment is so
different from that in the firms home mkt that the
enterprise has to devout considerable effort, time
and money learning the rules of the game.

Pioneering costs include;

Costs of failure research confirms that the
probability of survival increases if the firm enters a
national mkt after several other foreign firms have
already done so.
Costs of promoting and establishing a prdt offering
including costs of educating the crs- especially when
the prdt being promoted is unfamiliar to local
consumers. Later entrants may be able to ride on an
early entrants investments in learning and cr
education by watching how the early entrant
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proceeded in the mkt.

Scale of entry and strategic

International firms must also consider the scale of
commitments
entry into foreign mkts.
Entering a mkt on large scale involves the
commitment of significant resources rapid entry.
This entry is influenced by the nature of
competition in the mkt.
On the positive side, it will make it easier for the
company to attract crs and distributors. The scale
of entry gives both the crs and distributors
reasons for believing that a company will remain
in the mkt for the long run.
On the negative side, by committing in a specific
mkt, the firm may have fewer resources available
to support expansion in other desirable mkts.
Note: the large scale entrant is deemed to enjoy
first-mover advantages and vice versa.
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MODES OF ENTRY
The various modes for serving foreign
mkts are;
1.Exporting
2.Licensing
3.Franchising to host country firms
4.Joint ventures
5.Consortia
6.Wholly owned subsidiary
7.Acquisition
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Exporting

Export is usually domestically owned production,

sales and distribution. Exporting accounts for
some 10% of the global economic activity.
Exporting may be direct or indirect. It may take
any of the forms below;
Direct exporting occurs when a company sells
to a cr in another country. This is the most
common approach employed by companies
taking their first international step because the
risks of financial loss can be minimized.
Indirect exporting usually means that the
company sells to a buyer (importer or distributor)
in the home country, which in turn exports the
prdt. These include; large retailers, wholesale
supply houses, trading companies and others
who buy to supply crs abroad
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 Exporting has been boosted by the internet. The

internet is fast becoming an important foreign mkt entry
mode itself. Initially internet mktg focused on domestic
sales, however, a surprisingly large no. of companies
started receiving orders from crs in other countries
resulting in the concept of international internet mktg
(IIM).
Today most companies are actively designing internet
catalogues targeting specific countries with multi-lingual
web sites.
Companies that have been successful in using this
include; Dell Computer Corporation - (Virtual store),
Amazon etc.
Another aspect that has boosted export as an entry
mode is direct sales. Particularly of hi-technology and
big ticket industrial prdts, a direct sales force may be
required in a foreign country. This requirement may
mean establishing an office with local and /or expatriate
managers and staff depending on the course on the size
of the mkt and potential sales revenues.
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Advantages
Control product and production costs
Gear sales and distribution to each country
Need close coordination to insure that product
matches cultural norms of the foreign market.
Only good if manufacturing costs at home
remain competitive.
Disadvantages
High transport costs- especially for bulk prdts.
Tariff barriers by host country these can make
exporting uneconomical
Stiff competition local agents often carry the
prdts of competing firms and so have divided
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loyalties

Licensing
A licensing agreement is an arrangement where by the
licensor
grants the rights to intangible property to
another entity- the licensee for a specified period of time
and in return, the licensor receives a royalty fee from the
licensee.
Intangible property here includes; patents, inventions,
formulas, processes, designs, copyrights and trademarks.
Manufacturing, sales and distribution is all done overseas
and not under the control of the home country.
Proprietary technology or information is licenses to the
foreign company.
Major risk is losing control of sensitive product,
technology or information
It is a favourite for small and medium sized companies
though by no means limited to such companies.
Common examples include; TV programming,
Pharmaceuticals
etc
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Advantages
Low development costs for firms lacking capital to
develop operations overseas.
Licensing is a lower risk entry mode specially
Licensing without the name Limits exposure to
economic, financial, and political instability
Permits the company access to markets that may
be closed or that may have high entry barriers.
Disadvantages
Does not give the firm tight control over
manufacturing, mktg and strategy that is required
for realising experience curve and location
economies.
Can produce a new competitor: the licensee
Can be problematic if licensee cannot guarantee
qualityit affects the brands
overall reputation. 13
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Franchising
Similar to licensing although tends to involve
longer term commitments than licensing.
Franchising is basically a specialised form of
licensing in which the franchiser not only sells
intangible property (normally a trademark) to
the franchisee but also insists that the
franchisee agree to abide by strict rules as to
how it does business.
The franchiser provides a standard package of
prdts, systems and management services while
the franchisee provides mkt knowledge, capital
and personal involvement in management.
This combination of skills permits flexibility in
dealing with local mkt conditions and yet
provides the parent firm with reasonable degree
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of control.

As with licensing, the franchiser typically receives a

royalty payment, which amounts to some
percentage of the franchisees revenues.
Advantages
Lower-risk entry mode
Limits exposure to economic,
instability
Higher level of control

financial,

and

political

Very rapid market penetration

Disadvantages
Can be problematic if franchisee cannot guarantee quality
Can produce a new competitor: the franchisee
Problematic if the concept can be easily copied

Suitable for retailers, e.g. McDonalds, Pepsi,

KFC, Uchumi, etc.
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Example: McDonalds
St. Petersburg

Buenos AiresLIU - IM

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Joint Venture (JV)

International Joint Ventures (IJV) as a means of
foreign mkt entry have accelerated sharply
over the last 30 years.
A JV entails establishing a firm that is jointly
owned by two or more otherwise independent
firms.
It has been argued that besides serving as a
means of lessening political and economic risks
by the amount of a partners contribution to
the venture, IJVs provide a way to enter mkts
that pose legal and cultural barriers that is less
risky than acquisition of an existing company.

Example: In 2001, Xerox and Fuji Photo = Fuji Xerox (75/25 Xerox holding 25% ownership
stake and Fuji holding 75%)
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Characteristics of JVs
1.JVs are established, separate, legal entities
2.JVs acknowledge intent
management of the JV

by

partners

to

share

in

the

3.JVs are partnerships between legally incorporated entities like

companies, chartered organisations, or governments and not
between individuals
4.Equity positions are held by each of the partners.

Preferred entry mode in developing countries, where

they contribute to developing local expertise and to the
countrys balance of trade if production is exported.
International firm provides expertise, know-how, most
of the capital, brand name reputation, trademark etc
while the Local partner provides the labor, the
infrastructure, local expertise and relationships, and
connections to the government
70% of all joint ventures
up within 3.5 years18
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Advantages
Higher control entry mode, potentially resulting in
higher profits.
Costs and risks shared with joint-venture partner.
Local partner shares local market expertise,
relationships, as well as connections to government
decision-making bodies.
Disadvantages
Repatriation of profits may be difficult if local
government has control over stake in the local jointventure partner.
Can produce a new competitor: the joint-venture
partner
Shared ownership can lead to conflicts and battles for
control between the investing firm if their goals and
objectives change or if they take different views as to
what their strategy should
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Similar to JVs.

Consortia

Characteristics
1.They typically involve a large number of
participants
2.They frequently operate in a country or mkt
in which none of the participants is currently
active.
Consortia are developed to pool financial and
management resources and to lessen risk.
Often, huge construction projects are build
under a consortium arrangement in which
major contractors with different specialties
for a separate company specifically to
negotiate for and produce
one job.
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Example:
The most prominent international consortium has been
Airbus. Airbus industries was originally formed when
four major European aerospace firms agreed to work
together to build commercial airliners. In 2000, the
four agreed to transform the consortium to a global
company to achieve operations efficiencies that would
allow it to compete better against Boeing.
Airbus (France Aerospatiale 38%, UK British Aerospace 20%,
Germany Daimler DASA 38%, Spain Constucciones Aeronauticas
4%); founded as a challenge to Boeing

However:
Consortiums can create monopoly effect, so they are only
allowed;
1.Where expensive R&D is involved
2.In underserved markets
3.In markets where the government and/or the marketplace
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can control its monopolistic
activity.

Wholly Owned
Subsidiaries
In a wholly owned
subsidiary, the firm owns 100%
of the stock.
Establishing an wholly owned subsidiary can be
done in two ways;

1.The firm can set up a new operation in that

country- often referred to as a Green field venture.
2.Acquire an established firm in that host nation
and use that firm to promote its products.
Advantages
Protection of technology
Ability to engage in global strategic coordination
Ability to realise location and experience
economies.
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Disadvantages
High costs and risks

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Acquisitions

Self study!!!!!

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Other International
Strategic Alliances

Sometimes licensing, franchising and joint

ventures are called Strategic Alliances. But
in general the Strategic Alliances are more
short term and have not the same level of
international commitment than the named
entry modes.
Strategic Alliance: a relationship between
two or more companies attempting to reach
joint corporate and market related goals while remaining independent organizations.
Typically, the term refers to nonequity
alliances.
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Examples of Strategic Alliances

Manufacturing:
Manufacturing
alliance
(A
nonequity
relationship, in which one firm handles the
others manufacturing (or some aspects of it),
Contract manufacturing (manufacture of
products)
Engineering
alliances,
Technological alliances, R&D alliances

Marketing:
A nonequity relationship, in which one firm
handles marketing (or some aspects) for
another firm.

Distribution:
One firm handles the distribution or some
aspect of the distribution process for another
firm.
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Thank you!!!!

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