Chapter 6 Entry Strategy

Outline

Basic Entry Decisions Entry Modes Strategic Alliances Merger & Acquisition Case: p426 Merrill Lynch in Japan Fuji Xerox 柯达、乐凯、富士

Operating in Japan for 35 years. First foreign securities firm in Japan. Only foreign securities firm listed on the Tokyo

Stock Exchange. Analysts provide research

on over 300 companies.

Why did Merrill Lynch’s initial entry into Japan meet with such limited success?

What role did changing regulations play in Merrill Lynch’s 1997 investment?

What remained the major impediments to Merrill Lynch in Japan? What had not changed since its initial entry? Did the new entry strategy address these impediments?

1 Basic Entry Decisions

1-1 Which markets to enter? 1-2 When to enter the markets? 1-3 What scale of entry?

1-1 Which Foreign Markets Favorable benefit-cost-risk trade-off:

Politically stable developed and developing nations. Free market systems No dramatic upsurge in inflation or private-sector

debt.

Unfavorable Politically unstable developing nations with a mixed

or command economy or where speculative financial bubbles have led to excess borrowing..

1-2 Timing of Entry

Advantages in early market entry:

First-mover advantage. Build sales volume. Move down experience curve and achieve cost

advantage. Create switching costs.

Disadvantages: pioneering costs. Changes in government policy.

1-3 Scale of Entry

Large scale entry Strategic Commitments - a decision that has a

long-term impact and is difficult to reverse. More attractive to consumers; May cause rivals

to rethink market entry. May lead to indigenous competitive response.

Small scale entry: Time to learn about market. Reduces exposure risk.

B company

A company Entry non-entry

Entry 10/10 30/0

Non-entry 0/30 0/0

B company

A company Entry non-entry

Entry -5/-5 50/0

Non-entry -- --

2 Entry Modes

2-1 Exporting 2-2 Licensing 2-3 Franchising 2-4 Turnkey Projects 2-5 Joint Ventures 2-6 Wholly Owned Subsidiaries

non-equity or contractual arrangement

Equity arrangement

2-1 Exporting Advantages:

Avoids cost of establishing manufacturing operations. May help achieve experience curve and location

economies.

Disadvantages: May compete with low-cost location manufacturers. Possible high transportation costs. Tariff and non-tariff barriers. Possible lack of control over marketing reps.

2-2 Licensing

Advantages: Reduces costs and risks of establishing enterprise. Overcomes restrictive investment barriers.

Disadvantages: Lack of control. Cross-border licensing may be difficult. Creating a competitor

2-3 Franchising

Advantages: Reduces costs and risk of establishing enterprise.

Disadvantages: May prohibit movement of profits from one

country to support operations in another country. Quality control.

2-4 Turnkey Projects

Advantages: Can earn a return on knowledge asset. Less risky than conventional FDI.

Disadvantages: No long-term interest in the foreign country. May create a competitor. Selling process technology may be selling

competitive advantage as well.

"Licensing propriety technology to foreign competitors is the best way to give up a firm's competitive advantage." Discuss.

2-5 Joint Ventures

Advantages: Benefit from local partner’s knowledge. Shared costs/risks with partner. Reduced political risk.

2-5 Joint Ventures

Disadvantages: Risk of giving control of

technology to partner. May not realize

experience curve or location economies

Shared ownership can lead to conflict.

2-6 Wholly Owned Subsidiary

Advantages: No risk of losing technical competence to a

competitor. Tight control of operations. Realize learning curve and location economies.

Disadvantage: Bear full cost and risk.

Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Disadvantage

Exporting Ability to realize location andexperience curve economies

High transport costsTrade barriersProblems with local marketing agents

Turnkeycontracts

Ability to earn returns fromprocess technology skills incountries where FDI isrestricted

Creating efficient competitorsLack of long-term market presence

Licensing Low development costs andrisks

Lack of control over technologyInability to realize location and

experience curve economiesInability to engage in global strategic coordinationTable 9.1a

Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Disadvantage

FranchisingLow development costs andrisks

Lack of control over qualityInability to engage in global strategic

coordination

Jointventures

Access to local partner’sknowledge

Sharing development costs and risks

Politically acceptable

Lack of control over technologyInability to engage in global strategic

coordinationInability to realize location andexperience economies

Whollyownedsubsidiaries

Protection of technologyAbility to engage in global

strategic coordinationAbility to realize location andexperience economies

High costs and risks

Table 9.1b