so how does a firm go about entering a new market well there's a number of different ways one is exporting which we've talked about one is licensing we'll go into a little bit more detail you can create a joint venture you can create a wholly owned subsidiary uh you can acquire an established enterprise or you can go about a strategic alliance and we're going to go through each of these and the advantages and disadvantages of each one so when you're trying to determine how to enter a new market you have to take into consideration some specifics about the country that you're looking to enter what are the transportation costs going to be like to get your product out of that country are there any trade barriers tariffs or or anything that inhibits trade what are the political and economic risks the business risks and then um what are the costs and then what's your firm strategy uh does this it uh it is a good opportunity if moving into a new country fits with your organization strategy it's not if it doesn't fit it's just cheap that's just that is not going to lead to a successful outcome so you have to decide what markets to enter when and then how large you want to be when you when you enter those markets so the as you're sitting and trying to decide where to expand your business you have to decide which foreign markets you want to look at the long run potential um for profit in that market how stable is it politically and are there any oddities about the economy is it a market-based economy is it a command economy or you have a strong um political leader in charge that that may take control or is it somewhere in between sort of a mixed economy ideally you're looking for a market-based economy here's an example of a a of a an expansion that worked really well this is Tesco Supermarket it's a UK based chain and I think they're in 20ome countries now making billions of dollars they customized their product mix a bit for each location but it's a model that has been highly successful in moving moving out and it was a a green field expansion all right so how do you decide how and when to enter you want to start by looking at what's the right time to enter are your competitors there already um are there advantages to being being the first mover or are there extra risks to being the first mover in into a country um what are the costs to being later let your competitor go in there first and watch and see what mistakes uh that competitor makes and then decide whether or not you're going to enter that market um there are definitely advantages to capturing a market first you're going to preempt your rivals and build some sales volume before a rival gets in there and then hopefully you can create switching costs which means that it's difficult for your your customers to switch from your product to the new entry and so if you're able to to uh cap capture some of those switching costs uh uh then that typically is advantageous to you too but there are disadvantages to being the first there pioneer being the first company it to go into a market in a particular industry can be really problematic if the government hasn't figured out how they're going to work with your industry entering their market so there are what we call pioneering costs being the first in there lots of first u firsttomarket businesses fail because uh it's challenging to work with the government it's very slow the government doesn't really know how to operate with your uh with your company and and move the process along and so that can cause undue delays that means the business may fail and then the cost of promoting and um in uh selling a new product to a local market can be quite high it may take a while for customers to adopt your product and and in the meantime uh your business may not be sustainable so when you're looking to enter a market you have to decide on scale there's some advantages to small scale is you get to kind of dip your toe in the water and um learn from that to help reduce your overall risk but you can't really build market share and you may not be known widely and so it may take longer to uh capture the market now to get into a market there's a number of different ways we can do we can export which we've talked about we can do turnkey projects we can do licensing franchising joint ventures or wholly owned subsidiaries of of your main company so exporting low costs you're producing your product in your country and you're and you're shipping it to other countries um uh there could be some advantages to if we think about that experience curve um uh cost and uh and price that you're able to sell your product for so your profitability uh you may be able to sell more volume produce more volume at your current plant and export to another c country and therefore um you move down that experience cost and create some new economies however um you may not be producing your product in the lower lowest cost market and so your cost may be higher than some compet competitors transportation costs depending on the size and scale of your product that can be quite high and factor into your cost uh structure there could be tariff tariffs and um there could be some foreign agents that uh that aren't um acting in the best interest of the exporters there's all kinds of issues with um uh graft and uh and corruption at ports of entry and so it could be a challenge to get your product into into a a market so exporting is an option but it's often a costly option uh it is not the lowest cost option that will uh produce the greatest value for your your firm another option is called turnkey and this involves hiring a contractor it's usually a lo local business and you tell them "Okay I want a plant in this general region i want this number of employees i want to be able to produce this product." And they do it they set it all up for you and at the end of it they turn over the key and you've got a an operational plant ready to go okay so it it's nice because you're working with a local agent who knows the market and um and knows how to navigate the market it tends to be less risky um but uh uh you often don't stay in the country you're there for a period of time and then you turn the factory back over you in the meantime you took this turnkey um contractor and you told him everything about how to produce your product and so he may go and create his own company and so now you've created a competitor who knows the local market far better than you do um and and uh your technology to get your manufacturing facility up and running has now been turned over to a contractor so again it can limit your competitive advantage so turnkeys um are less popular as markets are becoming developed you're seeing fewer turnkey operations licensing we talked a little bit um when we talked about strategy so you're you're taking your intellectual property and you're giving it to um a lensur in in a new country and telling them to go ahead and here's the specifications here's here's our intellectual property produce the product and sell it um uh in general um you don't have any development costs and you don't have any um you don't have to build a factory avoid those costs um so the investment costs are lower um uh let's see you you can capitalize on market opportunities easily uh because you don't even have to build anything you're just your product is now just available in another country however you've got no control so the license has a set of specifications on how to build or develop your product but you can't really control whether it's being done properly um we've seen lots of uh lots of issues with that uh over time and um you you can't be strategic about how much of the product the the lens or produces and uh whether he starts dumping the product um uh and again you you're giving away your competitive advantage you're giving your intellectual property to the licensor and so you're you're losing something in that mix so licensing is an option uh but in general it it is for products with very little with intellectual property that is does not have a high value on it okay so more um commodity kind of projects you'd see with licensing franchising is um you have an idea that started in the in the US and say you're a US-based firm and um that idea you think will sell elsewhere and so you line up franchises who are going to take your idea and you're going to give the specifications for how to run this business and you're going to um create some strict laws and rules around how to develop your franchise and um you're going to sell the right to franchise your business um to these franchiseors and and so the advantage is you have to set up businesses all you're doing is taking what you've done well and selling the right to do that in another country to uh to an individual um however again um you you've limited profitability because um you have an agreement on how much you make per item sold um and then the the ability to manage franchises in your home country is challenging imagine it when you've got uh 12,000 miles between you and the and the franchiseor the distance becomes problematic and um maintaining the quality of your product and your product's reputation can be challenged if your franchises are not uh not operating properly another option is a joint venture and that's when two firms come together and um and uh produce a product often it's a service for joint ventures uh you can benefit if your your partner is a local firm you can benefit by the knowledge that that in that firm has from having worked in that business already you're sharing costs and risks and so uh um I don't have to fund an entirely new business that we're going to each put in to this business so we um cut our costs in half and therefore cut some of our risk uh if you're if your joint venture partner is local you often um avoid some of the risk of government interference because you have a local partner which is typically valued now um you're giving control to your your venture joint venture problem uh partner they'll know again about your technology and some of your intellectual property so uh that's a bit of a challenge um uh you may not be able to control your subsidiaries um uh in these econ in these locations and you have shared ownership of of the output and uh that may not be valuable long term and then you have a wholly owned subsidiary so your main company is located in Cincinnati Ohio and now you're going to open a branch in uh Ho Chi Min City uh you own 100% you can either do it as a green field which is a brand new um from the groundup business or you can acquire an existing firm so um you're the advantage is uh you don't lose control you have complete control uh u you can run the operations exactly as you see fit you can pick the location um you can um val you can get value from the experience curve because as you produce more in that location your cost should decline um but you've got the full cost of produ of setting up this business and all the risks attached to all the political risks if the government is unstable all the economic risks if there's economic downturns in that economy um uh so there are challenges as well this table is a really nice summary of the different uh types of of um ways you can enter a new market and the advantages and disadvantages of each all right so um how do you decide how you're going to go in well one is um what are your core competences what are you best at and um and are you willing to share that with a with a partner or with a contractor depending on the type of business what kind of technological knowhow how technological and how much intellectual property the more intellectual property is in your business the more you want control so that tends to lead toward a green field um let's see if you have proprietary technology you're probably not going to want to license it and you're probably not going to want to do a joint venture you don't want to share that information and um uh if you're trying to establish your technology is the dominant design um then you may want to think about licensing but you also may want to go into that market on your own so so you want to look at your managerial knowhow your competitive advantage um any trademark laws and the risk of losing control and all of those things come into play as you're thinking through um what kind of operation you want to have when you enter a new market all right um firms that have um high pressure to reduce their costs um are often likely to um look at exporting or um or subsidiaries exports if you can do it um with transportation costs limited that's a cheap way typically to enter a market but wholly owned subsidiaries in an in an industry I'm sorry in a country that has low uh manufacturing labor costs can be a really inexpensive way to uh uh to help control your costs and and grow the value for your company um okay so if you choose to enter through a subsidiary you can manage the location the scale of the operations and um anytime you're looking to do global standardization so you're looking at the same product produced and and sold around the world or you're looking at transnational strategy you want low cost and high um high specialization for a given market those are typically you're looking at wholly unsubsidiaries so you could instead of doing a green field you could do an acquisition the beauty of an acquisition is the company already exists so it's quick to get up and get started so oftentimes you get an advantage over any any of your if your US-based firm any US competitors that may be also looking to enter that market so you can preempt those competitors it's less risky than a green field because you have some local um expertise in in an organization that's already been running hopefully effectively there and um the challenge is a lot of these operation a lot of these um joint ventures aren't successful if you think of just US firms that have merged how often they fail because there's culture differences or the ways of doing business are different um between the two organizations now picture doing that with an international company where things are very very different so often there's there's failure you you believe you can come in and um you acquire this firm you're going to be able to run it more efficiently it's called the hubris hypothesis and with Ubis we typically believe that you overpay for an asset and therefore it's it's not going to pay off in the long run uh the culture clash is very real it's very real in any acquisition but an international acquisition is that much more challenging and then often you don't realize um uh the gains that you expected to have that uh in any acquisition we uh we value what we expect the um the combined organization to be worth um and we often overestimate the value that we'll bring to that operation and so therefore it it fails over time and very frequently companies are so anxious to get it to enter a new market they fail to do adequate pre-acquisition screening of the potential uh um partner organization all right so for acquisitions they are they reduce the risks of failure because you've got a company that already is already there uh but you have to be really careful about the screening and um it allows you to move rapidly um once you once you agree to the acquisition you're in the market much faster than if you're developing a green field with green fields um you can build exactly what you want where you want it size you want it um with all the technology that you want to bring to the the the the firm disadvantages are it's slower because you are creating something brand new and you don't have a track record there and you don't have a local partner so there are some additional risks um and then it's challenging if while you're taking the time to go through all of the the um permitting to to build your green field a competitor acquires a local firm and enters the market before you so that's a that's a risk that you would take so which do you do it really depends on the circumstances of your firm um if you're already well established um uh and you have interest from a global competitor you might want to think about a an acquisition if there are no competitor firms in the market right now and you have time and you really want to customize the product the the manufacturing facility exactly as you want go ahead and uh take the time to to do a green field the last option is a strategic alliance and this is a cooperative um between um potential uh competitors and you form essentially a joint venture and um over time there have been an increase in strategic alliances we've seen it with some of the the uh big four accounting firms they've created alliances or an accounting firm and a law firm have created an alliance to have to expand the services that they're able to offer now it it's uh it's a quick entry into a foreign market particularly if you're aligning with a local firm and and you're a multinational um you share fixed costs you can bring together complimentary skills the idea of an accounting firm and a law firm there's very complimentary skills that benefit your client base uh uh by one stop to be able to get all of their accounting and law work done at the same place and um and if the two firms uh work effectively together you could create the standards for others to operate uh in in that uh in that particular country but there are dis disadvantages um uh you uh you could give your competitors a lowcost route uh to new technology and markets because you're you're aligning with a competitor um and you can give away um more information than you receive in your strategic alliance so it's it's not a joint venture but there are elements of joint venture disadvantages as well because your competitor may learn more about you than you would ideally like so how do you make alliances work much like joint ventures you have got to spend the time selecting the right partner uh get as much information how do they work um how have they worked with other companies previously and and spend time getting to know them especially if the um the two firms in the alliance are from different cultures you need to put in that time up front to get to know each other and then um uh for your structure you want to make sure that um it you can control your your technology so that uh you are not giving away trade secrets high uh emphasis on strong contracts and um you know make agreements upfront on what skills you're going to swap and um and make sure that you uh you've got a strong commitment from your partner organization and that will help lead to a successful alliance to manage the alliance you want managers for both companies to get to know each other that interpersonal relationship is critically important to this success they need to know each other they need to respect each other and they need to have have an ability to work together well they don't have to have the same uh skill set but they need to have um mutual mutual respect for each other's skills and um you want the you want it to be a learning organization you want those um from your organization to learn from your your alliance partner and vice versa okay uh let's see okay so when we're thinking about where we're growing oops sorry we're thinking about where we're going to go um we want to think about the growth rates in that economy and um the political environment in that economy and is this really a market that we we are interested in entering today that will benefit our firm long term and that's how you think about entering a new market