Chapter 15 - Entry Strategy and Strategic Alliances

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 firms 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.

15

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 Electrics 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.

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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: Tescos International Growth Strategy
Management Focus: The Jollibee PhenomenonA 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 Electrics Joint Ventures

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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 companys hunch appears to be on the
mark. Chinas 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 companys
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.
Another Perspective: To extend this case, consider

{http://www.businessweek.com/news/2011-10-11/general-motors-looks-at-india-asiaafrica-for-more-capacity.html} and {http://www.businessweek.com/news/2011-0315/great-wall-motor-net-more-than-doubles-as-china-car-sales-surge.html}.

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LECTURE OUTLINE FOR CHAPTER

This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructors 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
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
and reduces risk exposure.
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.

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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.
Another Perspective: The Business Link {http://www.canadabusiness.ca/eng/} provides
information companies should know before they begin exporting. Students can click on
the various topics to learn more about export financing, export plans, dealing with risk,
and so on.
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.
Another Perspective: To learn more about how one company, Ashoka Technologies,
organizes turnkey projects for clients go to {http://www.turnkey-projects.com/turnkeyplants.html}.
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.
Another Perspective: 1000ventures, available at
{http://www.1000ventures.com/business_guide/jv_main.html} is a web site that offers a
wealth of information about joint ventures.
Another Perspective: Ford recently entered a joint venture with Toyota to build hybrid
pickup trucks. To learn more about why the arrangement made sense for both companies
go to {http://www.businessweek.com/news/2011-08-22/ford-to-join-with-toyota-todevelop-hybrid-pickup-trucks-suvs.html}
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.

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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.
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: Virgin Atlantic is exploring the possibility of forming a strategic
alliance in order to achieve its growth objectives. To learn more about what the company
is looking for in a partner, see {http://www.businessweek.com/news/2011-0616/branson-could-cut-stake-to-aid-virgin-atlantic-alliance-search.html}.

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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 Tescos 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) Tescos 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 Tescos 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 companys 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) Tescos 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 partners 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.

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d) Most students will probably agree that while Tescos 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
companys 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.
Another Perspective: Students can go to Tescos corporate home page
{http://www.tescoplc.com/} for up-to-date information about the companys global
expansion plans.
Another Perspective: To extend this feature, consider
{http://www.businessweek.com/magazine/content/11_23/b4231020954324.htm}.
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
structured in such a way as to reduce the risks of a firm's technological know-how being
expropriated by licensees, then licensing may be appropriate. A further example is when
a firm perceives its technological advantage as being only transitory, and it considers
rapid imitation of its core technology by competitors to be likely. In such a case, the firm
might want to license its technology as rapidly as possible to foreign firms in order to
gain global acceptance for its technology before imitation occurs. Such a strategy has
some advantages. By licensing its technology to competitors, the firm may deter them
from developing their own, possibly superior, technology. And by licensing its
technology the firm may be able to establish its technology as the dominant design in the
industry. In turn, this may ensure a steady stream of royalty payments. Such situations
apart, however, the attractions of licensing are probably outweighed by the risks of losing
control over technology, and licensing should be avoided
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 firms 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
minimized. For firms with a competitive advantage based on management know-how,

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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 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 firms 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
much tighter control over the quality and costs of the drug. The only other reason to
consider option (c) would be if an existing pharmaceutical firm could also give it much
better access to the market and potentially access to its products and technology, and that
this same firm would insist on the 50/50 manufacturing joint venture rather than agreeing
to be a foreign sales agent. The choice between (a) and (b) boils down to a question of
which way will be the most effective in attacking the market. If a foreign sales agent can
be found that is already quite familiar with the market and who will agree to aggressively
market the product, the agent may be able to increase market share more quickly than a
wholly owned marketing subsidiary that will take some time to get going. On the other
hand, in the long run the firm will learn a great deal more about the market and will likely
earn greater profits if sets up its own sales force.

CLOSING CASE: General Electrics Joint Ventures

The closing case explores General Electrics 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.

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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
acquisitions attractive because they can immediately begin business in the foreign
country, while greenfield investments allow companies to establish operations exactly as
they want them. Most students will probably agree that the control issue was very
important to GE. The company did not want to share control with another firm.
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
believes that by linking with local companies, it can gain invaluable knowledge of the
local market. In addition, joint ventures have proved to be an easier route in some
countries where local laws prohibit other types of entry methods. Some students may
suggest that the recent economic crisis could play a role in future investment decisions by
GE. Students taking this perspective may argue that the shared cost and risk implied by
joint ventures may be attractive to the company in troubled economic times.
operation.
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
control. General Electric has run into some problems with its joint venture approach.
For example, General Electric could not reach an agreement with potential British partner
Smiths Group, and ended talks with the company. General Electric has also had to settle
for minority stakes in some ventures when it would have preferred to have a majority
position.
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. GEs
partners find the firms innovative management techniques and strong management
development program particularly attractive. Most students will probably suggest that if
GE were to act opportunistically it would certainly find it more difficult to find willing

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partners in the future. Because the firm now relies on joint ventures for a significant
number of its investments, such a situation would be detrimental to the firms future
growth.
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
venture with a local company to gain knowledge of foreign markets, it has a long history
of being able to deal with different currencies, different political systems, and different
cultures that should help it be successful in new ventures. In addition, some students may
point out that the companys size is also attractive to partners because of the financial
strength it implies. Other students may also point out that GE appears to be a flexible
partner another asset that would make it attractive to partners.
Another Perspective: To explore General Electrics international operations in more
depth, go to {http://www.ge.com/} and click on worldwide.

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 Japans
Toyota and the United States General Motors to build cars and trucks. Since its
inception, the pant has produced some eight million cars and trucks including U.S.
models like the Chevy Nova and Chevy Prizm, as well as Japanese models like the
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Toyota Corolla and Toyota Tacoma. Moreover, despite the announcement of its
impending closing, the plant is still running at full capacity today, producing new
Corollas and Tacomas at the rate of one every 54 seconds.
The decision to form NUMMI came about 25 years ago when Japanese automakers
wanted to expand into the U.S. market, and U.S. automakers wanted to learn new
production techniques. Toyota believed that its agreement with General Motors could
help it achieve several goals. The company wanted to learn how to do business in the
United States, how to manage unions, and how to deal with U.S. workers. General
Motors believed that collaboration with Toyota could help the company learn the more
efficient Japanese production techniques and implement a just-in-time delivery system.
According to Robert Cole of the University of California at Berkeley, Toyota more or
less accomplished its goals, but General Motors was less successful at achieving its
objectives. Cole claims that for at least a decade, managers at General Motors resisted
input from Toyota, and so missed out on opportunities to improve.
Today, workers at the plant, many of whom have worked there for 10 or 20 years, are
uncertain about their futures. NUMMI is Californias only auto assembly plant, and there
are few other opportunities available in the state. California was among the most heavily
affected areas in the country during the recent global recession, and the closing of the
plant is yet another blow to the state. In addition, the companies that have supplied the
plant may be forced to layoff an additional 40,000 people, making the business
environment in the area even worse. NUMMI workers, who average about $28 per hour,
are organizing protests against the plant closing, hoping to keep it open. However, their
efforts are likely to do little. General Motors has already pulled out of the joint venture
as part of its reorganization after its bankruptcy, and Toyota believes that it can produce
its vehicles more efficiently at its newer plant in San Antonio, Texas. Still, according to
Cole, the joint venture should be viewed as a success story. Thanks to the collaboration,
Toyota recognized the value that U.S. workers had to offer, and General Motors learned
to think of productivity and efficiency in a new way.

Discussion Questions:
1. What is a joint venture? What prompted the decision to form NUMMI? How did the
joint venture benefit Toyota? What did the arrangement mean to General Motors?
2. Reflect on the success of NUMMI. Did both partners benefit equally from the joint
venture? Why or why not?
3. Why is the NUMMI venture ending? What does this imply about the nature of the
auto industry, and indeed the global economy?
4. What does the closure of the NUMMI plant mean to the Freemont area? Reflect on the
negative effects to the host country of foreign direct investment. In your opinion, would
the plant have a better chance of remaining open if it involved another company from the
U.S. rather than a company from Japan?

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INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following from
International Business DVD Volume 6:

Title: UK Company Expands to Ukraine for Farming

Learning Objectives
The purpose of this video is to help you:
Explore the ethics involved in foreign ownership of a countrys fundamental assets
like farmland.
Discuss whether investments in land are a form of neocolonialism.
Define foreign direct investment and identify factors that make a country attractive to
foreign investors.
Consider the impact of foreign companies on the host country.

Key Words

Foreign direct investment

Impact of the multinational company on the host country
Ethics and social responsibility
Globalization
Global competition and strategy
Political economy
Neocolonialism

Synopsis
Until a couple of years ago, swaths of land in Ukraine that had been previously used for
agriculture stood untouched and filled with weeds and grass. Today, the fields are busy
with British combine harvesters bringing in a successful wheat crop. The fields are part
of huge tracts of land about the size of England that have been unused for the fifteen
years or so since the collapse of the Soviet farming system. As evidenced by the crops
that are currently being harvested, the fields are fertile, but were simply uncultivated.
Large companies and rich countries recognizing the food production that has been lost, as
well as the future potential of the land see Ukraine as an attractive location for investment.
British investors will grow some four to five tons of wheat on the fields, double the
national average of Ukraine. Now, Richard Sprinks, head of Landkom, the owner of the
combine harvesters, is looking at other investment possibilities in the

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country. Sprinks hopes to buy thousands of acres of unused farmland and convert them
to productive fields.
The investment by Landkom is part of a growing trend in the world. Countries and
companies, in response to dire predictions of global food shortages, are investing in land
with the hopes of growing crops. Britain has invested in Ukraine, China is buying up
land in Cambodia, and the Arab countries are investing in Africa. However, some are
questioning whether the investments are actually ethical. The British Food Security
advisor, for example, believes that the investments are unethical and in fact little different
from neocolonialism. He feels that land should be, and in fact, is, a countrys most
important fundamental asset. Investors though, disagree. They argue that their
investments in countries where much of the farming still involves horse-drawn plows, are
actually improving living standards and production efficiency and that everyone will
benefit. One farmer in Ukraine notes that he is not happy with the situation and would
rather own the fields instead. But the farmer is also resigned to the situation and the fact
that those with money have more control.
For now, the debate over whether foreign ownership of farmland is ethical will probably
continue. Regardless of the outcome of the discussion, the fields are once again
productive and more much-needed food is being produced. What is not clear though is
whether handing over control of the land to foreign companies was really the best way to
achieve this outcome.

Discussion Questions
1. Discuss the issues involved when countries and companies buy farmland in other
countries. Is the practice ethical? Why or why not? Are investors from rich countries
exploiting the assets of developing countries? Do the investors have a moral obligation
to give back to the countries where they have invested?
2. What is foreign direct investment? Using the information provided in the video,
provide an example of foreign direct investment. What factors make countries like
Ukraine attractive to foreign investors?
3. Consider the trend of investing in foreign farm land using different political ideologies.
How would those taking a radical perspective view the trend? What arguments would
those taking a free market approach make?
4. Reflect on the costs and benefits of foreign direct investment. How is Ukraine
benefiting from investments like the one shown in the video? What adverse effects from
the investment do you see? What does your response suggest for other countries such as
Cambodia that have been attracting similar investments?

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INCORPORATING globalEDGE EXERCISES

Use the globalEDGE site {http://globalEDGE.msu.edu/} to complete the following
exercises:

Exercise 1
A vital element in a successful international market entry strategy is an appropriate fit of
skills and capabilities between partners. As such, the Entrepreneur magazine annually
publishes a ranking of the Top Global Franchises. 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, desirable qualifications in possible franchisees, and the support and
training typically provided by the franchisor. Are there areas where improvement can be
made for the company to maintain competitiveness? Provide sufficient justification for
your position.

Exercise 2
The U.S. Commercial Service prepares reports known as the Country Commercial
Guide for countries of interest to U.S. investors. Utilize the Country Commercial Guide
for Russia to gather information on this countrys energy and mining industry.
Considering that your company has plans to enter Russia in the foreseeable future, select
the most appropriate entry method. Be sure to support your decision with the information
collected.

Answers to the Exercises

Exercise 1
The annual ranking of the top 200 global franchisers can be found by searching the term
entrepreneur at http://globaledge.msu.edu/ResourceDesk/. This resource is named
Entrepreneur Magazine: Top Global Franchises and is found under the globalEDGE
category Research: Rankings. Be sure to click on the Resource Desk link to search this
area of the globalEDGE website.
Search Phrase: Top Global Franchises
Resource Name: Entrepreneur Magazine: Top Global Franchises
Website: http://www.entrepreneur.com/franchises/topglobal/index.html
globalEDGE Category: Research: Rankings

Exercise 2
The Country Commercial Guides can be accessed by searching for the term country
commercial guide at http://globaledge.msu.edu/ResourceDesk/. The link is located
under the globalEDGE category Research: Multi-Country. A direct link to the Country
Commercial Guide for Russia is also located on the Country Insights page for Russia at
http://globaledge.msu.edu/countries/russia/.

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Search Phrase: Country Commercial Guide

Resource Name: Country Commercial Guides for U.S. Investors
Website: http://www.buyusainfo.net/adsearch.cfm?search_type=int&loadnav=no
globalEDGE Category: Research: Multi-Country
OR
globalEDGE Location: Countries / Region: Asia & Middle East / Russia
Resource Name: Russia
Website: http://globaledge.msu.edu/countries/russia/ (site location frequently changes,
therefore link through the globalEDGE Country Insights page might be more reliable)

End of Part Case Notes

Part Five:
Coca-Cola
1. Why do you think that Roberto Goizueta switched from a strategy that emphasized
localization towards one that emphasized global standardization? What were the benefits
of such a strategy?
Answer: Goizueta believed that the main difference between the U.S. market and foreign
markets was the level of penetration in the foreign markets. Goizueta felt that the same
product could be sold in the same way everywhere, and so centralized management and
marketing in Atlanta, focused on core brands, and took equity stakes in foreign bottlers.
This allowed Coca Cola to have a high level of control and gain scale economies.
2. What were the limitations of Goizuetas strategy that persuaded his successor, Daft, to
shift away from it? What was Daft trying to achieve? Datfs strategy also did not
produce the desired results. Why do you think this was the case?
Answer: Most students will probably agree that it was the emergence of smaller, more
nimble competitors that forced Daft to change Coca Colas course. The smaller
companies were producing beverages designed to meet the demands of local markets, and
Daft felt that Coca Cola needed to take a similar approach. Accordingly, he gave local
managers control of strategy, product development, and marketing. Dafts strategy
backfired however, and failed to produce the desired growth. Many students will
probably point out that by localizing strategy, Daft failed to capitalize on the benefits of
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having a global brand, like the ability to develop products that can appeal to multiple
markets, economies of scale in production and marketing, and so on.
3. How would you characterize the strategy now being pursued by Coke? What is the
enterprise trying to do? How is this different from the strategies of both Goizueta and
Daft? What are the benefits? What are the potential costs and risks?
Answer: Today, Coca Cola has taken a more transnational approach to its strategy. The
new strategy allows the firm to vary pricing, product offerings, and marketing messages
from market to market, while at the same time, providing guidance from headquarters.
Coca Cola is also promoting the notion of global learning by trying to leverage ideas
across nations. Most students will probably recognize that Coca Colas new approach
represents a mid-point between the firms previous strategies. Students may note that
while the new strategy seems to provide the best of both worlds, Coca Cola will have to
be careful to ensure that lines of control and responsibility remain clear and that
communication within the organization is strong.
4. What does the evolution of Cokes strategy tell you about the convergence of
consumer tastes and preferences in todays global economy?
Answer: Many students will probably agree that Coca Colas experience confirms what
many marketing experts suggest that while there is a convergence of tastes and
preferences of consumers across markets, local preferences still matter. Firms that fail to
meet the demands of consumers in each market cannot succeed in the long run.
Another Perspective: Students can explore Cokes global operations at the companys
web site as {http://www.coca-cola.com/index.jsp}.

Diebold
1. Prior to 1997, Diebold manufactured its ATM machines in the United States and sold
them internationally via distribution agreements, first with Philips NV and then with IBM.
Why do you think Diebold chose this mode of expanding internationally? What were the
advantages and disadvantages of this arrangement?
Answer: Prior to 1997, Diebolds main focus was on its domestic market. The company
had very little international experience. By linking up with Philips NV and later IBM,
Diebold was able to take advantage of its partners knowledge of the international
marketplace. In addition, Diebold was able to venture into foreign markets without the
significant commitment that would have been required had it established its own
distribution network.

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2. What do you think prompted Diebold to alter its international expansion strategy in
1997 and start setting up wholly owned subsidiaries in most markets? Why do you think
the company favored acquisition as an entry mode?
Answer: By 1997, international sales comprised more than 20 percent of Diebolds
overall sales. However, the company felt that there was still room to grow and that its
partner was underperforming. Consequently, Diebold bought IBMs share of the venture
and decided to establish its own foreign distribution channels. Diebold was particularly
excited about opportunities in China, India, and Brazil, and wanted to pursue these
markets aggressively. Diebold quickly acquired companies in Brazil and Europe giving
it an already established presence in these markets. Most students will probably
recognize that this approach allowed Diebold to avoid the challenges associated with
growing a new operation from scratch.
3. Diebold entered China via a joint venture, as opposed to a wholly owned subsidiary.
Why do you think it did this?
Answer: When Diebold embarked on its new strategy in the late 1990s it was focused on
pursuing markets where the emerging middle class was just beginning to create a new
demand for ATMs. While the company used an acquisition strategy to quickly gain a
foothold in Brazil and Europe, it was forced to use a different strategy in China. Because
there were no viable options for acquisition, Diebold decided to establish a new
distribution and manufacturing joint venture in which it held a majority position.
4. Is Diebold pursuing a global standardization strategy or a localization strategy? Do
you think this choice of strategy has impacted upon its choice of entry mode? How?
Answer: Most students will probably agree that Diebold is pursuing a localization
strategy. The company has determined that people use ATMs differently across markets.
In the United States for example, ATMs are primarily used for banking purposes. In
contrast, some countries use ATMs to file tax returns or distribute theater tickets.
Accordingly, Diebold has established a manufacturing presence in several regions to be
closer to key markets. In addition, the company has used an acquisition strategy to buy
up companies with knowledge of the local market.

JCB in India
1. What was the strategic rationale underlying JCBs entry into India in 1979, and China
in 2005? Given that capital to fund expansion is limited, does it make more sense for
JCB to expand its presence in these markets, as opposed to more developed markets, such
as those of Western Europe?
Answer: When JCB entered the Indian market in 1979, the company felt the market was
primed for growth, and that the potential in the market was too large to ignore. By
entering the market early, JCB hoped to establish a foothold in the market and an
advantage over competitors.

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2. Why do you think JCB chose to enter India via a joint venture, as opposed to some
other entry mode?
Answer 2: JCB entered the Indian market in 1979 via a joint venture with Escorts. The
decision to enter via a joint venture arrangement was prompted by high tariff barriers that
made JCBs traditional strategy of exporting its product to foreign locations difficult.
Given that JCB was primarily an exporter and had little experience operating in foreign
locations, the joint venture arrangement offered the company a means of serving the
Indian market without incurring all the risk involved in setting up a wholly owned
operation.
3. Why did JCB not simply license its technology to Escorts?
Answer: JCBs technology provided the company with a key competitive advantage.
JCB avoided licensing arrangements because it felt that such arrangements did not give it
the control over its technology that was needed. JCB feared that licensing its technology
to Escorts could eventually make Escorts a direct competitor.
4. What were the potential disadvantages of JCBs joint venture with Escorts?
Answer 4: JCB was concerned that the joint venture limited its ability to expand. The
company did not want to share its proprietary technologies that were at the core of its
competitive advantage with Escorts, and feared that without complete control over the
venture, it could not properly serve the rapidly growing Indian market.
5. What were the benefits of gaining full control of the Indian joint venture in 2002? Can
you think of any drawbacks?
Answer: While the joint venture between JCB and Escorts was successful, JCB chose to
buy out its partner. JCB took advantage of new government regulations to initially buy a
majority position in the venture in 1999, and later in 2002, buy it outright. Most students
will probably agree that the main benefit of gaining full control of the venture was that
JCB could now transfer its leading edge technologies to the venture without fearing that it
could be creating a future competitor. Furthermore, since JCB had full control over the
venture, it could continue its expansion in India. Some students may wonder though
whether the company has taken on too much risk in the Indian market.
Another Perspective: Students can go to {http://www.jcb.com/} for additional
information on the company.

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IKEA
1. By the early 1970s IKEA had established itself as the largest furniture retailer in
Sweden. What was the source of its competitive advantage at that time?
Answer: Many students will probably attribute IKEAs success in the 1970s to innovation.
The company continually looked for new and better ways to do everything from product
design to shipping. The companys stylish, yet low priced designs were a breath of fresh
air to many consumers who were tired of the more traditional lines that were common at
the time. Store location was another important advantage for IKEA. Rather than locating
in the city center like most furniture retailers, IKEA took the innovative step of locating
its outlets on the city outskirts where they were more easily accessible. Similarly,
IKEAs innovative approach to marketing and its establishment of the self-assembly
concept gave the company a further advantage over its competitors.
2. Why do you think IKEAs expansion into Europe went so well? Why did the company
subsequently stumble in North America? What lessons did IKEA learn from this
experience? How is the company now applying these lessons?
Answer: IKEAs experiences in the United States were in stark contrast to its experiences
in Europe. The company met with great success in Europe, where its concept of
inexpensive, quality furniture with clean design lines was well received. Many students
will probably suggest that IKEA failed to recognize the fact that consumers in Europe
were more similar to consumers in Scandinavia than were customers in the United States.
For example, the sizing of beds used by IKEA in Sweden was similar to that used in
Europe, but was completely different from the system used in the United States. U.S.
consumers were unfamiliar with buying sheets sized in centimeters, and more
accustomed to buying them in terms of bed size like queen or twin. IKEA has responded
to these differences by developing and customizing products to better fit U.S. tastes, and
by shifting manufacturing to factories in the United States to avoid exchange rate issues
that could drive up prices. IKEAs new approach has proved to be quite successful. In
2008, the United States was the companys second largest market. Today, IKEA is
taking the lessons it learned from its experiences in the United States to China where it is
currently adapting its concept to meet Chinese preferences.
3. How would you characterize IKEAs strategy prior to its missteps in North America?
How would you characterize its strategy today?
Answer: Most students will probably agree that prior to its missteps in North America,
IKEA largely followed a global standardization strategy whereby it sold the same product
in the same way everywhere. After the company realized that this strategy was not
appropriate in all markets, the company shifted toward a more transnational approach in
which it standardized those elements that could be standardized, but adapted elements as
necessary.

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4. What is IKEAs strategy towards its suppliers? How important is this strategy to
IKEAs success?
Answer: IKEAs suppliers are central to the companys success. In 2008, the company
had 1,380 suppliers located in 54 countries, and relied on external suppliers for 90
percent of its products. IKEA works closely with suppliers to find the best possible
materials at the lowest possible costs to produce its products. IKEA views its
relationships with suppliers as being long-term, and prides itself on being demanding but
fair. The company will provide support to suppliers, but in return, asks suppliers to
provide excellent quality and low prices.
5. What is the source of IKEAs success today? Can you see any weaknesses in the
company? What might it do to correct these?
Answer: Many students will probably attribute IKEAs continued success to it ability to
remain on the leading edge of the industry. The company is forward thinking and willing
to make bold decisions. Some students may note that the fact that the company is
privately held gives it an advantage when it comes to making long-term decisions.
Because investors are not looking for quick profits, IKEA has the freedom to adopt
strategies that may take some time to implement and provide a return. Other students
may suggest that the companys frugal, family-like culture also contributes to its success.
Some students however, may wonder whether the companys continued focus on
inexpensive products will make it unattractive to consumers as they get older, and
demand more luxurious products.

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