Question

Read the Chapter 8 Mini-Case: An International Strategy Powers ABB's Future

Respond to question 3: Why has ABB used acquisitions and joint ventures as dominant entry modes in international markets?

Answer 1

Company Profile: -

ABB is short form for Asea Brown Beveri and is one of the largest companies of Switzerland, where it is headquartered in Zurich. The country has its prime focus, in key areas such as robotics, power, automation etc. The company was founded in the year 1988 and has its presence across the globe.

It has it name in the Fortune 500 and is ranked 341 out of 500 in the Fortune 500 Companies across the globe.

Case Specifics: -

For understanding why ABB has primarily used Acquisitions and Joint Ventures, it is important to look at what these refer to. Acquisitions refer to a company taking over the operations of an existing one whereas Joint Ventures refer to two companies coming together and forming a new enterprise. The key reasons why the company has used this as a strategy to enter foreign markets is as follows

1) By entering a market through Joint Ventures or Acquisition, a company can cash in on the already existent brand value of the other and utilize this to maximize their overall profits. Local companies tend to have higher sales reputation and newer ones lesser. When a new company is formed as a result of joint ventures or direct acquisition, the brand value push which the acquiring or new firm gets is much higher in comparison to it entering solo in the market place.

2) The local market knowledge of existing companies is relatively way higher than what new entrants would have. When we enter a new market all by ourselves, we need to spend a considerable amount of money towards research and development. Older firms already have conducted these researches previously. Thus, the acquisition or joint venture allows ABB to have higher knowledge about an area without even conducting its own research and development activities.

3) Joint ventures alone can significantly reduce the risk of operations for any company. The company is held together with a different company which thus happens to share the liabilities which arise out of business. Even in acquisitions, in most cases ABB would only have a majority stake while rest of the risk would be shared by the partner firm.

4) Some governments tend to have strict rules against new entrants which enter solo without the element of joint ventures or acquisitions. For example, in some countries there are strict laws that new entrants would have to use resources within the country or others relating to heavy taxation. This increases the overall costs for any firm.

5) Existing firms have a deep network of supply chain and understand local conditions very well. This is therefore beneficial for any company engaging in work.

To avoid this, ABB has preferred to use joint ventures and acquisitions as an active way of dominant entry into countries.

Conclusion: -

Thus, to cash in on government benefits which are extended to existing companies and to use the competencies and key positive areas of existing firms, ABB uses joint ventures and acquisitions as the mode of entry into international markets.

Please feel free to ask your doubts in the comments section if any.