Global Entry Strategies,Joint Ventures, and Alliances
Sources: Dornier et al., GOL, 1998Flaherty, GOM, 1996Daniels, Radebaugh, International Business, 8th Ed., Addison-Wesley 1998
Soumen Ghosh, International OM, Lecture Notes, Georgia Tech 1996Alex Tsai, „A Note on Strategic Alliances,“ HBS 1997Bleeke, 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 UsageProfessional contacts 48%Trade Journals 44%Directories 31%Trading companies 30%Import brokers 24%Foreign subsidiary 22%Trade fairs 16%Foreign trade offices 13%
Entry StrategiesSupplier Ratings on a National Basis
Country Avg. QualAvg. Serv.Avg. PriceCanada 5 4 5Japan 2 5 12Mexico 12 15 6Germany 1 1 9UK 4 3 7France 6 11 11India 16 16 14Sth Korea 9 6 1Taiwan 10 8 2South America 13 14 16
Entry Strategies
Trade and Communication Channels / Buying
Channel Use [%]Assigned buyer in purchasing unit 38%Manufacturer‘s representative 34%Foreign buying office 10%Import broker 10%Trading company 8%Foreign subsidiary 7%Import merchant 5%State trading agency 1%
Entry StrategiesChoice of International Entry Mode
ExportingTapping 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 SubsidiaryLocating own operations in a foreign site
Entry StrategiesAdvantages/Disadvantages of Entry
Modes
Entry ModeControl Resource Dissemination Commitment Risk
Exporting high medium lowLicensing low low highJoint Venture medium medium mediumSubsidiary high high low
Entry StrategiesEntry Mode Variables
Environmental variables - resource commitment
Country riskLocation familiarityDemand conditionsVolatility of competition
Strategic variables - controlExtent of national differencesExtent of scale economiesGlobal concentration
Transaction Variables - risk
Value of firm specific know-howTacit nature of know-how
Entry Strategies
Classification of Entry Strategies
Equity arrangements
ProductionOwnership
Non-equityarrangements
Production LocationHome Country Foreign country
Exporting Wholly owned opnsPartially owned opnsJoint venturesEquity alliances
LicensingFranchisingManagement contractsTurnkey operations
Overview
Entry Strategies
Strategic Alliances
Contractual Agreements Equity Arrangements
TraditionalContracts
Non-TraditionalContracts
No NewEntity
Creation ofNew Entity
Dissolution ofEntity
Arms-length
Buy/Sell ContractsFranchising
LicensingCross-Licensing
Joint R&D
Joint Product Development
Long Term Sourcing
Joint Manufacturing
Joint Marketing
Shared Distribution
Shared Service
Standard Setting
Research Consortia
Minority EquityInvestments
Equity Swaps
Joint Venture Mergers
Acquisitions
Types of Alliances
Types of Alliances
LEVEL OF COMMITMENTLEVEL OF COMMITMENT
STRATEGIC STRATEGIC IMPORTANCEIMPORTANCE
Acquisition
Minority Interest
Joint Venture
Joint Marketing
Joint Development Projects
Licensing Agreements
Alliance/Consortia
Commercial Contracts
Technology Trials
Low
Medium
High
Low High
Strategic AlliancesDefinition
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 AlliancesWhy 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 exchangeReduce risk and search costsE.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 resourcesNew 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 AlliancesIncentives to Enter Strategic Alliances (cont’d)
Economies of scaleUntil a new entrant has reached it own econs of scale in prodn, it is at a significant cost disadvantage => take part in competitor‘s econs of scale Competitor may reduce average unit cost and create add‘l entry barrier
International expansionInternational 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 AlliancesMyths
„We‘re 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 AlliancesSix Types of Alliances
Collisions Between CompetitorsInvolve the core businesses of two strong direct competitorsTends to be short-lived and fail to achieve their strategic and financial goalsTend to end in dissolution or a merger
Alliance of the WeakHope that together the weak firms will improve their positionsThey usually grow weaker and the alliance failsOften acquisition by a third party
Strategic AlliancesSix Types of Alliances (cont’d)
Disguised SalesA weak company combines with a strong company (often a (future) direct competitor)The weakling remains weak and is acquired by the stronger fellowDisguised sales tend to be short-lived, usually less than five years
Bootstrap AlliancesCombination of a strong and a weak companyWeak one tries to improve its capabilities, but usually remains weak and is acquired by partnerIf successful, the partnership evolves into an alliance of partners
Strategic Alliances
Six Types of Alliances (cont’d)Evolutions to a Sale
Two strong and compatible partnersCompetitive 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 EqualsTwo 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 complementarity
Know your partner
Achieve goal and strategy congruency
Identify conflict points
Make clear rules
Make transactions transparent
Communicate clearly and often
Control creatively
Share equitably
Be flexible
Review and revise
Know when to exit