Chapter 15 – Entry Strategy and Strategic Alliances
15-1
Entry Strategy and Strategic Alliances
Learning objectives
• Explain the three basic
differences that firms
contemplating foreign
expansion must make: which
markets to enter, when to enter
those markets, and on what
scale.
• Compare and contrast the
different modes that firms use
to enter foreign markets.
• Identify the factors that
influence a firm’s choice of
entry strategy.
• Recognize the pros and cons of
acquisitions versus greenfield
ventures as an entry strategy.
• Evaluate the pros and cons of
entering into strategic alliances.
This chapter is concerned with three closely related topics:
the decisions of which markets to enter, when to enter
those markets, and on what scale.
When a firm that wishes to enter a foreign market, it has
several options, including exporting, licensing or
franchising to host country firms, setting up a joint venture
with a host country firm, or setting up a wholly owned
subsidiary in the host country to serve that market. Each
of these options has its advantages and each has its
disadvantages.
Strategic alliances have become more frequent. They may
be seen as one way for firms to enter into cooperative
agreements between actual or potential competitors. The
term “strategic alliances” is often used rather loosely to
include a wide range of arrangements between firms,
including cross-share holding deals, licensing
arrangements, formal joint ventures, and informal
cooperative deals.
The magnitude of the advantages and disadvantages
associated with each entry mode are determined by a
number of different factors, including transport costs and
trade barriers, political and economic risks, and firm
strategy.
The opening case explores how General Motors focused
on China as its next growth market. The company used a
joint venture strategy in the market and by 2010 sold more
cars in China than in the United States. The closing case
discusses General Electric’s changing perspective on the
value of joint ventures as a market entry mode. In the
past, General Electric has avoided joint ventures and the
shared control they imply when entering foreign markets,
but more recently, the company has embraced the entry
mode as a means of acquiring knowledge of the local
market.
15
Chapter 15 – Entry Strategy and Strategic Alliances
15-2
OUTLINE OF CHAPTER 15: ENTRY STRATEGY AND STRATEGIC
ALLIANCES
Opening Case: General Motors in China
Introduction
Basic Entry Decisions
Which Foreign Markets?
Timing of Entry
Scale of Entry and Strategic Commitments
Summary
Management Focus: Tesco’s International Growth Strategy
Management Focus: The Jollibee Phenomenon—A Philippine Multinational
Entry Modes
Exporting
Turnkey Projects
Licensing
Franchising
Joint Ventures
Wholly Owned Subsidiaries
Selecting an Entry Mode
Core Competencies and Entry Mode
Pressures for Cost Reductions and Entry Mode
Greenfield Venture or Acquisition?
Pros and Cons of Acquisitions
Pros and Cons of Greenfield Ventures
Greenfield or Acquisition?
Strategic Alliances
The Advantages of Strategic Alliances
The Disadvantages of Strategic Alliances
Making Alliances Work
Management Focus: Cisco and Fujitsu
Chapter Summary
Critical Thinking and Discussion Questions
Closing Case: General Electric’s Joint Ventures
Chapter 15 – Entry Strategy and Strategic Alliances
15-3
CLASSROOM DISCUSSION POINT
Ask students to find several examples of companies expanding into new markets.
Students can use publications like the Wall Street Journal or Business Week 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 back to the discussion during the presentation of the material so students
recognize the trade-offs companies make.
OPENING CASE: General Motors in China
The opening case describes the entry of General Motors into China. General Motors
initially entered China in 1997 via a joint venture with Chinese automaker, Shanghai
Automotive Industry Corporation. General Motors believed that China would become an
important market in the near future. So far, the company’s hunch appears to be on the
mark. China’s auto market was strong even during the recent global recession giving
General Motors something to cheer about even as sales in the United States continued to
fall. Today, the company sells more cars in China than it does in the United States.
Discussion of the case can revolve around the following questions:
1. What attracted General Motors to China in 1997? What were the benefits of making a
significant investment in the country?
2. Which entry mode did General Motors used to enter China? What advantages did this
entry mode have over other ways to expand into the market?
3. In your opinion, has General Motors’ approach to China paid off? Was the company’s
decision to make a significant commitment to the market a good one?
Another Perspective: To explore General Motors’ Chinese operations in more depth, go
to {http://www.gmchina.com/} and click on “English”.
Chapter 15 – Entry Strategy and Strategic Alliances
15-4
LECTURE OUTLINE FOR CHAPTER
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
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.
Slide 15-4 What Influences Entry Mode Choice
Several factors affect the choice of entry mode including transport costs, trade barriers,
political and economic risks, costs, and firm strategy.
Slides 15-5-15-6 Which Foreign Markets?
The choice of foreign markets will depend on their long run profit potential.
Slides 15-7-15-9 Timing of Entry
Once attractive markets are identified, the firm must consider the timing of entry. Entry
is early when the firm enters a foreign market before other foreign firms, and late when
the firm enters the market after firms have already established themselves in the market.
First mover advantages are the advantages associated with entering a market early.
First mover disadvantages are disadvantages associated with entering a foreign market
before other international businesses.
Slide 15-10 Scale of Entry and Strategic Commitments
After choosing which market to enter and the timing of entry, firms need to decide on the
Slide 15-11 Which is Best?
There are no “right” decisions when deciding which markets to enter, and the timing and
scale of entry, just decisions that are associated with different levels of risk and reward.
Slides 15-12-15-14 Entry Modes
The six entry modes are exporting, turnkey projects, licensing, franchising, joint ventures,
and wholly owned subsidiaries.
Chapter 15 – Entry Strategy and Strategic Alliances
15-5
Slide 15-15 Exporting
Exporting avoid costs of investing in new location and may help achieve experience
curve and location economies. Exporting faces challenges from tariff barriers,
transportation costs, control over marketing, and local low-cost manufacturers.
Slide 15-16 Turnkey Projects
Turnkey projects allow a company to get a return on knowledge assets and are less risky
than conventional FDI. The disadvantages are that there is not long-term interest in the
location, the project may create a competitor, and if process technology is involved, the
firm may be selling a competitive advantage.
Slide 15-17 Licensing
Licensing does not bear the costs and risks of investment and avoids political/economic
restrictions in a country.
Slide 15-18 Franchising
Franchising reduces costs and risks, avoids political and economic restrictions, and
allows for quicker expansion. Disadvantages include loss of control over quality.
Slides 15-19-15-20 Joint Ventures
Joint ventures benefit from the local partner’s knowledge, shared costs, and reduced risk.
Disadvantages include loss of control over technology and conflict between partners.
Slide 15-21 Wholly Owned Subsidiaries
Wholly owned subsidiaries offer the most control and the highest level of risk and cost.
Slide 15-22 Selecting an Entry Mode
The optimal choice of entry mode involves trade-offs.
Chapter 15 – Entry Strategy and Strategic Alliances
15-6
Slide 15-23 Core Competencies and Entry Mode
The optimal choice of entry mode for firms pursuing a multinational strategy depends to
some degree on the nature of their core competencies.
Slide 15-24 Pressures for Cost Reductions and Entry Mode
When pressure for cost reductions is high, firms are more likely to pursue some
combination of exporting and wholly owned subsidiaries.
Slides 15-25-15-26 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.
Slide 15-27 Pros and Cons of Acquisitions
Pros: quick, preemptive, possibly less risky. Cons: disappointing results, overpay,
optimism/hubris, culture clash, failure of synergies
Slide 15-28 Pros and Cons of Greenfield Ventures
Greenfield ventures allow the firm to build the subsidiary it wants, but it is slow, risky,
and may involve preemption by competitors.
Acquisition is quicker, so a consideration if there are competitors ready to enter.
Slide 15-29 Strategic Alliances
Strategic alliances refer to cooperative agreements between potential or actual
competitors.
Slide 15-30 The Advantages of Strategic Alliances
Strategic alliances facilitate entry into a foreign market, allow firms to share the fixed
costs (and associated risks) of developing new products or processes, bring together
complementary skills and assets that neither partner could easily develop on its own, can
help a firm establish technological standards for the industry that will benefit the firm.
Chapter 15 – Entry Strategy and Strategic Alliances
15-7
Slides 15-31-15-33 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
{http://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: Reread 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 long 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) In March 2006, Tesco announced that it would enter the United States. This represents
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 others Tesco has
entered? What are the risks here? How do you think Tesco will do?
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
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
strength to the venture where it is paired with the partner’s knowledge of the local
Chapter 15 – Entry Strategy and Strategic Alliances
15-8
d) Most students will probably agree that while Tesco’s entry into the crowded market in
the United States represents a departure from its traditional strategy of focusing on
developing nations with little existing competition, the strategy still reflects the
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 does significantly increase 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
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
Chapter 15 – Entry Strategy and Strategic Alliances
15-9
QUESTION 4: A small Canadian firm that has developed some valuable new medical
products using its unique biotechnology know-how is trying to decide how best to serve
the European Union. 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?
a. Manufacture the product at home and let foreign sales agents handle marketing.
b. Manufacture the products at home and set up a wholly owned subsidiary in Europe to
handle marketing.
c. Enter into a strategic 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 option (c) would
seem unnecessarily risky and expensive. After all, the transportation costs required to
ship drugs are small relative to the value of the product. Both options (a) and (b) would
expose the firm to less risk of technological loss, and would allow the firm to maintain
CLOSING CASE: General Electric’s Joint Ventures
The closing case explores General Electric’s change in strategy. For years, General
Electric entered new markets using wholly owned operations that it built from the ground
up. Today however, the company has moved to a joint venture approach. The following
questions can be helpful in directing the discussion.
Chapter 15 – Entry Strategy and Strategic Alliances
15–10
QUESTION 1: GE used to have a preference for acquisitions or greenfield ventures as
an entry mode, rather than joint ventures. Why do you think this was the case?
ANSWER 1: Many companies choose acquisitions or greenfield investments as an entry
because they give the company full control and all the profits. Firms may also find
QUESTION 2: Why do you think that GE has come to prefer joint ventures in recent
years? Do you think that the global economic crisis of 2008-2009 might have impacted
upon this preference in any way? If so, how?
ANSWER 2: General Electric has shifted away from its traditionally preferred method of
entering new markets via wholly owned subsidiaries to entering new markets through
joint ventures with local firms for a number of reasons. Two key factors in the strategic
shift are the lower risk and cost associated with joint ventures. The company also
QUESTION 3: What are the risks that GE must assume when it enters into a joint
venture? Is there any way for GE to reduce these risks?
ANSWER 3: Most students will probably focus on the fact that joint ventures, while
offering firms the opportunity to share costs and risks, also imply that firms are sharing
QUESTION 4: The case mentions that GE has a well-earned reputation for being a good
partner. What are the likely benefits of this reputation to GE? If GE were to tarnish its
reputation by, for example, opportunistically taking advantage of a partner, how might
this impact the company going forward?
ANSWER 4: GE is well recognized in the industry as being a good partner. GE’s
partners find the firm’s innovative management techniques and strong management
Chapter 15 – Entry Strategy and Strategic Alliances
15–11
QUESTION 5: In addition to its reputation for being a good partner, what other assets do
you think GE brings to the table that make it an attractive joint venture partner?
ANSWER 5: Students may suggest that GE is recognized as being a good partner not
only because of the management knowledge is shares with its partners, but also because
of its vast experience doing business in other countries. While GE may form a joint
INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Title: California Braces As NUMMI Auto Plant Nears Closing
Run Time: 8:56
Abstract: This video explores the joint venture between Toyota and General Motors
known as NUMMI and in particular, the reasons for the collaboration, and the
implications of its demise.
Key Concepts: globalization, competitive strategy, global competition, global
production, global economy, joint ventures, foreign direct investment, market entry,
strategic alliances
Notes: At the New United Motor Manufacturing, Incorporated plant, known more
simply as NUMMI, in Freemont, California, workers are still reeling from the news that
the operation will be shutting its doors in a few weeks. The plant closing will render
some 4,700 people unemployed, and force the layoffs of many others in associated
industries. NUMMI is a first-of-its–kind joint venture formed in 1984 between Japan’s