Lecture 3

Entry Strategy II
Dr. Sangeeta Yadav

Choice of international entry mode

Licensing-low development costs and risks-lack of control over technology-issues of global coordination JVs-shared development costs-access to partners knowledge conflicts of contract Subsidiaries-protection of technology-global coordination-but high costs and risks Strategic competitive outcomes-international diversification-innovations-risks in international environments- political-economic-

Wholly Owned Subsidiaries

Greenfield Entry (or wholly owned subsidiaries WOS)

Allows the MNE greater control over subsidiary strategy and operations Used to reduce risk in highly uncertain markets or in markets with high cultural distance Allows for centrally coordinated global actions

Lack of available or suitable acquisition targets especially in emerging economies

Japanese subsidiary was a loss making unit to retaliate against rivals NEC and Toshiba globally

Greenfield Entry: Limitations

Growth through Greenfield can be time consuming, reducing speed to market High capital expenditure needed. Increasing financial exposure/risk, and country risk Potential national hostility to internal development

Cross-Border Mergers and Acquisitions

Definitions
Acquisition of majority and minority stakes M&A typology:
Horizontal Vertical Conglomerate Related vs unrelated

Rentsch and Scheider (1991), Haspeslagh and Jemison (1991)

Motivations
Synergistic motives
Leverage superior managerial capabilities Enhance market power and scale economies Access to complementary resources

Managerial motives
Self interested actions such as empire building guided for informal norms and cognitions.

Lenovas acquisition of IBM to access IBMs worldwide client base. at the price of US$1.25 billion. After the transaction, Lenovo Group will become the third largest PC maker worldwide with an annual revenue exceeding US$10 billion.

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Wal-Marts entry into the UK retail sector via acquisition of ASDA stores in 1999

Explaining the Wal-Mart acquisition entry into the UK retail market?

UK government policy towards out-of-town developments would cause internal growth to be very slow Finding large sites in the UK very difficult acquisition allows it to access an existing network of stores PR concerns to aggressively building stores Good operational fit between Asda and Wal-Mart
Arnold, S. and Fernie, J. Wal-Mart in Europe: Prospects for the UK, International Marketing Review, Vol.17, No.4/5, pp.416-432.

International Acquisitions
Common Problems Search for the ideal takeover candidate can involve heavy costs, especially in management time. Information asymmetry making evaluation of assets and capabilities difficult. The acquiring firm can assume many liabilities financial, managerial of the acquired firm. Difficulty in achieving successful post-acquisition integration and cultural clashes.

Wal-Marts acquisitions of Wertkauf and Interspar supermarket chains in 1999 for German entry.

Sold its 85 stores to German rival Metro in 2006

Wal-Mart has left the building!!

Reasons for Wal-Marts failed Acquisition in Germany

Poor quality acquisition targets (second-tier retailers with geographically dispersed stores in poor locations) Miscalculation of competition. Strong local competition (Aldi and Lidi) Larger scale competitors and fierce price competitors Insufficient scale to achieve critical mass

Reasons for Wal-Marts failed Acquisition in Germany

In appropriate marketing to the German consumer (errors and misjudgements). US Ethnocentric style at management level (e.g cultural clashes with employees) and store level

International Joint Ventures

Formation and Management

Definition of IJVs and Design Parameters

Definition It is a separate or new corporate entity, where two or more or more legally distinct organisations contribute assets, own the venture to some degree, and share associated business risks (Harrigan, 1988) An IJV is when at least one partner had its head quarters outside the ventures country of operation (Geringer, 1988), or the venture is owned by two or more parents of different nationality (Beamish and Inkpen, 1995)

Design Parameters
Equity versus Non-Equity Equity ownership level
50:50; <50 or >50

Management control
(Shared or Unitary i.e. one partner). Life-span (project based or unlimited). Option included in the contract to buy or sell partner equity

Motives/conditions for International Joint Venture Formation in Emerging Markets (see Glaister and Buckley, 1996)
Entry to the market (achieving market penetration and overcoming initial entry barriers) Risk Reduction (reduce financial exposure, reduce macro risk and reduce competitive risk). Access complementary assets/resources Access tacit knowledge (marketing, technology) Achieve legitimacy in the host market.

The 200m Tesco/Hymall joint venture in China: Bridging theory and practice
TESCOS FIRST ORDER MOTIVES: MARKET POWER THEORY Catch up with Wal-Mart and Carrefour RESOURCE BASED THEORY Access local resources/capabilities driven by its strategic retail localisation policy INSTITUTIONAL THEORY External legitimacy in the areas of property, labour and the political landscape

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Private Motives - The Hidden Agenda!

[See Hennart et al, 1999]. E.g. Japanese Manufacturers entering into joint ventures with US Electronic companies under the pretence of partnership, but really to acquire assets and learn proprietary knowledge.

Destabilising Forces in International Joint Ventures: Inter-organisation/partner based

Internal competition over control (creating distrust and conflict/political factions. Often management personality driven) Resource asymmetry (i.e. poor partner resource leading to poor performance, changing partner resource positions) Strategic asymmetry (divergent strategic objectives/priorities leading to conflict over strategy or changes in interdependency levels)
(See Harrigan, 1988 for asymmetry related problems and Owens and Quinn, 2007 for both interorganisational and environment problems and their connections).

Now it's war at BP-TNK The oil giant's dispute with its Russian partners has erupted into open hostilities with the stage set for a long battle in the international courts (The Sunday Times, 27th July 2008)

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Destabilising Forces in IJVs

Operational asymmetry (Incompatible operating procedures/methods and systems between partners leading to conflict). Cultural asymmetry (National and corporate culture differences between partners resulting in opposing value systems/beliefs) and learning problems. Managerial opportunism and/or contract incompleteness (Benign/cheating behaviour by one partner creating distrust/political factions and raising transaction costs towards monitoring and enforcing contracts).

Destabilising Forces Macro based

Macro volatility [Home or Host Market Economic and political change leading to poor subsidiary performance and/or inter-partner conflict] Weak institutional development [weak property rights protection within host market leading to partner opportunism and possible creation of a competitor]

Destabilising Forces: Macro-based

Increasing competition and/or poor market performance (Host and Home Market leading to changing strategic priorities and management/resource commitment).

Emerging/changing opportunities and priorities within the global network (changing commitment levels and resource transfers to joint venture).

Strategic Alliances

Strategic Alliances
Strategic alliances-objectives-entry into foreign markets-share fixed costs and associated risksbringing together complementary skills and assets-however the failure rate of such alliances high-managerial and financial failures-issues of partner selection-establishing contractual safeguards-seeking credible commitments

Strategic Alliances
Motivation for cooperation Political or resource related factors Strategic goals -transaction costs-organizational-competitive advantage and SCM theories Alliance creation-selecting partners-definition of boundaries-clarifying expectations and partner contributions-

Strategic Alliances
Nature of planned interactions-product versus R & D-partner objectives-cultural differences Theories-capabilities and competence-private versus common benefits-risk resource relationship-networks and social interactionscontracting-cultural effects Alliance maintenance-control and smooth operations-evolution of knowledge-

Strategic Alliances
Bargaining power-competitive learningdistribution of benefits-response to environmental challenge Theories-agency-resource dependence-strategic interdependence and environmental uncertaintycultural and behavioral effects Alliance dissolution-degree of interrelationsrights to jointly developed products, facilities and knowledge-bargaining power Theories-property rights-valuation models

Strategic Alliances
Drivers of alliances: Globalization-information system capabilitiesQuality/environmental factors SCM Understanding core competencies and competitiveness National culture, policy and preferences

Summary
Greenfield allows control but can be costly and slow. The main sources of value in acquisitions are access and development of markets; and global or regional consolidation through complementary resources and capabilities. IJVs allow access to market and partner resources; vulnerable to opportunism, inappropriate structure and conflict over operations and strategic direction.

References
Geringer, J.M. (1991), Strategic determinants of partner selection criteria in international joint ventures, Journal of International Business Studies, Vol.22, No.1, pp-41-62. Glaister, K.W. and Buckley, P.J. (1996). Strategic motives for international alliance formation, Journal of Management Studies, Vol.33, No.3, pp.301-332. Harrigan, K.R. (1985) Strategies for Joint Ventures, Lexington Books, Lexington, MA Harrigan, K. R. (1988) Strategic alliances and partner asymmetries, Management International Review, Vol. 28, pp. 5372. Hennart, J.F. (1991), The Transaction cost theory of joint ventures: an empirical study of Japanese subsidiaries in the United States Management Science, Vol.37, No.4, pp.483-497. Hennart, J.F. Roehl, T. Zietlow, D.S. (1999), Trojan Horse or Workhorse? The evolution of U.S Japanese Joint Ventures in the United States, Strategic Management Journal, Vol.20, pp.15-29.

References
Haspeslagh. P. and Jemison D. B. (1991). Managing acquisitions: Creating value through corporate renewal. New York: Free Press. Lasserre, P. (2003). Global Strategic Management, Houndmills, UK: Palgrave. Larsson, R. and Risberg, A. (1998). Cultural awareness and national versus corporate barriers to acculturation. in Gertsen, M. C., Sderberg, A-M and Torp, J. E. (eds.) Cultural Dimensions of International Mergers and Acquisitions, Berlin: Walter de Gruyter, 39-56. Morosini, P. and Singh, H. (1994). Post-cross-border acquisitions: implementing national culture-compatible strategies to improve performance. European Management Journal, 4: 390-400. Rentsch, J. R. and Scheider, B. (1991). Expectations of postmerger organizational life: A study of responses to merger and acquisition scenarios. Journal of Applied Social Psychology, 21: 233-252.

Thank You!
Dr. Sangeeta Yadav