IBM Entry Modes 2016

29-10-2016
Foreign Market Entry Modes
Professor Sougata Ray

Indian Institute of Management Calcutta
Classical Entry Mode Options
Pure Entry Options
Classical Entry Modes
Product Export FDI 3rd party licensing
Intel's chips Cola giants McDonalds outlets
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29-10-2016
Mode of Entry – Finer Options
• A set of tradeoffs
Time
Risk Own subsidiary / Organic Mode
Cost Acquisition
Joint Venture
License / Franchise
Own Distributor
Export
Control
Learning
Management Involvement
Entry Mode Decision Matrix

Strategic Importance
Hi
of Country
Lo
Lo Hi
Stand-alone Attractiveness
of Country
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29-10-2016
Strategy Option Comparisons

Parameter Subsidary Joint VentureLicensing Exports
Total Returns High High moderate to low Moderate
Capital Requirement
high moderate negligible low
Mgt resource costsV. high high small Moderate
Control over ops High moderate low high
Commercial risk V. High High low low
political risk High moderate low low
Forex risk High High lowest low
tax rate [effective]
High High lower V. High
Technology risk V. low moderate can be high low
Speed of entry Moderate Low Moderate High
Access to Feedback
V. high High Low V. low
Benefit of EOS Moderate moderate Low high
Local adaptation High V. High Moderate low
Selection Criteria for Entry Mode Choice
• Market attractiveness - Short, Medium & Long

Term
 Size, growth and profit potential
• Country risk exposure
• Regulatory situation
• Strategic importance of the country market
• Industry structure and nature of rivals
• Urgency of entry
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29-10-2016
Selection Criteria for Entry Mode Choice
• Prior company experience

• Level, time and cost of local adaptation
• Availability of local partners
• Uniqueness of the Business model
• Need and ease of transferring core competence
• Desire or need for control
• Uniqueness of corporate culture
Export strategy: Pros & Cons

PROS CONS
• No / low new Investments • Existing slack capacity
• Reach customers quickly used up by domestic
• Complete control over demand
production • formidable tariff, non-
• Economies of large-scale tariff & other barriers
production • high exposure to LT forex
• capacity utilization up risk
• familiar production • Foregoes potential location
environment economies
• Low S.T forex risk exposure • Difficult to respond to
customer needs well
When Is Export Appropriate?• JIT & CRM difficult
 Low trade barriers
 Home location has cost/efficiency advantage
 Customization not crucial
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29-10-2016
Licensing Strategy : Pros & Cons

PROS CONS
• Very high ROI • lower NPV relatively
• No new Cap-ex; fast • Difficulty in transferring tacit
• Low cyclical income knowledge
fluctuation [hedging • limited life agreements
cyclical biz risk] – Negotiation of a transfer price
• Avoids trade barriers – Monitoring transfer outcome
• tax benefits • lack of control over licensee’s
• low political risk quality
• Potential for utilizing • Licensee may become
location economies competitor
• Access to local knowledge,
Test Mktg.; tech info. When Is Licensing Appropriate?
 Well codified knowledge
 Strong property rights regime
 Location advantage restricted to local market
Foreign Acquisition
Pros Cons
• Speed • Uncertainty about target’s value
• Access to complementary • Cost of acquisition

assets, Upgrade corporate • Organizational clashes may
resources impede integration
• Access to target’s local • Difficulty in “absorbing” acquired
knowledge assets
• Control over foreign operations
• Major commitment/ Risk
• Control over own technology
When Is Acquisition Appropriate?
 Market for corporate control well developed
 Acquirer has high “absorptive” capacity
 High synergy and complementarity
 Speed of entry critical for gaining competitive advantage
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Going it Alone: “Green Field” Entry

Pros Cons
• Normally feasible • Slower startup
• Avoids risk of • Requires knowledge of
overpayment foreign management
• Avoids problem of • High risk and high
integration commitment
• Still retains full control
When Is “Green Field” Entry Appropriate?

 Lack of proper acquisition target
 Embedded competitive advantage – need for
stronger coupling with global operation
 In-house local expertise
Joint Venture
Pros Cons
• Access to partner’s local • Potential loss of
knowledge proprietary knowledge
• Reduction of concern • Potential conflicts
about overpayment between partners
• Both parties have some • Neither partner has full
performance incentives performance incentive
• Significant control over • Neither partner has full
operation control
When Is a Joint Venture Appropriate?
 Embededness in the local society important
 Both partners contribute hard-to-measure inputs
 Large expected mutual gains in the long-run
 Trade secrets can be walled off

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29-10-2016

Foreign Market Entry Modes

Professor Sougata Ray

Classical Entry Mode Options

Pure Entry Options

Classical Entry Modes

Product Export FDI 3rd party licensing

Intel's chips Cola giants McDonalds outlets

Mode of Entry – Finer Options

Entry Mode Decision Matrix

Strategy Option Comparisons

Selection Criteria for Entry Mode Choice

• Market attractiveness - Short, Medium & Long

Selection Criteria for Entry Mode Choice

• Prior company experience

Export strategy: Pros & Cons

Licensing Strategy : Pros & Cons

• Access to complementary • Cost of acquisition

Going it Alone: “Green Field” Entry

When Is “Green Field” Entry Appropriate?

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