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Global Entry Strategies,

Joint Ventures, and Alliances

Sources: Dornier et al., GOL, 1998


Flaherty, GOM, 1996
Daniels, Radebaugh, International Business, 8th Ed., Addison-Wesley 1998
Soumen Ghosh, International OM, Lecture Notes, Georgia Tech 1996
Alex Tsai, A Note on Strategic Alliances, HBS 1997
Bleeke, Ernst, Is Your Strategic Alliance Really a Sale?, HBR (Jan-Feb 1995) 97-105
Overview

Entry Strategies

Strategic Alliances
Entry Strategies
Information Sources about Overseas Suppliers

Source Usage
Professional contacts 48%
Trade Journals 44%
Directories 31%
Trading companies 30%
Import brokers 24%
Foreign subsidiary 22%
Trade fairs 16%
Foreign trade offices 13%
Entry Strategies
Supplier Ratings on a National Basis

CountryAvg. QualAvg. Serv.Avg. Price


Canada 5 4 5
Japan 2 5 12
Mexico 12 15 6
Germany 1 1 9
UK 4 3 7
France 6 11 11
India 16 16 14
Sth Korea 9 6 1
Taiwan 10 8 2
South America 13 14 16
Entry Strategies
Trade and Communication Channels / Buying

Channel Use [%]


Assigned buyer in purchasing unit 38%
Manufacturers representative 34%
Foreign buying office 10%
Import broker 10%
Trading company 8%
Foreign subsidiary 7%
Import merchant 5%
State trading agency 1%
Entry Strategies
Choice of International Entry Mode

Exporting
Tapping foreign markets through marketing channels

Licensing (also Franchising)


Operations granted to the licensee in exchange for lump
sum payment, per unit royalty fee, or proportion of profits

Joint Venture (also Management Contract)


Ownership split agreement

Wholly Owned Subsidiary


Locating own operations in a foreign site
Entry Strategies
Advantages/Disadvantages of Entry Modes

Entry Mode Control Resource


Dissemination
Commitment Risk

Exporting high medium low


Licensing low low high
Joint Venture medium medium medium
Subsidiary high high low
Entry Strategies
Entry Mode Variables

Environmental variables - resource


Transaction Variables -
commitment
Country risk
risk
Location familiarity Value of firm specific
Demand conditions know-how
Volatility of competition Tacit nature of know-how

Strategic variables - control


Extent of national differences
Extent of scale economies
Global concentration
Entry Strategies
Classification of Entry Strategies

Production Production Location


Ownership Home Country Foreign country

Equity Exporting Wholly owned opns


arrangements Partially owned opns
Joint ventures
Equity alliances

Non-equity Licensing
arrangements Franchising
Management contracts
Turnkey operations
Overview

Entry Strategies

Strategic Alliances
Types of Alliances

Contractual Agreements Equity Arrangements

Traditional Non-Traditional No New Creation of Dissolution of


Contracts Contracts Entity New Entity Entity

Arms-length Joint R&D Minority Equity Joint Venture Mergers


Investments
Buy/Sell Contracts Joint Product Development Acquisitions
Franchising Equity Swaps
Long Term Sourcing
Licensing
Cross-Licensing Joint Manufacturing

Joint Marketing

Shared Distribution

Shared Service

Standard Setting

Research Consortia
Types of Alliances

STRATEGIC
IMPORTANCE
Acquisition

High Minority Interest

Joint Venture

Joint Marketing

Medium Joint Development Projects

Licensing Agreements

Alliance/Consortia

Low Commercial Contracts

Technology Trials

Low High
LEVEL OF COMMITMENT
Strategic Alliances
Definition

Strategic Alliance = Cooperative Agreement

Long-term, explicit agreement between at least


two firms

Exchange can involve financial renumeration,


goods/services, information, or a combination of
the three
Strategic Alliances
Why do Firms Enter into Strategic
Alliances?

Transaction Cost Theory:


Transactions either through hierarchies (i.e., within the firm) or
through markets (i.e., externally)
If transactions occur more often, parties may be better off
negotiating a long-term contract
Uncertainties when contract complex => contract incomplete/
re-negotiation; also holds if investment in assets are made for only
one (potential customer)
As external market transactions become more costly, a firm is more
apt to internalize its activities to economize on transaction costs
(excludes the possibility of opportunistic behavior by partner)
Strategic Alliances
Incentives to Enter Strategic Alliances

Information exchange
Reduce risk and search costs
E.g., Technology transfer or technological complementarity
SMEs: cut risk through research sponsored by multiple big firms
Big firms: mitigate risk by supporting multiple innovative SMEs

Complementary resources
New entrant gains access to efficient production facilities,
established channels of marketing and distribution, custr loyalty
Existing competitor may share new technology for rapid expansion of
market share in response to revolutionary innovations
Strategic Alliances
Incentives to Enter Strategic Alliances (contd)

Economies of scale
Until a new entrant has reached it own econs of scale in
prodn, it is at a significant cost disadvantage => take part
in competitors econs of scale
Competitor may reduce average unit cost and create addl
entry barrier

International expansion
International expansion through a domestic partner at
reduced risk (e.g., for commercialization)
May be appropriate if speed of deployment important
Often chosen by small firms (less capital intensive) or as a
result of trade laws/restrictions
Strategic Alliances

Types of Strategic Agreements between Firms

R&D Licensing Agreement

Joint Venture
Effect on cooperating firms
New legal entity
Operating (own facilities) vs. non-operating (admin) joint venture
Mutual hostage position by combining real & financial assets
=> Incentives to share technology and info, invest in relationship-
specific assets, monitor each other

Effect on market
Increase in market power by binding upstream suppliers or
downstream distributors => higher entry barrier
Strategic Alliances
Myths

Were better off partnering with X than competing against it in


our core business

By joining forces with another second-tier company, we can


create a strong company while fixing our problems together

We need a strong partner to improve our skills

By partnering with another company in our industry, we can


access its new products and technologies while minimizing our
investments in core products and technologies

We can use an alliance to raise capital without giving up


management control
Strategic Alliances
Six Types of Alliances

Collisions Between Competitors


Involve the core businesses of two strong direct competitors
Tends to be short-lived and fail to achieve their strategic and
financial goals
Tend to end in dissolution or a merger

Alliance of the Weak


Hope that together the weak firms will improve their
positions
They usually grow weaker and the alliance fails
Often acquisition by a third party
Strategic Alliances
Six Types of Alliances (contd)

Disguised Sales
A weak company combines with a strong company (often a
(future) direct competitor)
The weakling remains weak and is acquired by the stronger fellow
Disguised sales tend to be short-lived, usually less than five years

Bootstrap Alliances
Combination of a strong and a weak company
Weak one tries to improve its capabilities, but usually remains
weak and is acquired by partner
If successful, the partnership evolves into an alliance of partners
Strategic Alliances
Six Types of Alliances (contd)
Evolutions to a Sale
Two strong and compatible partners
Competitive tensions develop, bargaining power shifts,
one of the partners ultimately sells out to the other
Often success in meeting the initial objectives
May exceed a seven-year period

Alliances of Complementary Equals


Two strong and complementary partners
Partners remain strong during the course of the alliance
Mutually beneficial, likely to last much longer than
seven years
Relationship Management
Carefully assess Control creatively
complementarity
Know your partner
Share equitably
Achieve goal and strategy Be flexible
congruency
Review and revise
Identify conflict points
Make clear rules
Know when to exit
Make transactions
transparent
Communicate clearly and
often

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