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