Greenfield strategy advantages and disadvantages

International Business
10e

By Charles W.L. Hill

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Chapter 15

Entry Strategy and Strategic Alliances

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What Are the Basic Decisions Firms Make When Expanding Globally?

Firms expanding internationally must decide
Which markets to enter

When to enter them and on what scale

Which entry mode to use

exporting
licensing or franchising to a company in the host nation
establishing a joint venture with a local company
establishing a new wholly owned subsidiary
acquiring an established enterprise
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LO 1: Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale.

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What Influences
the Choice of Entry Mode?

Several factors affect the choice of entry mode including
transport costs
trade barriers
political risks
economic risks
costs
firm strategy
The optimal mode varies by situation – what makes sense for one company might not make sense for another
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The Opening Case: JCB in China explores the British construction manufacturer’s expansion into China, and how the company approached each of the basic decisions.

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Which Foreign Markets
Should Firms Enter?

The choice of foreign markets will depend on their long-run profit potential
Favorable markets
are politically stable
have free market systems
have relatively low inflation rates
have low private sector debt
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Which Foreign Markets
Should Firms Enter?

Less desirable markets
are politically unstable
have mixed or command economies
have excessive levels of borrowing
Markets are also more attractive when the product in question is not widely available and satisfies an unmet need
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Management Focus: Tesco’s International Growth Strategy describes Tesco’s international expansion strategy. Tesco, the largest grocery retailer in the United Kingdom has established operations in a number of foreign countries. Typically, the company seeks underdeveloped markets in developing nations where it can avoid the head-to-head competition that goes on in more crowded markets, and then enters those markets via joint ventures where the local partner provides knowledge of the market while Tesco provides retailing expertise.

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When Should a Firm
Enter a Foreign Market?

Once attractive markets are identified, the firm must consider the timing of entry
Entry is early when the firm enters a foreign market before other foreign firms

Entry is late when the firm enters the market after firms have already established themselves in the market

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Why Enter a
Foreign Market Early?

First-mover advantages include
the ability to preempt rivals by establishing a strong brand name
the ability to build up sales volume and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants
the ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business
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Why Enter a
Foreign Market Late?

First-mover disadvantages include
pioneering costs - arise when the foreign business system is so different from that in the home market that the firm must devote considerable time, effort and expense to learning the rules of the game
the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes
the costs of promoting and establishing a product offering, including the cost of educating customers
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On What Scale Should a Firm Enter Foreign Markets?

After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry
firms that enter a market on a significant scale make a strategic commitment to the market
the decision has a long term impact and is difficult to reverse
small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market
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Is There a “Right” Way to Enter Foreign Markets?

No, there are no “right” decisions when deciding which markets to enter, and the timing and scale of entry - just decisions that are associated with different levels of risk and reward
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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
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How Can Firms
Enter Foreign Markets?

These are six different ways to enter a foreign market
Exporting – a common first step for many manufacturing firms

later, firms may switch to another mode
Turnkey projects - the contractor handles every detail of the project for a foreign client, including the training of operating personnel

at completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation
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LO 2: Compare and contrast the different modes that firms use to enter foreign markets.

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How Can Firms
Enter Foreign Markets?

Licensing - a licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee

patents, inventions, formulas, processes, designs, copyrights, trademarks
Franchising - a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business

used primarily by service firms
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Management Focus: The Jollibee Phenomenon—A Philippine Multinational describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but also managed to find the weaknesses in the larger company’s global strategy and capitalize on them. Jollibee, unlike McDonald’s, tailored its menu to the local market. The company was able to build on this localization strategy as it expanded into neighboring Asian countries and the Middle East. Today, Jollibee has even managed to find success in the United States where it is being hailed as a strong niche player.

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How Can Firms
Enter Foreign Markets?

Joint ventures with a host country firm - a firm that is jointly owned by two or more otherwise independent firms

most joint ventures are 50–50 partnerships
Wholly owned subsidiary - the firm owns 100 percent of the stock

set up a new operation
acquire an established firm
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Why Choose Exporting?

Exporting is attractive because
it avoids the costs of establishing local manufacturing operations
it helps the firm achieve experience curve and location economies
Exporting is unattractive because
there may be lower-cost manufacturing locations
high transport costs and tariffs can make it uneconomical
agents in a foreign country may not act in exporter’s best interest
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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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Why Choose a
Turnkey Arrangement?

Turnkey projects are attractive because
they are a way of earning economic returns from the know-how required to assemble and run a technologically complex process
they can be less risky than conventional FDI
Turnkey projects are unattractive because
the firm has no long-term interest in the foreign country
the firm may create a competitor
if the firm's process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors
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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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Why Choose Licensing?

Licensing is attractive because
the firm avoids development costs and risks associated with opening a foreign market
the firm avoids barriers to investment
the firm can capitalize on market opportunities without developing those applications itself
Licensing is unattractive because
the firm doesn’t have the tight control required for realizing experience curve and location economies
the firm’s ability to coordinate strategic moves across countries is limited
proprietary (or intangible) assets could be lost
to reduce this risk, use cross-licensing agreements
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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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Why Choose Franchising?

Franchising is attractive because
it avoids the costs and risks of opening up a foreign market
firms can quickly build a global presence
Franchising is unattractive because
it inhibits the firm's ability to take profits out of one country to support competitive attacks in another
the geographic distance of the firm from its franchisees can make it difficult to detect poor quality
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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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Why Choose Joint Ventures?

Joint ventures are attractive because
firms benefit from a local partner's knowledge of the local market, culture, language, political systems, and business systems
the costs and risks of opening a foreign market are shared
they satisfy political considerations for market entry
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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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Why Choose Joint Ventures?

Joint ventures are unattractive because
the firm risks giving control of its technology to its partner
the firm may not have the tight control to realize experience curve or location economies
shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time
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Why Choose a
Wholly Owned Subsidiary?

Wholly owned subsidiaries are attractive because
they reduce the risk of losing control over core competencies
they give a firm the tight control in different countries necessary for global strategic coordination
they may be required in order to realize location and experience curve economies
Wholly owned subsidiaries are unattractive because
the firm bears the full cost and risk of setting up overseas operations
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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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Which Entry Mode Is Best?

Advantages and Disadvantages of Entry Modes

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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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How Do Core Competencies Influence Entry Mode?

The optimal entry mode depends on the nature of a firm’s core competencies
When competitive advantage is based on proprietary technological know-how
avoid licensing and joint ventures unless the technological advantage is only transitory, or can be established as the dominant design
When competitive advantage is based on management know-how
the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant
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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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How Do Pressures for Cost Reductions Influence Entry Mode?

When pressure for cost reductions is high, firms are more likely to pursue some combination of exporting and wholly owned subsidiaries
allows the firm to achieve location and scale economies and retain some control over product manufacturing and distribution
firms pursuing global standardization or transnational strategies prefer wholly owned subsidiaries
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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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Which Is Better –
Greenfield or Acquisition?

The choice depends on the situation confronting the firm
A greenfield strategy - build a subsidiary from the ground up

a greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture
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LO 4: Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

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Which Is Better –
Greenfield or Acquisition?

An acquisition strategy – acquire an existing company

acquisition may be better when there are well-established competitors or global competitors interested in expanding
The volume of cross-border acquisitions has been rising for the last two decades
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Why Choose Acquisition?

Acquisitions are attractive because
they are quick to execute
they enable firms to preempt their competitors
they may be less risky than greenfield ventures
Acquisitions can fail when
the acquiring firm overpays for the acquired firm
the cultures of the acquiring and acquired firm clash
anticipated synergies are slow and difficult to achieve
there is inadequate pre-acquisition screening
To avoid these problems, firms should
carefully screen the firm to be acquired
move rapidly to implement an integration plan
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Why Choose Greenfield?

The main advantage of a greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants
But, greenfield ventures are slower to establish
Greenfield ventures are also risky
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What Are Strategic Alliances?

Strategic alliances refer to cooperative agreements between potential or actual competitors
range from formal joint ventures to short-term contractual agreements
the number of strategic alliances has exploded in recent decades
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LO 5: Evaluate the pros and cons of entering into strategic alliances.

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Why Choose
Strategic Alliances?

Strategic alliances are attractive because they
facilitate entry into a foreign market
allow firms to share the fixed costs and risks of developing new products or processes
bring together complementary skills and assets that neither partner could easily develop on its own
help a firm establish technological standards for the industry that will benefit the firm
But, the firm needs to be careful not to give away more than it receives
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What Makes
Strategic Alliances Successful?

The success of an alliance is a function of
Partner selection

A good partner
helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values
shares the firm’s vision for the purpose of the alliance
will not exploit the alliance for its own ends
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What Makes
Strategic Alliances Successful?

Alliance structure

The alliance should
make it difficult to transfer technology not meant to be transferred
have contractual safeguards to guard against the risk of opportunism by a partner
allow for skills and technology swaps with equitable gains
minimize the risk of opportunism by an alliance partner
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What Makes
Strategic Alliances Successful?

The manner in which the alliance is managed

Requires
interpersonal relationships between managers
cultural sensitivity is important
learning from alliance partners
knowledge must then be diffused through the organization
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LO 1: Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale.

*

The Opening Case: JCB in China explores the British construction manufacturer’s expansion into China, and how the company approached each of the basic decisions.

*

*

Management Focus: Tesco’s International Growth Strategy describes Tesco’s international expansion strategy. Tesco, the largest grocery retailer in the United Kingdom has established operations in a number of foreign countries. Typically, the company seeks underdeveloped markets in developing nations where it can avoid the head-to-head competition that goes on in more crowded markets, and then enters those markets via joint ventures where the local partner provides knowledge of the market while Tesco provides retailing expertise.

*

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*

*

*

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
*

LO 2: Compare and contrast the different modes that firms use to enter foreign markets.

*

Management Focus: The Jollibee Phenomenon—A Philippine Multinational describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but also managed to find the weaknesses in the larger company’s global strategy and capitalize on them. Jollibee, unlike McDonald’s, tailored its menu to the local market. The company was able to build on this localization strategy as it expanded into neighboring Asian countries and the Middle East. Today, Jollibee has even managed to find success in the United States where it is being hailed as a strong niche player.

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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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LO 3: Identify the factors that influence a firm’s choice of entry mode.

*

LO 3: Identify the factors that influence a firm’s choice of entry mode.

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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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LO 3: Identify the factors that influence a firm’s choice of entry mode.

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LO 4: Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

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LO 5: Evaluate the pros and cons of entering into strategic alliances.