Chapter 6

Modes of Entry

Non-exporting modes of entry

h Three main non-

non-exporting modes of entry
• Licensing (including franchising)
• Strategic Alliances
• Wholly owned manufacturing subsidiaries

Three modes of entry

LICENSING
Host Country
Home country Blueprint : “how to do it”

Ho
st
Host County

Co
un
try

WHOLLY-OWNED SUBSIDIARY STRATEGIC ALLIANCE (J.V.)

A replica of home A “joint effort”

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 The Impact of Entry Barriers
h The non-
non-exporting modes of entry basically
represent alternatives for the firm when entry
barriers to a foreign market are high.
h These entry barriers involve not only artificial
barriers such as tariffs, but also involve lack
of knowledge of the foreign market and a need
to outsource the marketing to local firms with
greater understanding of the market.

Licensing: What Is It?

h A license is a contractual agreement whereby the
licensor transfers to a licensee the right to use a
proprietary asset for a fee.
h Examples of proprietary assets include…
include…
• Process know-
know-how or technology
• Trademarks and tradenames
• Patents
• Designs
• Intellectual property

Licensing
• Advantages for the new exporter
– Requires little depth of market knowledge
– Can be put in place fairly quickly
– Requires relatively little investment
– The need for local market research is reduced
– The licensee may support the product strongly in the new
market
• Disadvantages
– Can lose control over the core competitive advantage of
the firm.
– The licensee can become a new competitor to the firm.

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 Licensing:
When Is It Likely To Be Used?
h In technology-
technology-intensive and process industries
h When the technology is not central to the licensor’
licensor’s
core
h Between companies in developed countries
h When the licensor lacks the capital, managerial
resources, or knowledge of foreign markets required
for exporting or FDI
h When there is a desire to test and proactively develop
a market that can later be exploited with FDI

Licensing: When Is It Likely

To Be Used? (Cont’d)
h When prospects for “technology feedback”
feedback” are high
h When it applies to secondary markets that may be too
small to justify larger investments
h When the host country restricts (or prohibits) imports or
FDI, or when the threat nationalization is too great
h When the licensee is not likely to become a future
competitor
h When the pace of technological change (and
obsolescence) are high

Licensing: The Agreement

h Generally, the license agreement specifies the rights to
be granted, the consideration payable, and the duration
of the terms. Typically, a license agreement will include
the following:
• A clear and correct description of the parties to the
agreement, identifying the corporate names of each party,
its incorporating jurisdiction, and its principal place of
business
• A preamble describing the parties, their reasons for entering
into the agreement, and their respective roles
• A list of defined terms, to simplify a complex document and
avoid ambiguiity or vagueness

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 Licensing:
The Agreement (Cont’d)
• A set of schedules for implementation
• A description of the geographical limitations to be
imposed
• Terms relating to the duration and any provisions for
extension
• Provisions for granting of rights to future refinements by
the licensor
• Provisions for “technological flowback”
flowback” from the licensee
• Details regarding royalties or periodic payments
• Specification of minimum performance requirements to
ensure the licensee’
licensee’s “best efforts”
efforts”

Licensing: Some Risks

h Leakage”
Leakage” -- The dissipation of one’
one’s proprietary
advantage
h Your reputation now depends on another’
another’s
performance
h Creation of a new competitor -- Despite best
efforts to the contrary

Licensing
h Original Equipment Manufacturing (OEM)
• A company enters a foreign market by selling its
unbranded product or component to another
company in the market country
– Examples:
– Canon provides cartridges for Hewlett-
Hewlett-
Packard’
Packard’s laser printers
– Samsung sells unbranded television sets ,
microwaves, and VCRs to resellers such as
Sears, Amana, and Emerson in the U.S.

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 Franchising
h A form of licensing where the franchisee in a local
market pays a royalty on revenues - and sometimes
an initial fee - to the franchisor who controls the
business and owns the brand.
h The local franchisee typically invests money in the
local operation and has the right to operate under the
franchisor’
franchisor’s brand name.
h The franchisee gets help setting up the operation,
usually according to a well-
well-developed blueprint.
The business is typically very standardized (fast
food operations is a case in point).

Franchising Pros and Cons

• Advantages
– The basic “product”
product” sold is a well-
well-recognized brand
name.
– The franchisor provides various market support
services to the franchisee
– The local franchisee raises the necessary capital and
manages the franchise

• A disadvantage
– Careful and continuous quality control is necessary
to maintain the integrity of the brand name.

Survey Findings
h Firm Characteristics:
• International systems are larger than domestic
counterparts.
h Relationship Characteristics:
• Domestic systems exhibit higher levels of solidarity.
– Greater geographic and cultural proximity should facilitate
building relational ties.
• Domestic systems exhibit higher levels of
opportunism.
– Greater geographic and cultural distance does not lead to
more opportunistic behavior.

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 Survey Findings
h Variables Not Significant:
• Age or Franchise Experience
– Confirms that controlling for size, experience is not
significant.
• Behavioral Transparency
– Either closer proximity in domestic systems does not
facilitate greater transparency, or
– Franchisors anticipate potential problems and adjust
monitoring capabilities prior to internationalization.
• Relationship Effectiveness
– Neither domestic nor international systems are more
effective.
– Both are equally effective at achieving (different) goals.

What is a
Strategic Alliance?
h SAs represent a variety of cooperative arrangements,
frequently between competing firms, which are more
than a standard customer-
customer-supplier relationship or
venture capital investment, but fall short of an
outright acquisition.
h A SA is a particular mode of inter-
inter-organizational
relations in which the partners make substantial
investments in developing a long-
long-term collaborative
effort and common orientation toward their
individual and mutual goals.

What is a
Strategic Alliance?
h SAs are relatively enduring interfirm
cooperative arrangements, involving flows and
linkages that utilize resources and/or
governance structures from autonomous
organizational, for the joint accomplishment of
individual goals linked to the corporate mission
of each sponsoring firm. [Parkhe
[Parkhe 1993]

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 Why the Growth in Strategic
Alliances?
h It is necessary to compete in order to be globally
competitive.
h Globalization mandates alliances, and that these
SAs have become a sine qua non condition for
corporate survival.
h A firm’
firm’s competitive situation today depends on
its abilities and the quality of its alliances.
h Some say SAs are “transitional devices rather
than stable arrangements.”
arrangements.”

Core Dimensions of a
Strategic Alliance
h “The fundamental purpose of any strategic alliance
is to enhance the long-
long-term competitiveness of the
strategic partners”
partners”
h Goal compatibility
h Strategic advantage
h Interdependence
h Commitment
h Communications and Conflict resolution
h Coordination of work
h Planning

Motivations/Goals of
Alliance Formation
h Obtain a new product
h Gain access to a technology/process
h Marketing--
Marketing--performance
performance of distribution, promotion, or service
h Over-
Over-come protectionism
h Reduce production costs
h Direct payments
h Diversify risk
h Secure supply resources
h Achieve economies of scale
h Learn core competencies
h Gather intelligence
h Block competition

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 Structural Format of
Strategic Alliances
h Form of an alliance refers to its structural
organizational
• Equity
• Number of partners
h Mode of an alliance represents the directional flow
of inputs and outputs among partners
h Market coverage of an alliance is the initial target
considered for the alliance’
alliance’s output
h Linkage of an alliance refers to the relationship
between partners within the distribution channel
h Motive

Form
hContractual agreements or Non-
Non-equity
agreements
hEquity participations
hJoint Ventures
hConsortia

Consortia
h Collaborative arrangement among three or more
parties, regardless of the equity structure
h Multiple partner cooperations increase the
degree of complexity
h Typically involve large projects where the
resources and capabilities of any two firms are
inadequate
h May involve government agencies as partners
h More common in industries with very heavy
development demands

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 Mode
h Sequential mode involves a one-
one-way transfer of
a resource or value chain activity among alliance
members
h Reciprocal mode depicts each alliance member
exchanging complementary outputs or value
chain activities with each other
h Pooled mode entails alliance members sharing
value chain activities or drawing from common
resources

Linkage
hVertical alliances are formed with suppliers
or customers to reduce resource or
distribution uncertainly
hHorizontal alliances are formed with
competitors in the same industry or other
firms that provide complementary skills
and resources
hHybrid alliances encompass both vertical
and horizontal members

The Four C’s of Successful ISAs

Compatible Goals Cooperative

Cultures
Successful International
Strategic Alliances

Complementary Commensurate Risk

Skills
This framework can be used to determine when to utilize a
strategic alliance and in the selection of an alliance
partner.
[Brouthers, Brouthers, & Wilkinson, 1995]

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Equity Alliances: Joint Ventures
h Joint Ventures
• Involve the transfer of capital, manpower, and
usually some technology from the foreign partner
to an existing local firm.
• Examples include Rank-
Rank-Xerox, 3M-
3M-Sumitomo,
several China entries where a government-
government-
controlled company is the partner.
• This was the typical arrangement in past alliances
– the equity investment allowed both partners to
share both risks and rewards.
• Today non-
non-equity alliances are common.

Rationale for Non-

Non-Equity Alliances
• Tangible economic gains at lower
risk
• Access to technology
• Markets are reached without a long
buildup of relationships in channels
• Efficient manufacturing made
possible without investment in a
new plant

SA’s allow two companies to undertake missions impossible

for one individual firm to undertake.
• Strategic Alliances constitute an efficient economic
response to changed conditions.

Distribution Alliances

• Also called “piggybacking”

piggybacking”, “consortium
marketing”
marketing”
• Examples
– SAS, KLM, Austrian Air, and Swiss Air
– STAR Alliance (United Airlines, Lufthansa, Air
Canada, SAS, Thai Airways, and Varig Brazilian
Airlines)
– Chrysler and Mitsubishi Motors

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 Pros and Cons of Distribution
Alliances
h Advantages h Disadvantages
• Improved capacity load • Time arrangement can
• Wider product line limit growth for the
• Inexpensive access to a partners
market • Can hinder learning
• Quick access to a market more about the market,
creating obstacles to
• Assets are further inroads
complimentary
• Each partner can
concentrate on what they
do best

Manufacturing Alliances
h Shared manufacturing examples
• Volvo and Renault share body parts and components
• Saab engines made by GM Europe
h Advantages
• Convenient
• Money saving
h Disadvantages
• The organization must deal with two principals in
charge of production, harder to communicate
customer feedback
• Can put constraints on future growth

R&D Alliances
h R&D Alliances
• Provide favorable economics, speed of access, and
managerial resources and are intended to solve
critical survival questions for the firm
• Used to be seen as particularly risky, since
technological know-
know-how is often the key
competitive advantage of a global firm
• The risk of dissipation has become less of a
concern, however, as technology diffusion is
growing ever faster anyway.

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 Complementary Strengths
Create Value
PARTNER STRENGTH… + PARTNER STRENGTH… = JOINT OBJECTIVE

Pepsico marketing clout for Lipton recognized tea brand and To sell canned iced tea
canned beverages customer franchise beverages jointly

Philips consumer electronics Levi Strauss fashion design and Outdoor wear with integrated
innovation and leadership distribution electronic equipment for
fashion-conscience consumers

KFC established brand and Mitsubishi real estate and site- To establish a KFC chain in
store format, and operation selection skills in Japan Japan
skills
Siemens presence in range of Corning technological strength To create a fiber-optic cable
telecommunications markets in optical fibers and glass business
worldwide and cable-
manufacturing technology
Ericsson technological Hewlett-Packard computers, To create and market network
strength in public software, and access to management systems
telecommunications network electronics-channels

SOURCES: “Portable Technology Takes the Next Step: Electronics You Can Wear,”The Wall Street Journal, August 22, 2000, B1, B4; Joel Bleeke and David Ernst, “Is Your
Strategic Alliance Really a Sale?” Harvard Business Review 73 (January-February 1995); 97-105; and Melanie Wells, “Coca-Cola Proclaims Nesta Time for CAA.” Advertising
Age, January 30, 1995, 2 See also http://www.pepsico.com; http://www.kfc.com;http://www.siecor.com;http:www.ericsson.com; and http://www.hp.com.

Manufacturing Subsidiaries

h Wholly Owned Manufacturing Subsidiaries

• Undertaken by the international firm for several
reasons
– To acquire raw materials
– To operate at lower manufacturing costs
– To avoid tariff barriers
– To satisfy local content requirements

Manufacturing Subsidiaries
ADVANTAGES DISADVANTAGES
• Local production lessens • Higher risk exposure
transport/import-related costs,
• Heavier pre-decision
taxes & fees
information gathering &
• Availability of goods can be research evaluation
guaranteed, delays may be
• Political risk
eliminated
• “Country-of-origin” effects
• More uniform quality of product
can be lost by manufacturing
or service
elsewhere.
• Local production says that the
firm is willing to adapt products &
services to the local customer
requirements

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 FDI: Acquisitions
• Instead of a “greenfield”
greenfield” investment, the company can enter
by acquiring an existing local company.
• Advantages
– Speed of penetration
– Quick market penetration of the company’
company’s products

• Disadvantages
– Existing product line and new products to be introduced
might not be compatible
– Can be looked at unfavorably by the government,
employees, or others
– Necessary re-
re-education of the sales force and distribution
channels

Entry Modes and Local Marketing Control

y The local marketing can be controlled to varying
degrees, quite independent of the entry mode chosen.
The typical global firm maintains a sales subsidiary to
manage the local marketing. Examples:

marketing control
mode of entry independent agent joint with alliance partnerown sales subsidiary
exporting Absolut vodka in the US Toshiba EMI in Japan Volvo in the US
licensing Disney in Japan Microsoft in Japan Nike in Asia
strategic alliance autos in China EuroDisney Black&Decker in China
FDI Goldstar in the US Mitsubishi Motors in US P&G in the EU

Optimal Entry Mode Matrix

Company Product/Market Situation

strategic
posture Emerging High-growth Mature Services

Incremental Indirect Indirect exports Direct exports Licensing/

exports Alliance

Protected Joint venture Indirect exports Alliance/ Licensing

Licensing

Control Wholly Acquisition/ Wholly owned Franchising/

owned Alliance subsidiary Alliance/
subsidiary Exporting

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 Illustrative Entry Strategies

Company Product/Market Situation

strategic
posture Emerging High-growth Mature Services

Incremental Supervalu North American Rossignol Dialogue to

to Russia fish to Japan skis to U.S. Europe

Protected Pharmaceuticals Sun Energy Coca-Cola Disneyland

in China technology to bottling; in Japan
Europe Toyota-GM
tie-up
Control New FDI Matsushita in IBM Hilton,
in India U.S. TV market Worldwide; Sheraton;
autos in U.S. McDonalds

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