Chapter 15 ‒ Entry Strategy and Strategic Alliances
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Entry Strategy and Strategic Alliances
Learning objectives
expansion: which markets to
enter, when to enter those
markets, and on what scale.
markets.
• Identify the factors that
• Recognize the pros and cons of
acquisitions versus greenfield
ventures as an international
entering into strategic alliances
when going international.
This chapter is concerned with three closely related
topics: the decisions about which markets to enter,
when to enter those markets, and on what scale.
or franchising to host country firms, setting up a
joint venture with a host country firm, or setting up
Strategic alliances have become more frequent.
They may be seen as one way for firms to enter into
cooperative agreements between actual or potential
shareholding deals, licensing arrangements, formal
joint ventures, and informal cooperative deals.
costs and trade barriers, political and economic
risks, and firm strategy.
The opening case explores the strategic alliances
based coffee company, to enter markets in Europe
and Asia.
15
Chapter 15 ‒ Entry Strategy and Strategic Alliances
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OUTLINE OF CHAPTER 15: ENTRY STRATEGY AND STRATEGIC
Timing of Entry
Management Focus: Tesco’s International Growth Strategy
Scale of Entry and Strategic Commitments
Market Entry Summary
Management Focus: The Jollibee Phenomenon
Joint Ventures
Wholly Owned Subsidiaries
Selecting an Entry Mode
Core Competencies and Entry Mode
Pressures for Cost Reductions and Entry Mode
Advantages of Strategic Alliances
Disadvantages of Strategic Alliances
Making Alliances Work
Chapter Summary
Critical Thinking and Discussion Questions
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CLASSROOM DISCUSSION POINT
Ask students to find several examples of companies expanding into new markets.
Students can use such publications as The Wall Street Journal or Bloomberg
Businessweek as sources. Then ask students to consider why the companies involved
chose the form of market entry involved.
Try to get students to think about the trade-offs involved with the various forms of
market entry. Jot their responses on the board using the framework presented in the text.
Finally, refer to the discussion during the presentation of the material so that students can
recognize the trade-offs companies make.
OPENING CASE: Gazprom and Global Strategic Alliances
Summary
The opening case describes the many strategic alliances of Gazprom, the Russian-owned
oil company. With interests in the extraction, production, and sale of petroleum, natural
gas, and other products, Gazprom relies on its alliances with companies in other countries
as well as its own, to expand its markets and diversify its revenues. Discussion of the case
can begin with the following questions:
QUESTION 1: Many of Russian oil giant Gazprom’s strategic alliances are with
companies in foreign countries. Do you see any disadvantages to these companies of
partnering with a government-owned Russian company?
ANSWER 1: Some students will probably suggest that for companies like Dow
Chemical, a publicly-owned U.S. company, partnering with a Russian government-
owned company could result in a clash of strategies. While Dow’s objective will be to
QUESTION 2: What are the advantages for Gazprom of forming strategic alliances with
companies in other countries? Discuss Gazprom’s alliance with Lukoil. How does the
collaboration create a win-win scenario for both companies?
ANSWER 2: Russia’s Gazprom has effectively partnered with foreign companies in
multiple markets and businesses to both diversify and expand its business. Gazprom’s
Chapter 15 ‒ Entry Strategy and Strategic Alliances
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
companies. The two organizations plan to support each other in bids for offshore projects.
In doing so, they will increase their chances for success and be in a position to counter
the power Rosneft, an oil company nearly twice the size of Gazprom.
QUESTION 3: Gazprom recently formed a strategic alliance with China. Why is China
important to the company? What prompted the alliance?
ANSWER 3: After Europe, in response to the Ukrainian crisis and continued conflict
with Turkey, imposed constraints on Gazprom’s operations, the company turned to
Another Perspective: To find out more about Gazprom, go to:
{http://www.gazprom.com/about/} and
{https://www.theguardian.com/world/2015/aug/07/gazprom-oil-company-share-price-
collapse}.
Teaching Tip: To expand the discussion of market entry strategies, consider Caterpillar
Joint Venture – China and International Market Entry Strategies in the International
Business Library at http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your keyboard to
search for the video title.
LECTURE OUTLINE FOR CHAPTER
This lecture outline follows the Power Point Presentation (PPT) provided along with this
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips and additional perspectives.
Slide 15-3 Basic Entry Decisions
Firms expanding internationally must decide which markets to enter, when to enter them
and on what scale, and which entry mode to use. Entry modes include exporting,
licensing, or franchising to a company in the host nation; establishing a joint venture with
a local company; establishing a new wholly owned subsidiary; or acquiring an
established enterprise.
What Influences the Choice of Entry Mode?
Several factors affect the choice of entry mode including transport costs, trade barriers,
political and economic risks, costs, and firm strategy.
Slides 15-4 ‒ 15-8 Which Foreign Markets?
The choice of foreign markets will depend on their long-run profit potential.
Timing of Entry
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Once attractive markets are identified, the firm must consider the timing of entry. Entry is
called pioneering costs.
Scale of Entry and Strategic Commitments
After choosing which market to enter and the timing of entry, firms need to decide on the
scale of market entry. Large-scale entry may keep rivals out and may stimulate
indigenous competitive response. Small-scale entry allows time to learn about the market
The six entry modes are exporting, turnkey projects, licensing, franchising, joint ventures,
and wholly owned subsidiaries.
Exporting
Exporting avoids the costs of investing in a new location and may help achieve
experience curve and location economies. Exporting faces challenges from tariff barriers,
the various topics to learn more about export financing, export plans, dealing with risk,
and so on.
Turnkey Projects
Turnkey projects allow a company to get a return on knowledge assets and are less risky
restrictions in a country.
Franchising
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Franchising reduces costs and risks, avoids political and economic restrictions, and
Wholly owned subsidiaries offer the most control and have the highest level of risk and
cost.
Slides 15-18 – 15-20 Selecting an Entry Mode
The optimal choice of entry mode involves trade-offs.
Core Competencies and Entry Mode
Slides 15-21 – 15-25 Greenfield Ventures or Acquisitions
Firms can establish a wholly owned subsidiary in a country through a greenfield
strategy (building a subsidiary from the ground up) or through an acquisition strategy.
Pros and Cons of Acquisitions
Pros: quick, preemptive, possibly less risky. Cons: disappointing results, overpay,
Slides 15-26 ‒ 15-30 Strategic Alliances
Strategic alliances refer to cooperative agreements between potential or actual
competitors.
The Advantages of Strategic Alliances
Strategic alliances facilitate entry into a foreign market, allow firms to share the fixed
Chapter 15 ‒ Entry Strategy and Strategic Alliances
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Strategic alliances can give competitors low-cost routes to new technology and markets,
but unless a firm is careful, it can give away more than it receives.
The firm must be certain that the partner is one that can help the firm achieve its goals
and not act opportunistically to exploit the alliance purely for its own ends.
Another Perspective: Argentina’s biggest food company is looking for strategic alliance
partners to help it expand into foreign markets. To learn more, see
{https://www.bloomberg.com/news/articles/2017-11-07/argentina-s-biggest-food-
company-seeking-partner-for-asia-growth}.
Making Alliances Work
The success of an alliance is a function of partner selection, alliance structure, and
manner in which the alliance is managed.
Another Perspective: The Association of Strategic Alliance Professionals
{www.strategic-alliances.org/} is an organization devoted to the formation of successful
strategic alliances. The organization is supported by a number of well-known global
companies and provides information on the involvement of the companies in strategic
alliances.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Review the Management Focus on Tesco. Then answer the following
questions:
a. Why did Tesco’s initial international expansion strategy focus on developing nations?
b. How does Tesco create value in its international operations?
c. In Asia, Tesco has a history of entering into joint venture agreements with local
partners. What are the benefits of doing this for Tesco? What are the risks? How are
those risks mitigated?
d. Tesco’s entry into the United States represented a departure from its historic strategy
of focusing on developing nations. Why do you think Tesco made this decision? How is
the U.S. market different from other markets Tesco has entered?
ANSWER 1:
a. Tesco’s global expansion strategy has been rather unique in the grocery industry.
Rather than competing head-to-head with established retailers in developed markets like
b. The keys to Tesco’s success in its international operations is its ability to spot markets
with strong underlying growth trends, identify existing companies in those locations that
have a deep understanding of the local market, form a joint venture with those companies
Chapter 15 ‒ Entry Strategy and Strategic Alliances
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
and transfer its expertise in the industry to the venture, and later buy the partner out. The
strategy is highly successful, supplementing the company’s UK earnings with an
additional ₤22.4 billion in revenues in 2012. Tesco is now the number three company in
the global grocery industry.
c. Tesco’s strategy of entering foreign markets via joint ventures has proven to be highly
successful. The company is able to bring its expertise in retailing as well as its financial
d. Most students will probably agree that Tesco’s initial entry into the crowded market in
the United States represented a departure from its traditional strategy of focusing on
QUESTION 2: Licensing propriety technology to foreign competitors is the best way to
give up a firm’s competitive advantage. Discuss.
ANSWER 2: The statement is basically correct—licensing proprietary technology to
foreign competitors significantly increases the risk of losing the technology. Therefore,
licensing should generally be avoided in these situations. Yet licensing still may be a
good choice in some instances. When a licensing arrangement can be structured in such a
way as to reduce the risks of a firm’s technological know-how being expropriated by
QUESTION 3: Discuss how the need for control over foreign operations varies with
firms’ strategies and core competencies. What are the implications of the choice of entry
mode?
ANSWER 3: If a firm’s competitive advantage (its core competence) is based on control
over proprietary technological know-how, licensing and joint venture arrangements
should be avoided if possible so that the risk of losing control over that technology is
Chapter 15 ‒ Entry Strategy and Strategic Alliances
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
minimized. For firms with a competitive advantage based on management know-how, the
risk of losing control over the management skills to franchisees or joint venture partners
is not that great. Consequently, many service firms favor a combination of franchising
and subsidiaries to control the franchises within particular countries or regions. The
subsidiaries may be wholly owned or joint ventures, but most service firms have found
that joint ventures with local partners work best for controlling subsidiaries.
QUESTION 4: A small Canadian firm that has developed valuable new medical products
using its unique biotechnology know-how is trying to decide how best to serve the
European Union market. Its choices are given below. The cost of investment in
manufacturing facilities will be a major one for the Canadian firm, but it is not outside its
reach. If these are the firm’s only options, which one would you advise it to choose?
Why?
• Manufacture the products at home and let foreign sales agents handle marketing.
• Manufacture the products at home and set up a wholly owned subsidiary in
Europe to handle marketing.
• Enter into an alliance with a large European pharmaceutical firm. The product
would be manufactured in Europe by the 50–50 joint venture and marketed by the
European firm.
ANSWER 4: If there were no significant barriers to exporting, then the third option
would seem unnecessarily risky and expensive. After all, the transportation costs required
to ship drugs are small relative to the value of the product. The first two options would
expose the firm to less risk of technological loss and would allow the firm to maintain
CLOSING CASE: Starbucks’ Foreign Entry Strategy
Summary
The closing case describes the strategy used by Starbucks to expand into markets
throughout Europe and Asia. Founded in 1971, Starbucks is based in Seattle. The
company began its aggressive international expansion in 1995, when CEO Howard
Schultz decided to open a joint venture with Japanese retailer Sazaby Inc. In order to
replicate the North American Starbucks experience, several Starbucks employees from
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the United States were sent to work in Japanese stores, and all Japanese employees went
through an extensive training process. The process proved enormously successful, and
the company soon pursued similar joint ventures throughout Asia and Europe, with the
Chinese market in particular showing impressive growth. Discussion of the case can
begin with the following questions:
QUESTION 1: Starbucks has become a phenomenon worldwide with more than 24,000
stores in more than 60 countries. Sales are great even at relatively high prices for its
products. This can perhaps be explained in the U.S. (and other wealthy markets) but how
can Starbucks’s success be explained by its foreign market entry in less developed and
emerging markets?
ANSWER 1: This question should generate an interesting conversation in the classroom.
Some students will suggest that while Starbucks has become a meeting place or an office
of sorts in the United States and other developed countries, in some developing markets,
QUESTION 2: Do you expect that the growth of the number of Starbucks stores
worldwide will continue into more countries or do you expect Starbucks to focus on more
stores in the foreign markets in which the company already has at least some stores
already established?
ANSWER 2: Most students will probably suggest that Starbucks will probably continue
QUESTION 3: With the CEO and driver of the company—Howard Schultz—stepping
down as the company’s unquestioned leader, do you expect Starbucks to change its
foreign market entry strategy in any way?
ANSWER 3: Howard Schultz has been the champion and cheerleader for Starbucks’
Italian coffee shop format since the 1980s. Under his guidance, Starbucks has grown