Ch14-Collaborative Strategies.ppt

© 2001 Prentice Hall 14-1

International Businessby

Daniels and Radebaugh

Chapter 14Collaborative Strategies


ObjectivesTo explain the major motives that guide managers when

choosing a collaborative arrangement for IBTo define the major types of collaborative arrangementsTo describe what companies should consider when entering

into arrangements with other companiesTo discuss what collaborative arrangements succeed or failTo discuss how companies can manage diverse collaborative

arrangements


IntroductionCompanies must choose an international operating mode,

many of which are collaborative• Collaboration frequently lessens control• MNEs with fully global orientation use most of the

operational modes availableStrategic alliance—collaboration is of strategic importance to

one or more of the companiesCollaborations—provide different opportunities and problems

than do trade or wholly owned direct investment


OPERATIONS

OBJECTIVES

STRATEGY

Modes• Self-handling•Collaborative arrangements

Functions

OverlayingAlternatives

MEANS

EXTERNAL INFLUENCES

COMPETITIVE ENVIRONMENT

PHYSICAL AND SOCIETAL FACTORS

Collaborative Arrangements as IB Operating Modes


a. Wholly owned operationsb. Partially owned with remainder widely held

a. Exporting

c. Joint venturesd. Equity alliances

a. Licensingb. Franchisingc. Management contractsd. Turnkey operations

EquityArrangements

Non-equityarrangements

PRODUCTIONOWNERSHIP

PRODUCTION LOCATION

Home country Foreign country

Collaborative arrangements shaded in blue

Alternative Operating Modes for Foreign Market Expansion


MOTIVES FOR COLLABORATIONGeneral• Spread and reduce costs• Specialize in competencies• Avoid competition• Secure vertical and horizontal links• Gain market knowledge

MOTIVES FOR COLLABORATIONSpecific to international business• Gain location-specific assets• Overcome legal constraints• Diversify geographically• Minimize exposure in risky environments

OBJECTIVES OF INTERNATIONAL BUSINESS• Sales expansion • Resource acquisition• Diversification• Competitive risk minimization

Relationship of Strategic Alliances to Companies’International Objectives


Motives for Collaborative ArrangementsSome of the motives for collaboration for domestic operations

are both:• The same for international operations• Different for international operations

Each participating company has its own primary objective for international operations and its own motive for collaboration

General Motives for CollaborationSpread and reduce costs—sometimes it is cheaper to get

another company to handle work, especially:• At small volume can spread fixed costs• When the other company has excess capacity

– company handling production or sales may lower its average costs

• Cooperative ventures may increase operating costs


General Motives for Collaboration (cont.)Specialize in competencies

• Resource-based view of the firm—holds that each company has a unique combination of competencies

• Large, diversified companies realign to focus on their major strengths

– licensing can yield a return on a product that does not fit the company’s strategic priority based on its best competencies

Avoid competition—when markets are too small, companies band together so as not to compete

• Companies may combine resources to combat larger competitors

• Companies may collude to raise everyone’s profitsSecure vertical links—companies may lack competence or

resources to become fully vertically integratedSecure horizontal links—may provide finished products or

components


General Motives for Collaboration (cont.)Gain market knowledge—learn about a partner’s technology,

operating methods, or home markets

International Motives for CollaborationGain location-specific assets—collaboration with local firm used

to deal with barriers encountered when operating abroad• Foreign companies may gain operational assets when

teaming with local companiesOvercome legal constraints—country may require foreign

companies to share ownership• Collaboration a means of protecting assets

– hinders nonassociated companies from pirating the asset

Diversify geographically—can smooth its sales and earnings because business cycles differ

Minimize exposure in risky environments—reduce base of assets located abroad


Types of Collaborative ArrangementsForms of foreign operations differ in the:

• Amount of resources committed to the operation• Proportion of resources located abroad

Type of collaborative arrangement selected may necessitate trade-offs among objectives

Companies with difficult-to-duplicate resource have a wider choice of operating form

Some Considerations in Collaborative ArrangementsDesire for control over foreign operations

• The greater reliance on collaboration, the greater the loss of control over decision making

• External arrangements imply the sharing of revenuesPrior expansion of the company abroad—may reduce some

advantages of more foreign expansion


LicensingLicenser grants rights to intangible property to licensee to use

in a specified geographic area for a specified period• Licensee ordinarily pays a royalty to licenser• Intangible property includes patents, copyrights,

trademarks, franchises, and methods or systemsLicensing often has an economic motive—the desire for faster

start-up, lower costs, or access to additional resourcesCross-licensing—exchange of technology among companies

• Reduces competition on products and in marketsPayment—varies in amount and type of payment

• Several factors determine the payment amount• Bargaining used to establish the price

Most licenses granted to companies in which licensee has an ownership stake


AGREEMENT-SPECIFIC FACTORS Affecting the Technology Value• Market restrictions (including exports)• Exclusivity of the license• Limits on production size• Product quality requirements• Grantback provisions• Tie-in provisions• Duration of the agreement• Age of the technology• Duration of the patent• Other constraints on the use of technology

ENVIRONMENT-SPECIFIC FACTORS Affecting the Technology Value• Government (of both licensor’s and licensee’s countries) regulation of licensing• Level of competition among alternative suppliers of similar technology• Political and business risks in the licensee’s country• Product and industry norms• Technology-absorbing capacity of the licensee’s country

Determinants of Compensation for InternationalLicensing of Technology


LICENSOR’S OFFER PRICE

Upper limit: Smaller of 1. Estimate of licensee’s additional profits from use of technology or 2. Estimate of licensee’s cost of obtaining same or similar technology from alternative sources

Lower limit: Estimate of direct transfer costs, opportunity costs, and R&D costs

LICENSEE’S BID PRICE

Upper limit: Smallest of 1. Estimate of additional profits from use of technology or 2. Estimate of cost of developing same or similar technology or 3. Estimate of costs of obtaining same or similar technology from best alternative source

Lower limit: Estimate of licensor’s direct transfer costs

Zero price

Bargainingrange

Determinants of Compensation for InternationalLicensing of Technology


FranchisingSpecialized form of licensing—franchisor

• Sells an independent franchisee the use of intangible property

• Operationally assists the businessFranchisor and franchisee—act like a vertically integrated

companyOrganization of franchising

• Franchisor enters foreign market by setting up a master franchise that has the authority to open outlets or develop subfranchises

• Franchisor may may enter market by dealing directly with individual franchisees

– easier for known franchisors to attract investors


Franchising (cont.)Operational modifications

• Problems faced by franchisor include securing good locations, finding suppliers, and gaining operating permission from the government

• Difficult to transfer factors that affect success– the more standardization, the less acceptance in the

foreign country– the more adjustment to the foreign country, the less

the franchisor is needed

Management ContractsMeans by which a company may transfer managerial talent

• Management personnel assists foreign company• Company gains income with little capital outlay

Host country gets assistance without needing direct investment


Turnkey OperationsCompany contracts another to build complete, ready-to-

operate facilities• Involve industrial-equipment manufacturers and

construction companies• Customer is often a governmental agency• Usually involve very large, expensive contracts

Securing contracts entails—public relations, price, export financing, managerial and technological quality, experience, and reputation

Joint VenturesMore than one organization owns a company

• Consortium—more than two organizations participateManagement problems increase with more owners

• A partner’s control of operations decreasesAppeal to companies new at foreign operations


NU

MB

ER

OF

PA

RT

NE

RS

Many

None

OWNERSHIP CONSORTIUM

Equity(more ownership)

Sharing Nonequity(less ownership)

Wholly owned

Tightcontrol

Consortium

Equity alliance

Joint venture

Mediumcontrol

Sales contract

License

Franchise

Turnkey

Managementcontract

Littlecontrol

Control Complexity Related to Collaborative Strategy


Equity AlliancesCollaborative arrangement in which at least one company takes

an ownership position in the other(s)• Each party may take an ownership position in the other

partners’ businesses• Helps solidify collaboration

Problems of Collaborative ArrangementsMany arrangements develop problems that lead partners to

renegotiate their relationship• In spite of renegotiated relationships, many agreements

break down or are not renewedCollaboration’s importance to partners

• One partner may devote more managerial attention to the collaboration

– due to differences in size of the partners

Differing objectives—partners’ objectives may evolve differently over time


Problems of Collaborative Arrangements (cont.)Control problems

• Company loses some control over assets shared with others in collaborative arrangement

– may lose control of the extent or quality of use of assets

• Even though control is ceded to one of the partners, both may be held responsible for problems

• Not clear who controls employees in joint ventures• Without control residing with one of the partners, joint

operation may lack directionPartners’ contributions and appropriations

• Partners’ capabilities to contribute may change– weak link may cause drag on the relationship

• Suspicions may arise about what other partner(s) is taking from the operation


Problems of Collaborative Arrangements (cont.)Differences in culture

• Companies differ by nationality in how they evaluate the success of their operations

– differences can mean that one partner is satisfied while the other is not

• Some companies prefer not to collaborate with companies of very different cultures

– joint ventures from culturally distant countries survive at least as well as those between partners from similar cultures

• Differences in corporate cultures may also create problems within joint ventures

– compatibility of corporate cultures is important in cementing relationships


Managing Foreign ArrangementsAs the arrangement evolves:

• Partners will have to reassess certain decisions• Environment likely to change• Must reexamine the fit between collaboration and

strategyDynamics of collaborative arrangements

• Companies typically move from external to internal handling of foreign operations

– as commitment deepens, cost of switching from one mode of operation to another may be high

• Collaboration with local partner provides the company with opportunities to learn about culture and more confidently deepen its commitment to foreign operation

• Tensions may develop internally as a company’s international operations change and grow


Managing Foreign Arrangements (cont.)Finding compatible partners—company can:

• Seek out a partner for foreign operations• Respond to proposals from other companies• Must evaluate compatibility

– proven ability to handle similar types of collaborationNegotiating process

• Some technology transfer considerations are unique to collaborative arrangements

– provisions to not divulge technical information– retention of a key component so that partner will not

obtain complete information• Secrecy surrounding the financial terms of collaborative

arrangements


Managing Foreign Arrangements (cont.)Contractual provisions—guard against consequences of loss of

control of assets or intangible property• Contract should spell out:

– terminating the agreement– methods of testing quality– geographical limitations on the asset’s use– management responsibilities of each partner– future commitments of each partner– partner’s disposal of outcomes of collaborative

arrangementPerformance assessment—when collaborating with another

company it is necessary to:• Establish mutual goals• Spell out expectations in the contract• Continue to monitor performance• Determine whether to take over the operations

Ch14-Collaborative Strategies.ppt

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