Overview
The lecture explains the main strategies firms use to enter new international markets, detailing each entry mode's advantages and disadvantages and the key factors influencing the decision.
Entry Modes for New Markets
- Entry methods include exporting, licensing, joint ventures, wholly owned subsidiaries, acquisitions, and strategic alliances.
- Exporting means producing goods domestically and shipping them to foreign markets; it has low setup costs but higher transport costs and potential tariffs.
- Licensing allows a firm in another country to use your intellectual property; it's low-cost but offers little control and may risk giving away valuable assets.
- Franchising sells the business model to foreign operators; it eases expansion but makes quality control overseas challenging.
- Joint ventures involve partnering with a local firm, sharing costs, risks, and local expertise, but involve shared control and possible loss of proprietary knowledge.
- Wholly owned subsidiaries mean full ownership in a foreign market, either by building anew (greenfield) or acquiring an existing firm, offering control but with high costs and risks.
- Strategic alliances involve cooperation without full merger, leveraging complementary skills but risking transfer of sensitive information.
Key Factors in Market Entry Decisions
- Factors to consider: transportation costs, trade barriers, political and economic risks, business risks, and fit with the firm's strategy.
- Evaluate long-term profit potential, political stability, and type of economy (market, command, or mixed) in the target market.
- Timing matters: being a “first mover” can build market share but also carries pioneer risks, such as regulatory uncertainty and high promotion costs.
- Scale of entry: small-scale reduces risks but limits impact; large scale can rapidly build share but increases exposure.
Advantages & Disadvantages of Each Method
- Exporting is easy to start but may not be cost-effective for bulky or tariffed goods.
- Turnkey projects reduce local market risk but may create future competitors.
- Licensing/franchising offers fast, low-cost market access but risks losing control and intellectual property.
- Joint ventures share risks and local insights but may involve conflict and loss of control.
- Wholly owned subsidiaries maximize control, protect know-how, and exploit experience curves but are expensive and risky.
- Acquisitions enable rapid entry but risk culture clashes, overpayment, and integration failure.
- Strategic alliances offer speed and shared capabilities but may leak key knowledge to partners.
Decision-Making Considerations
- Consider the firm’s core competencies and willingness to share technology or knowledge.
- High-value intellectual property suggests preferring subsidiaries or greenfield investments over licensing or joint ventures.
- Exporting or subsidiaries suit firms aiming for global standardization or cost reduction.
- Acquisitions are faster and lower initial risk but demand thorough pre-screening to avoid failures.
Managing Alliances and Joint Ventures
- Carefully screen and select partners; build trust and mutual respect.
- Use strong contracts to protect technology and agree upfront on shared resources.
- Foster learning between partners and maintain open communication.
Key Terms & Definitions
- Exporting — Selling domestically produced goods to foreign markets.
- Licensing — Allowing another company to use your intellectual property in return for royalties.
- Franchising — Selling the rights to operate your business model in another country.
- Joint Venture — A business arrangement where two companies share ownership and operation in a new market.
- Wholly Owned Subsidiary — A foreign business fully owned by the parent company.
- Greenfield Investment — Building a new operation from scratch in a foreign country.
- Acquisition — Buying an existing company in the target market.
- Strategic Alliance — Formal cooperation between firms without merging ownership.
Action Items / Next Steps
- Review the summary table of entry methods and their pros/cons as referenced in the lecture.
- Analyze potential target markets using criteria such as risk, profit potential, and type of economy.
- Prepare case studies or examples of successful and failed market entries for discussion.