For this discussion, the case explores the international expansion of Starbucks. The company has expanded over the last thirty years from a single store in Seattle to more than 20,000 locations spread across 64 different countries. As Starbucks has expanded, it has been forced to meet the challenges of operating in different cultures and political systems. Today, Starbucks is focused on continuing its global expansion, particularly in China. Discussion of the case can revolve around the following questions.   

Discuss the following questions with your classmates on Blackboard. Before you begin, make sure to read the full closing case text from Chapter 13. 

QUESTION 1: Starbucks prefers a combination approach to foreign market entry: the use of joint ventures and licensing. Do you agree with this approach? Why or why not?

QUESTION 2: Many would argue that Starbucks coffee is expensive, and yet customers get “value” for their money. How do you think Starbucks has been able to transfer this business model and value proposition to international markets?

Post your answer by creating a new thread under this forum. Answer both questions, in a short answer format  (no less than 75 words each) 

Global Business Today 10e

by Charles W.L. Hill

and G. Tomas M. Hult

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

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The Strategy of International Business
Chapter 13: Entering Foreign Markets

Credit: © Don Heupel/AP Images

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Learning Objectives
LO 13-1 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale.
LO 13-2 Compare and contrast the different modes that firms use to enter foreign markets.
LO 13-3 Identify the factors that influence a firm’s choice of entry mode.
LO 13-4 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

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Opening Case:
Cutco Corporation – Sharpening Your Market Entry
Largest manufacturer of high-quality kitchen cutlery in the U.S. and Canada
Originally created as a product for Wear-Ever Aluminum, a division of Alcoa
Commitment to fine craftsmanship and Forever Guarantee
Formed following a management buyout that took the company private – a leap of faith
Sales force of mainly college students use “direct selling”

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The sales pitch to students is good pay, flexible schedules, personal growth, no experience needed, great training, and engagement with quality products. In fact, 85 percent of the sales force at Cutco is college-aged individuals.
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Introduction
Firms can enter foreign markets through
Exporting
Licensing or franchising to host country firms
A joint venture with a host country firm
A wholly owned subsidiary in the host country
The advantages and disadvantages of each entry mode is determined by
Transport costs and trade barriers
Political and economic risks
Costs
Firm strategy

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Did You Know?

Did you know increasingly more companies are born global?
Click to play video

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Basic Entry Decisions 1 of 7
A firm expanding internationally must decide
Which markets to enter
When to enter them
Scale of entry

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LO 13-1 Explain the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale.
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Basic Entry Decisions 2 of 7
Which Foreign Markets?
Firms need to assess the long run profit potential of each market
The most favorable markets are politically stable developed and developing nations with free market systems, low inflation, and low private sector debt
The less desirable markets are politically unstable developing nations with mixed or command economies, or developing nations where speculative financial bubbles have led to excess borrowing
The value an international business can create in a foreign market depends on the suitability of its product offering to that market and the nature of indigenous competition

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Management Focus: Tesco’s International Growth Strategy
Summary
This feature describes Tesco’s international expansion strategy. Tesco, the British grocer, has established operations in a number of foreign countries. Typically, the company seeks underdeveloped markets in developing nations where it can avoid the head-to-head competition that goes on in more crowded markets, and then enters those markets via joint ventures where the local partner provides knowledge of the market while Tesco provides retailing expertise. Discussion of the feature can revolve around the following questions:
Suggested Discussion Questions
1. Reflect on Tesco’s decision to expand internationally primarily through establishing operations in developing countries. What makes these countries attractive to Tesco?
Discussion Points: When companies make the decision to expand into new markets, they must balance the benefits, costs, and risks of doing business in each market. In Tesco’s case, developing markets were attractive not only because of their size, but also because of the likely future wealth of customers. To increase its chances for success, Tesco has focused on those markets where there are few capable indigenous competitors. Today, Tesco has more than 800 stores outside its home country of the United Kingdom, which generate £7.6 in annually revenues.
2. Why does Tesco believe it is important to transfer its core capabilities to new ventures? How have the company’s partners helped it find success in foreign locations?
Discussion Points: Tesco’s success in international markets is remarkable. In 2005, every one of the company’s foreign ventures was profitable. The company attributes its success to the transfer of its core competencies to each location. At the same time, the company believes that local management is important, and so it hires locally, but provides oversight from the United Kingdom. Tesco also feels that its partners in Asia, and their deep knowledge of the local market have played a significant role in its success in the region.
Teaching Tip: To learn more about Tesco’s international operations, go to {http://www.tescocorporate.com/}.
Lecture Note: Tesco’s questionable accounting practices have recently resulted in the resignation of its CEO. To learn more, consider {http://www.businessweek.com/ap/2014-10-29/uk-launches-criminal-investigation-in-tesco-case} and {http://www.businessweek.com/ap/2014-10-23/tesco-chair-resigns-after-accounting-scandal}.

Basic Entry Decisions 3 of 7
Timing of Entry
After a firm identifies which market to enter, it must determine the timing of entry
Entry is early when a firm enters a foreign market before other foreign firms
Entry is late when a firm enters after other firms have already established themselves in the market

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Basic Entry Decisions 4 of 7
Timing of Entry continued
Firms entering a market early can gain first mover advantages
The ability to pre-empt rivals and capture demand by establishing a strong brand name
The ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over later entrants
The ability to create switching costs that tie customers into their products or services making it difficult for later entrants to win business

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Is First-Mover Advantage Always a Good Thing?
Timing of entry into a foreign market is one of the most critical aspects of going international. Popularized by Marvin Lieberman and David Montgomery in 1988, first-mover advantage was an idea that resonated with every company. But, 10 years later, in 1998, Lieberman and Montgomery actually backed off their own idea that taking advantage of being the first mover was always a good strategy. At this time, it was too late: Venture capitalists, companies, people, and many scholars had already latched on to the positive things about being first in a new foreign market and stressed this approach over any other timing of entry. Now we are some 15 years into the twenty-first century, and the realization is that first-mover advantages also come with pioneering costs. If you had a choice of being the first-mover into a new emerging foreign market (e.g., Turkey) and being the fifth company entering that market with your product, what would you choose and why?
Sources: M. B. Lieberman and D. B. Montgomery, “First-Mover Advantages,” Strategic Management Journal, 9 (1988), pp. 41–58; M. B. Lieberman and D. B. Montgomery,  “First-Mover (Dis)Advantages: Retrospective and Link with the Resource-Based View,” Strategic Management Journal, 19 (1998), pp. 1111–25.

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Basic Entry Decisions 5 of 7
Timing of Entry continued
First mover disadvantages: the disadvantages associated with entering a foreign market before other international businesses
These may result in pioneering costs (costs that an early entrant has to bear that a later entrant can avoid) such as:
The costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes
The costs of promoting and establishing a product offering, including the cost of educating the customers

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Basic Entry Decisions 6 of 7
Scale of Entry and Strategic Commitments
Firms that enter foreign markets on a significant scale make a major strategic commitment that changes the competitive playing field
Involves decisions that have a long-term impact and are difficult to reverse
Small-scale entry can be attractive because it allows the firm to learn about a foreign market, but at the same time it limits the firm’s exposure to that market

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Basic Entry Decisions 7 of 7
Market Entry Summary
There are no “right” decisions with foreign market entry, just decisions that are associated with different levels of risk and reward
Firms in developing countries can learn from the experiences of firms in developed countries

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Management Focus: The Jollibee Phenomenon—A Philippine Multinational
Summary
This feature describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but also managed to find the weaknesses in the larger company’s global strategy and capitalize on them. Jollibee, unlike McDonald’s, tailored its menu to the local market. The company was able to build on this localization strategy as it expanded into neighboring Asian countries and the Middle East. Today, Jollibee has even managed to find success in the United States where it is being hailed as a strong niche player. Discussion of the feature can begin with the following questions:
Suggested Discussion Questions
1. How would Christopher Bartlett and Sumantra Ghoshal view Jollibee’s performance to date?
Discussion Points: Many students will probably suggest that Bartlett and Ghoshal would have a positive view of Jollibee’s performance so far. Jollibee has managed to survive McDonald’s push into the Philippines, learn from the company, and even capitalize on gaps in McDonald’s strategy of having an essentially standardized marketing approach. Now, Jollibee has successfully entered McDonald’s home market, and become a niche player in the fast food industry, and is making plans to expand into India.
2. A key difference between McDonald’s global strategy and that of Jollibee is that McDonald’s sees its path to success as offering a fairly standardized menu everywhere whereas Jollibee views localization as its ticket to success. In your opinion, would Jollibee have achieved its current position in the market if the company had standardized its menu like McDonald’s?
Discussion Points: Most students will probably argue that Jollibee’s competitive advantage is that it offers fast food tailored to local tastes, and that if the company pursued a standardized approach it would have failed. Students might note that McDonald’s global success with this strategy is due in part to the fact that it is a symbol of America, and as such offers an American experience in other markets. Because Jollibee does not have this type of global reputation, it must look for alternative ways to compete.
Teaching Tip: It is worth visiting Jollibee’s web page to see the American influence on the company. Go to {http://www.jollibee.com.ph/} and click on “International” to explore some of the company’s foreign locations.
Lecture Note: To extend this discussion consider {http://www.businessweek.com/news/2014-08-17/faster-food-at-philippine-minimarts-tests-mcdonald-s}.

Entry Modes 1 of 11
Modes to enter foreign markets
Exporting
Turnkey projects
Licensing
Franchising
Joint ventures
Wholly owned subsidiaries

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LO 13-2 Compare and contrast the different modes that firms use to enter foreign markets. 

Entry Modes 2 of 11
Exporting
Often the first method firms use to enter foreign market
Advantages
It is relatively low cost
Firms may achieve experience curve economies
Disadvantages
Lower-cost manufacturing locations exist
Transport costs can be high
Tariff barriers can make it uneconomical
Foreign agents fail to act in the exporter’s best interest

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Entry Modes 3 of 11
Turnkey projects
Involve a contractor that agrees to handle every detail of the project for a foreign client, including the training of operating personnel
At completion of the contract, the foreign client is handed the “key” to a plant that is ready for full operation

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Entry Modes 4 of 11
Turnkey Projects continued
Advantages
Allow firms to earn great economic returns from the know-how required to assemble and run a technologically complex process
Less risky in countries where the political and economic environment is such that a longer-term investment might expose the firm to unacceptable political and/or economic risk
Disadvantages
The firm has no long-term interest in the country
The firm can create a competitor
The firm’s process technology is a source of competitive advantage

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Entry Modes 5 of 11
Licensing
An arrangement whereby a licensor grants the rights to intangible property to another entity for a specified time period, and in return, receives a royalty fee
Intellectual property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks
Advantages
The firm does not have to bear the development costs and risks associated with opening a foreign market
The firm avoids barriers to investment
It allows a firm with intangible property that might have business applications, but which doesn’t want to develop those applications itself, to capitalize on market opportunities

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Entry Modes 6 of 11
Licensing continued
Disadvantages
The firm doesn’t have the tight control over manufacturing, marketing, and strategy necessary to realize experience curve and location economies
The firm’s ability to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another is compromised
There is the potential for loss of proprietary (or intangible) technology or property
To reduce this risk, firms can use cross-licensing agreements or link the agreement with the decision to form a joint venture

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Exporting or Licensing?
In Chapter 13, we discuss as series of advantages and disadvantages of exporting and licensing (as well as turnkey projects, franchising, joint ventures, and wholly owned subsidiaries as other entry mode choices). Exporting refers to the sale of products produced in one country to residents of another country. Licensing refers to an arrangement in which a licensor grants the rights to intangible property to the licensee for a specified period and receives a royalty fee in return. Both of these modes of entry into a foreign market have unique advantages and disadvantages. Oftentimes, selecting exporting or licensing depends on myriad factors—one being the global mindset of the business owner. Assume you have a choice to enter three emerging markets—Bolivia, Chile, and Peru, neighboring countries in South America. You have a great product, with lots of technological innovation and a lightweight packaging. Would you opt for exporting or licensing, and why?

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Entry Modes 7 of 11
Franchising
A form of licensing in which the franchisor sells intangible property and requires the franchisee agree to abide by strict rules as to how it does business
Advantages
It can avoid costs and risks of opening up a foreign market
Disadvantages
It may inhibit the firm’s ability to take profits out of one country to support competitive attacks in another
The geographic distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect

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So, You Think You Want to Own a Franchise?
Franchising is a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee but also insists that the franchisee agree to abide by strict rules as to how it does business. Some of the advantages of franchising include branding, advertising, reputation, and headquarters/ company support for development of the infrastructure needed to operate the franchise business. Some of the disadvantages of franchising include restrictions on territory and pricing, not being completely independent, franchise fee and ongoing royalty payments, and dependence on other franchise owners for nurturing the brand. Well-known worldwide franchise systems include Subway, 7-Eleven, Pizza Hut, and McDonald’s. Assume you are interested in being an international entrepreneur. Would franchising be your choice of starting a business?
Source: T. Hult, D. Closs, and D. Frayer, Global Supply Chain Management: Leveraging Processes, Measurements, and Tools for Strategic Corporate Advantage  (New York: McGraw-Hill Education, 2014).

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Entry Modes 8 of 11
Joint ventures
The establishment of a firm that is jointly owned by two or more otherwise independent firms
Advantages
A firm can benefit from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems
The costs and risks of opening a foreign market are shared with the partner
They can help firms avoid the risk of nationalization or other adverse government interference

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Entry Modes 9 of 11
Joint Ventures continued
Disadvantages
The firm risks giving control of its technology to its partner
The firm may not have the tight control over subsidiaries that it might need to realize experience curve or location economies
Shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

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Entry Modes 10 of 11
Wholly Owned Subsidiaries
100% ownership of the subsidiary
Set up a new operation in that country
Acquire an established firm

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Entry Modes 11 of 11
Wholly Owned Subsidiaries continued
Advantages
They reduce the risk of losing control over core competencies
They allow for the tight control over operations in different countries that is necessary for engaging in global strategic coordination
They may be required if a firm is trying to realize location and experience curve economies
Disadvantages
Firms bear the full costs and risks of setting up overseas operations

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Selecting an Entry Mode 1 of 3
Core Competencies and Entry Mode
Technological Know-How
When competitive advantage is based on proprietary technological know-how, firms should avoid licensing and joint venture arrangements in order to minimize the risk of losing control over the technology
If a technological advantage is only transitory, or the firm can establish its technology as the dominant design in the industry, then licensing may be attractive

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LO 13-3 Identify the factors that influence a firm’s choice of entry mode.
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Selecting an Entry Mode 2 of 3
Core Competencies and Entry Mode continued
Management Know-How
The competitive advantage of many service firms is based upon management know-how
International trademark laws are generally effective for protecting trademarks
Since the risk of losing control over management skills to franchisees or joint venture partners is not high, the benefits from getting greater use of brand names is significant

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Selecting an Entry Mode 3 of 3
Pressures for Cost Reductions and Entry Mode
Firms facing strong pressures for cost reductions are likely to pursue some combination of exporting and wholly owned subsidiaries
Allows the firm to achieve location and scale economies as well as retain some degree of control over worldwide product manufacturing and distribution
Firms pursuing global standardization or transnational strategies tend to prefer establishing wholly owned subsidiaries

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Greenfield or Acquisition? 1 of 5
Pros and Cons of Acquisitions
Are quick to execute
Enable firms to preempt their competitors
Can be less risky than greenfield ventures
However, many acquisitions are not successful

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LO 13-4 Recognize the pros and cons of acquisitions versus greenfield ventures as an entry strategy.
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Greenfield or Acquisition? 2 of 5
Pros and Cons of Acquisitions continued
Why Do Acquisitions Fail?
The firm overpays for the assets of the acquired firm
There is a clash between the cultures of the acquiring and acquired firm
Attempts to realize synergies by integrating the operations of the acquired and acquiring entities run into roadblocks and take much longer than forecast
There is inadequate pre-acquisition screening

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Greenfield or Acquisition? 3 of 5
Pros and Cons of Acquisitions continued
Reducing the Risks of Failure
Through careful screening of the firm to be acquired
By moving rapidly once the firm is acquired to implement an integration plan

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Greenfield or Acquisition? 4 of 5
Pros and Cons of Greenfield Ventures
Greenfield ventures are attractive because they allow the firm to build the kind of subsidiary company that it wants
Are slower to establish
Are risky because they have no proven track record
Can be problematic if a competitor enters via acquisition and quickly builds market share

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Greenfield or Acquisition? 5 of 5
Which Choice?
Dependent on circumstances confronting the firm
Well-established incumbents might be best for an acquisition as greenfield too slow
If no incumbents, then greenfield might be best

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How Risky Would Indonesia Be for a New Greenfield Investment?
Business is all about risk, the right risks. Choosing which risks to accept and which to avoid is at the heart of international business. These risks increase and become more interesting with entry into foreign markets. David Conklin discusses the idea of managing risk through planned uncertainty. By “planned uncertainty,” he means an awareness of contingencies, with possible what-if scenarios developed in advance. The key idea here is that through an ongoing monitoring of the various risk areas, decision makers can have much of the data they may need to address a number of possible outcomes. Of course, we have to know what uncertainty to plan for, and we don’t know what we don’t know. Planning for everything is impossible, but what Conklin suggests is that planned uncertainty is a way of thinking. Given that we don’t know the future, this way of thinking may be helpful in career development and other parts of our lives. Who ever said business wasn’t like surfing? So, as just one country example, how big do you think the risk is by entering Indonesia with a new greenfield investment?
Sources: D. Conklin, “Analyzing and Managing Country Risks,” Ivey Business Journal: Improving the Practice of Management, January/February 1992. Also, see “Indices” for countries on globalEDGE.msu.edu.

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Summary
In this chapter we have
Explained the three basic decisions that firms contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale.
Compared and contrasted the different modes that firms use to enter foreign markets.
Identified the factors that influence a firm’s choice of entry mode.
Recognized the pros and cons of acquisitions versus greenfield ventures as an entry strategy.

©McGraw-Hill Education.
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