GB528 Unit 4 Entry Mode Comparison Example

Five Ways Into Indonesia and One Scarce Asset: A Unit 4 Entry Mode Comparison for a Paint Maker

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Purdue University Global

GB528: Global Strategy

Unit 4 Entry Mode Comparison

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[Date]

The paint maker, the candidate partners and targets and every figure are composite and illustrative; the theories and sources cited are real.

The Decision

Ohio Valley Coatings wants to build a decorative paint business in Indonesia, a large and growing market. The industry analysis in Unit 2 found that rivalry is intense, buyer power is low, and distribution through small building-materials shops is the main barrier. The question now is how to enter.

Theory Before the Table

Anderson and Gatignon (1986) describe entry mode as a trade between control and resource commitment. A subsidiary the firm owns outright lets it protect its know-how and direct strategy, but they require more capital and expose the firm to more risk. Lower-control modes, such as licensing, cost less but leave the firm dependent on others and risk leaking its knowledge. Transaction costs, especially the risk that a partner will misuse proprietary knowledge, push firms toward control.

Dunning (1988) explains international production through three conditions: ownership advantages the firm brings, location advantages of the host country, and internalization advantages that make it better to use those assets within the firm than to sell or license them. Ohio Valley's ownership advantages are its acrylic formulations and tinting system. Indonesia's location advantages are a large market and low labor costs. Internalization favors keeping the formulas and tinting system inside the firm, because they are hard to protect under license.

Exhibit 1: Five Modes Against Five Tests

Exporting from the United States. Control over tinting system and formulas: high. Capital at risk: low. Speed to reach shops: slow, since it depends on importers. Access to local knowledge: low. Flexibility to exit: high. Paint is heavy and low in value per kilogram, and shipping it across the Pacific makes it uncompetitive outside premium niches.

Licensing a local producer. Control: low; the licensee learns the formulas. Capital: low. Speed: moderate, through the licensee's network. Local knowledge: high. Flexibility: moderate, bounded by the license term.

Joint venture with a distribution group. Control: moderate to high with a majority stake and protections for the tinting system. Capital: moderate, about $60 million for a 60 percent share of a venture with a new plant. Speed: fast, since the partner's trucks already reach thousands of shops. Local knowledge: high. Flexibility: moderate, governed by exit terms.

Acquiring a local paint maker. Control: high. Capital: high, with local producers valued richly. Speed: fast, if the target has distribution. Local knowledge: high. Flexibility: low; an acquisition is hard to unwind.

Greenfield plant and own distribution. Control: highest. Capital: high, about $40 million for the plant plus years of spending to build distribution. Speed: slowest, perhaps four to six years to reach national coverage. Local knowledge: low at first. Flexibility: low.

Every mode except the joint venture forces a choice between protecting the formulas and reaching the shops; the joint venture is the only one that can offer both.

A Five-Year View

In composite estimates, the three serious options differ sharply in how quickly they reach scale. The joint venture could reach about 6 percent of Indonesia's decorative paint market in five years, using the partner's network from the first year, with Ohio Valley's share of cumulative operating profit near $45 million against its $60 million investment. A greenfield entry would reach perhaps 3 percent in the same period, because distribution would be built island by island, and Ohio Valley would keep all the profit but earn little before year four. An acquisition, if a target were available, could reach 6 percent at once but would cost two to three times the joint venture investment. The joint venture offers the best balance of speed and capital, which is why it leads despite its loss of control.

Why Not the Alternatives

Exporting fails on cost. Licensing would put the tinting system and formulas in the hands of a local producer, which would be a competitor after the license ended; the internalization logic argues against it. Acquisition would give control and speed, but only if a target with strong distribution were available at a sensible price, and the leading producers are expensive and not for sale. Greenfield gives full control but is the slowest route to the asset that matters most.

The Recommendation: A Majority Joint Venture

Ohio Valley should form a joint venture with an Indonesian distribution group whose trucks already serve building-materials shops, holding 60 percent and contributing the formulas under a license that the venture uses but does not own. The venture would build a paint plant in West Java and sell through the partner's network, with Ohio Valley appointing the managing director and controlling technical decisions.

What the Choice Surrenders

Part of the profit. The partner takes 40 percent of earnings.

Some control. Decisions on distribution, pricing to shops and expansion to new islands will need the partner's agreement.

Knowledge exposure. The partner will learn how paint is made and sold, and may later want its own paint business. The partner evaluation in Unit 5 must test this risk.

Speed of decision. A joint venture adds a board, a partner and a second set of interests to every major decision.

Bamford et al. (2004) note that many joint ventures struggle because partners do not agree early on governance, decision rights and exit terms. The recommendation is therefore conditional on a term sheet that settles those questions before the venture is formed.

A Path to More Control

The joint venture need not be permanent. Many firms use a venture to learn a market and build volume, then buy out the partner once they understand the distribution system and have built their own relationships with shops and painters. A call option exercisable after five years, priced by an agreed formula, would let Ohio Valley move toward full ownership if the venture succeeds, while the partner would earn a fair return for the distribution it provided.

Conditions

The joint venture should proceed only if the term sheet protects the tinting system and formulas through a license that ends with the venture, gives Ohio Valley a call option to buy the partner's share after a set period or on a change of control, and sets clear rules for deadlock. If no suitable partner accepts those terms, the fallback is a smaller greenfield entry focused on Java, accepting a slower build and a longer wait for profit in exchange for full control.

References

Anderson, E., & Gatignon, H. (1986). Modes of foreign entry: A transaction cost analysis and propositions. Journal of International Business Studies, 17(3), 1-26. https://doi.org/10.1057/palgrave.jibs.8490432

Bamford, J., Ernst, D., & Fubini, D. G. (2004). Launching a world-class joint venture. Harvard Business Review, 82(2), 90-100.

Dunning, J. H. (1988). The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19(1), 1-31. https://doi.org/10.1057/palgrave.jibs.8490372