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Quiz 13 :

Entering Foreign Markets

Quiz 13 :

Entering Foreign Markets

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GM entered the Chinese market at a time when demand was very limited. Why? What was the strategic rational?
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G# entered the market in China in 1997 when the market was hardly 400,000 vehicles. Exporting was not an option since Japan and South Korea were geographically nearer and the freight cost from the US would render the vehicles uncompetitive.
So they entered into a JV with S#, who had themselves been an early entrant into the Chinese market. However G# saw the benefit of the first-mover advantage and went in with a large scale investment of $1.6 billion which was the largest FDI in the Chinese automobile industry at that time. This investment gave them:
1) Economies of scale.
2) First-mover advantage.
3) A chance to move down the experience curve very quickly.
4) Use location economies.
5) Establish a brand in the market.
6) It enabled the JV to develop vehicle models that were suited for the Chinese market.
7) It affirmed G# commitment to remain in the market, hence buikding trust.
These were the strategic reasons for G# to enter the Chinese market with a JV.

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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 jointventure 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 it would enter the United States. This 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 others Tesco has entered? What are the risks here? How do you think Tesco has been doing in the US?
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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 the United States and Western Europe, Tesco chose to pursue markets with strong growth potential, but little current competition.  The strategy allows the company to use its expertise to grow international market share, without incurring the costs of establishing itself in already crowded markets. 
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 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 ?7.6 billion in revenues in 2007.  Tesco is now the number four 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 strength to the venture where it is paired with the partner's knowledge of the local market.  Local managers are hired to run the operations, with only support coming from expatriate managers.  This format allows Tesco to use its core strengths to get into the market, and then later, after the ventures have become established, buy out its partner.  
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 company's traditional strategy in that the format the company has chosen to use, Tesco Express, still avoids the head-to-head competition that the company has steered clear of in developing markets.  In that sense, the strategy could prove to be highly successful.  The company can enter the market using its Tesco Express format, avoid major competition while it gains brand recognition and experience in the market, and then later, expand into the traditional grocery business.

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Outline the advantages and disadvantages of licensing and franchising as entry strategies.
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A Licensing agreement is where one firm parts with some of its IPR to enable another firm to manufacture products that were originally developed by the first firm in exchange for a royalty. Normally the IPR is protected by a patent and the licensing contract has various terms and conditions limiting what the second firm can do and cannot do under the same.
This method has certain advantages and disadvantages. The advantages are:
1) The primary advantage is that the licensee invests all that is required to start the overseas operation for the licensor. Thus the costs and risks of operating in a foreign market are avoided.
2) It is advantageous when the firm is unwilling to commit any investment in a market which it is unfamiliar with, or which is politically unstable.
3) It is used in markets where a firm wishes to enter but the country does not permit FDI.
4) It also could be a case where a firm possesses some IPR which it does not wish to develop itself and licenses out to another.
The disadvantages are:
1) It greatly limits the firm's ability to have a right control on the manufacturing, marketing and strategy in the foreign market. This means that it does not get any benefits from the experience curve or the location economies. When these factors are important licensing would not be the right strategy to expand overseas.
2) Competing in a global market may require a strategy where the profits in one market are used to stave off a competitive attack in another country. This is very much limited in a licensing situation.
3) Technology is often the basis of a firm's competitive advantage. BY licensing it the firm loses control on this crucial asset. The licensee having absorbed the technology may become a competitor after the end of the licensing period or even earlier is the IPR control in that country are quite lax.
One way of reducing the risk is to sign a cross-licensing agreement. In this in return for the technology that the first firm gives to the second firm the second firm agrees to give in addition to the royalty some part of its IPR to the first firm. This reduces the risk on either firm trying to behave in an opportunistic manner.
Franchising is a form of licensing in an industry where the technology content is low and where the production has to be local. Here the franchisor parts with its IPR (normally a trademark) under the understanding that the franchisee agrees to conduct his business in a certain way as prescribed by the franchisor. Normally franchisee agreements are longer than licensing agreements. The Franchisor usually gets a royalty as a percentage of the revenues.
In return the franchisee will assist the franchisor to run his business. He may also insist on certain minimum standards to be followed and how the business premises should look. Franchising is very common in the fast-food industry.
Franchising has its advantage and disadvantages. The advantages are:
1) All the initial investment is made by the franchisee to set up the business.
2) This is an incentive for the franchisee to make the business profitable in the shortest span of time.
3) It enables the franchisor expand very rapidly in a foreign market with very little cost and risk.
The disadvantages are:
1) Franchising has fewer disadvantages when compared to licensing.
2) There are very few advantages related to the experience curve or location economies that are needed by the franchisor.
3) The operation is a low technology one so the risk of opportunism is low.
4) As in licensing it restricts one's ability to shift profits from one market to another.
5) The most important aspect is the loss of quality control. When a trademark is used one associate a certain quality with it. If in one franchisee operation this is lacking it could harm the brand. Control is often difficult because of the geographical distances between the principal and the franchisee outlets.
One way is to set up a subsidiary in each country which then controls all the franchisee outlets in that country. This arrangement has proven to be successful for most of the fact-food principals.

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What factors influence the timing of entry into a foreign market?
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What factors determine the scale of entry into a foreign market?
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What factors determine the choice of which foreign market to enter?
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Why did GM enter through a joint venture with SAIC? What are the benefits of this approach? What are the potential risks here?
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When might an acquisition of an established competitor be the best vehicle for entering a foreign market?
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Why did GM not simply license its technology to SAIC? Why did it not export cars from the United States?
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Discuss how the need for control over foreign operations varies with firms' strategies and core competencies. What are the implications for the choice of entry mode?
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Outline the advantages and disadvantages of exporting as an entry strategy.
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What are the risks associated with pursuing an acquisition-based entry strategy? How can these risks be reduced?
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How does a consideration of core competencies influence the choice of entry mode?
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Entering Foreign Markets Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises: Entrepreneur magazine annually publishes a ranking of America's top 200 franchisers seeking international franchisees. Provide a list of the top 10 companies that pursue franchising as a mode of international expansion. Study one of these companies in detail, and provide a description of its business model, its international expansion pattern, the qualifications it looks for in its franchisees, and the type of support and training it provides.
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When might establishing a greenfield venture be the best vehicle for entering a foreign market?
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How does the choice of cost reductions influence the choice of entry mode?
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Licensing proprietary technology to foreign competitors is the best way to give up a firm?s competitive advantage. Discuss.
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Entering Foreign Markets Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises: The U.S. Commercial Service prepares a series of reports titled the Country Commercial Guide (or, CCG )for each country of interest to U.S. investors. Utilize this guide to gather information on India. Imagine that your company is in health technologies and is considering entering this country. Select the most appropriate entry method, supporting your decision with the information collected from the commercial guide.
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Outline the advantages and disadvantages of joint ventures as an entry strategy.
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Why has the joint venture been successful to date?
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