T5

102 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances TOPIC SUMMARY TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Topic Objectives After studying this topic, students should be able to: 1. Understand the foreign market analysis and choosing a mode of entry 2. Explain entry exporting to foreign markets 3. Discuss the international corporate cooperation and benefits of strategic alliances 4. Discuss the scope of strategic alliances and its implementation 5. Explain pitfalls of strategic alliances TOPIC SUMMARY Topic five examines the various entry modes available to companies as they expand internationally. The topic begins with the choice of entry modes, and then proceeds to discuss the advantages and disadvantages of each one. Besides that, this topic explores international strategic alliances in detail. The chapter begins with a discussion of the various types of strategic alliances and then goes on to explore the benefits of alliances. The scope of strategic BUS 3233

103 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Mixing and Matching Joint Venture Because work teams have become so ubiquitous in management today, it follows that many new joint ventures and other alliances will have work teams as a critical component. But managers need to pay careful attention to the culturally based differences that can exist among people in such settings and how those differences can facilitate or hinder the new venture. Consider, for example the experiences that three multinational firms had when they decided to “venture abroad” together. It all started when IBM, Siemens, and Toshiba entered into a new joint venture to work together in developing an advanced type of computer chip. Each firm identified a set of research scientists for the project and the total group of around 100 people assembled for work at an IBM facility in East Fishkill, a small Hudson River Valley town in New York. The idea was that the best and brightest minds from three diverse companies would bring such an array of knowledge, insight, and creativity to the project that it was bound to succeed. Unfortunately, things didn’t start out well, and it took much longer than expected for the firms to really figure out how to work together. The biggest reasons cited for the early difficulties related to the cultural differences and barriers that existed among the group members. For example, the Japanese scientists were accustomed to working in one big room where everyone could interact with every

104 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Source: Adapted from C.W.L Hill, Global Business today, 6th Edition (pp 411- 412), New York: McGraw Hill 1. Differentiate between strategic alliance and joint ventures? (5 marks) 2. What type of strategic alliance that implemented by General Electric and relate with the article above? (7marks) 3. Explain three (3) advantages of joint venture strategy and from the advantages stated, what are the potential pitfalls might face by General Electric Company from this mode of entry? (8 marks) 5.1 FOREIGN MARKET ANALYSIS To successfully increase foreign market share, firms must assess alternative markets; evaluate the respective costs, benefits, and risks of

105 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances entering each; and select those that hold the most potential for entry or expansion. 5.1.1 Assessing Alternative Foreign Markets A firm must consider a variety of factors, including market potential, levels of competition, the legal and political environment, and sociocultural influences when assessing alternative foreign markets. Information on some of the factors is easily obtainable from published sources in the firm’s home country. Other information may be subjective and difficult to obtain. In fact, it may be necessary to visit the foreign location in question. Market Potential. The first step in foreign market selection is assessing market potential. Variables a firm might wish to consider include population, GDP, per capita GDP, public infrastructure, and ownership of goods such as automobiles and televisions. Students should refer to Building Global Skills in Chapter Two for a list of publications that provide this type of information. Next, a firm must collect information relating to the specific product line under consideration. It may be necessary for a firm to use proxy data in some cases. The potential for growth in a particular market can be estimated using both objective and subjective measures. Levels of Competition. Firms must also consider the current and future level of competition in foreign markets. Firms assessing their competitive environment should identify the number and size of firms already competing in the potential market, their relative market shares, their pricing and distribution strategies, and their relative strengths and weaknesses. Continual monitoring can help firms identify new opportunities. Legal and Political Environment. It is important that a firm understand the host country’s policies toward trade, as well as its general legal and political environment, prior to making an investment. Trade

106 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances barriers, for example, might induce a firm to enter a market via FDI as opposed to exporting. In some countries, legal and political issues will impact both entry methods and the repatriation of profits. A country’s tax policies and government stability may also affect a firm’s strategy. The text provides specific examples of how these factors affected the international strategies of various firms. Sociocultural Influences. Sociocultural influences should also be considered when assessing foreign market opportunities. In many cases, firms will attempt to minimize the potential impact of sociocultural differences by initially focusing on countries that are culturally similar to their home markets. Depending on the proposed type of internationalization effort, certain sociocultural variables may be more important than others. For example, if the proposed strategy is to export goods to a new market, the sociocultural factors of most importance are those that relate to consumers. In contrast, if a firm is considering establishing a factory or distribution center in a foreign country, the firm should evaluate sociocultural factors associated with its potential employees. 5.1.2 Evaluating Costs, Benefits, and Risks Costs. There are two types of relevant costs at this point: direct and opportunity. Direct costs are incurred when entering the foreign market in question and include costs associated with setting up a business operation, transferring managers to run it, and shipping equipment and merchandise. A firm incurs opportunity costs when entering one market precludes or delays its entry into another. The profits it would have earned in the second market are opportunity costs.

107 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Benefits. Benefits from entering a foreign market include expected sales and profits, lower acquisition and manufacturing costs, foreclosing of markets to competitors, competitive advantage, access to new technology, and the opportunity to achieve synergy with other operations. Risks. A firm entering a new market incurs the risks of opportunity costs, additional operating complexity, and direct financial loss due to misassessment of market potential. In some extreme cases, a firm may also risk loss due to government seizure of property, war, or terrorism. It is important that firms carefully assess foreign markets prior to making strategic decisions. Poor strategic judgments may rob a firm of profitable operations, while a continued inability to reach the right strategic decisions may threaten the firm’s existence. 5.2 CHOOSING A MODE OF ENTRY Dunning’s eclectic theory (see Chapter Six) can be helpful in providing insight as to the best means of penetrating foreign markets. The theory considers three factors: ownership advantages, location advantages, and internalization factors, which in addition to other factors such as the firm’s need for control, the availability of resources, and the firm’s global strategy, help a firm decide among exporting, FDI, joint ventures, licensing, and franchising. Ownership advantages are the tangible or intangible resources owned by a firm that grant it a competitive advantage over industry rivals. The text provides examples of both tangible (Vale Inco, Ltd’s nickel-bearing ore) and intangible (the luxury appeal of LVMH Moet Hennessy Louis Vuitton’s products) ownership advantages. The nature of a firm’s ownership advantage will play a role in the firm’s

108 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances selection of entry mode and will help it overcome the liability of foreignness. Location advantages are those factors that affect the desirability of host country production relative to home country production. The choice of home country versus host country production is affected by factors such as relative wage rates, land acquisition costs, capacity in existing plants, access to R&D facilities, logistical requirements, customer needs, the administrative costs of managing a foreign subsidiary, political risk, and government restrictions. Internalization advantages are factors that affect the desirability of a firm producing a good or service itself rather than relying on an existing local firm to handle production. If transaction costs are high, the firm may select FDI or a joint venture as an entry method. If transaction costs are low, franchising, contract manufacturing, or licensing may be a better choice. The text illustrates this concept with an example of the factors affecting choice of entry mode in the pharmaceutical industry. Other factors that affect a firm’s choice of entry method include its need for control, the availability of resources, and the firm’s overall global strategy. In sum, the choice of an entry mode will be a tradeoff between risk and reward, the level of resource commitment necessary, and the level of control the firm seeks. 5.3 EXPORTING TO FOREIGN MARKETS The most common international business activity is exporting, or the process of sending goods or services from one country to other countries for use or sale there. There are many advantages to exporting. It allows a firm to control its financial exposure in the host country; in fact, in most situations the risk is limited to basic start-up costs and the value of the goods or

109 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances services involved in the transaction. Exporting also allows a firm to enter a market on a gradual basis, gain experience in operating internationally, and obtain information about certain markets without any investment expense. Firms may have a proactive motivation for entering a foreign market, and in effect be pulled into the market as a result of the opportunities available there. The text provides several examples of firms that have exported as a result of a proactive motivation. For instance, in 2011 Constellation Brands, the world’s largest wine distributor chose to develop its own marketing and distribution channels to take advantage of the 20% annual growth rate in the Chinese consumption of wine. Firms may also export as a result of a reactive motivation whereby they are pushed into exporting because domestic opportunities are shrinking, or production lines are running below capacity, or they are seeking higher profit margins. 5.3.1 Forms of Exporting There are three forms of exporting: indirect exporting, direct exporting, and intracorporate transfer. Indirect exporting occurs when a firm sells its products to a domestic customer, who in turn exports the product, in either its original form or a modified form. Because indirect exporting is usually not done on a conscious basis, the process does not provide the firm with experience in international business and does not allow the firm to capitalize on potential export profits. Direct exporting involves sales to customers located outside the firm’s home country. Although one-third of firms exporting for the first time are responding to an unsolicited order, subsequent efforts are

110 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances usually the result of a deliberate effort, allowing a firm to gain valuable international business experience. An intracorporate transfer is the selling of goods by a firm in one country to an affiliated firm in another. Intracorporate transfer has become more important as the sizes of MNCs have increased, and today represents some 40 percent of all U.S. merchandise exports and imports. 5.3.2 Additional Considerations In addition to considering which form of exporting to use, a firm must also assess government policies, marketing considerations, logistical considerations, and distribution issues. Government policies such as export promotion policies, export financing programs, and other forms of home country subsidization encourage exporting. However, tariff and nontariff barriers may discourage firms from selecting exporting as an entry mode. The text illustrates this concept with the example of how voluntary export restraints on Japanese automobile exports encourage Japanese producers to manufacture in the U.S. Marketing concerns, including image, logistics, distribution, responsiveness to the customer, and the need for quick feedback, may also affect a firm’s choice of entry method. The text provides several examples of products, which are successful as exports because of their image. Logistical Considerations. A firm must consider the logistical costs of exporting such as the physical distribution costs of warehousing, packaging, transporting and distributing goods, and inventory carrying costs when selecting an entry mode.

111 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Distribution issues may also influence a firm’s decision to export. Many firms are forced to use distributors in foreign markets, and the selection of the distributor can be critical to the firm’s international success. In some cases, the best distributor may already be handling a competitor’s products and a firm will be forced to weigh the costs of using a less experienced distributor with the costs of using a distributor that will not handle its products on an exclusive basis. In addition, compensation decisions must be made, the firm may find that its business judgment differs from the distributors, and pricing strategies may differ. 5.3.3 Export Intermediaries A firm may market and distribute its goods via an intermediary, a third party specializing in the facilitation of exports and imports. There are several types of export intermediaries including export management companies, Webb-Pomerene associations, and international trading companies. An export management company (EMC) is a firm that acts as its client’s export department. Several thousand EMCs operate in the U.S., providing clients with information about the legal, financial, and logistical details of exporting. Some EMCs act as commission agents, while others take title to the good. A Webb-Pomerene association is a group of U.S. firms that operate within the same basic industry and that are allowed by law to coordinate their export activities without fear of violating U.S. antitrust laws. Fewer than 25 associations exist today, providing market research, overseas promotional activities, freight consolidation, contract negotiations, and other services for members.

112 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances An international trading company is a firm directly engaged in trading a wide variety of goods for its own account. Unlike an EMC, an international trading company participates in both exporting and importing. Japan’s sogo sosha are the most important trading companies in the world. The success of the sogo soshas is a result of several factors. First, they are able to continuously obtain information about economic conditions and business opportunities anywhere in the world. Second, they have a ready source of financing from the keiretsu, and a built-in source of customers (fellow keiretsu members.) Other Intermediaries. Manufacturers’ agents solicit domestic orders for foreign manufacturers while manufacturers’ export agents act as an export department for domestic manufacturers. Finally, export and import brokers bring together international buyers and sellers of standardized commodities, and freight forwarders specialize in the physical transportation of goods. 5.4 INTERNATIONAL LICENSING Licensing is an arrangement whereby a firm, the licensor, sells the rights to use its intellectual property to another firm, the licensee, in return for a fee. Firms operating in countries with weak intellectual property protection are not advised to use licensing. However, in cases where tariff and nontariff barriers, restrictions on the repatriation of profits, or restrictions on FDI discourage other alternatives, licensing may be the only option. Licensing is attractive because it requires few out-of-pocket costs, and because it allows a firm to capitalize on location advantages of foreign production without incurring any ownership, managerial, or

113 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances investment obligations. The text provides examples of how licensing contributes to the success of Nintendo and Saks. 5.4.1 Basic Issues in International Licensing The actual licensing agreement is a critical part of the licensing process, and reflects the bargaining power and skills of the licensor and licensee. The contract should consider the boundaries of the agreement; compensation, rights, privileges, and constraints; dispute resolution; and duration of the contract. Specifying the Agreement’s Boundaries. The first step in negotiating a licensing contract is specifying the boundaries of the agreement. The text provides an example of how Pepsi sets the boundaries in its licensing agreement with Heineken. Determining Compensation. Compensation under a licensing agreement is called a royalty. Both parties have an interest but opposing views in the determination of an agreement’s compensation. The licensor wants to receive as much compensation as possible, while the licensee wants to pay as little as possible. Royalties of 3-5 percent are common. Establishing Rights, Privileges, and Constraints. A licensing contract should spell out the rights and privileges of the licensee and the constraints the licensor may impose. Typically, licensees are prohibited from divulging information learned from the licensor to third parties, are required to keep specific records on the sale of products or services, and must follow specified standards regarding product and service quality. Specifying the Agreement’s Duration. Finally, a licensing agreement specifies the duration of the arrangement. Licensors who have chosen licensing as a low-cost means of gaining information about a foreign market may seek a short-term agreement. However, a

114 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances licensee will seek an agreement that is long enough for it to recoup its investments in market research, the establishment of distribution networks, and/or production facilities. The text notes, for example, that the licensees that built Tokyo Disneyland required a 100-year agreement with Walt Disney Company. 5.4.2 Advantages and Disadvantages of International Licensing A primary advantage of licensing is its relatively low financial risk. In addition, licensing permits a company to investigate foreign market sales potential without making significant investment in financial and managerial resources. Licensees benefit from the arrangement by being able to make and sell products with a proven track record, yet incur relatively little R&D cost. A primary disadvantage of licensing is that it limits market opportunities for both the licensee and the licensor. In addition, there is mutual dependence between the licensor and the licensee, and costly and tedious litigation to resolve disputes may hurt both parties. Finally, firms must carefully word their licensing agreements to minimize problems and misunderstandings, and also guard against creating a future competitor. 5.5 INTERNATIONAL FRANCHISING A franchising agreement allows an independent entrepreneur or organization, called the franchisee, to operate a business under the

115 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances name of another, called the franchisor, in return for a fee. Franchising is one of the fastest growing forms of international business today. 5.5.1 Basic Issues in International Franchising International franchising is more likely to succeed when the franchisor has already achieved considerable success in franchising in its domestic market; the franchisor has been successful domestically because of unique products and advantageous operating systems; the factors that contributed to its domestic success are transferable to foreign locations; and there are foreign investors who are interested in entering into franchise agreements. The text illustrates this concept by examining the franchise agreements of McDonald’s. A formal contract is associated with franchise agreements. A typical contract specifies the fee and royalties paid by the franchisee for the rights to use the name, trademarks, formulas, and operating procedures of the franchisor. In addition, under a franchise contract, the franchisee typically agrees to adhere to the franchisor’s requirements for appearance, reporting, and operating procedures. Usually, the franchisor agrees to help the franchisee establish the new business. U.S. firms are the leaders in the international franchise business, perhaps because franchising is more common in the U.S. than in other countries. The text provides examples of U.S. and non-U.S. firms that have been successful at franchising. 5.5.2 Advantages and Disadvantages of International Franchising Primary advantages of international franchising are that it allows franchisees to enter a business with a proven track record, and

116 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances allows franchisors to expand internationally at relatively low cost and risk. Franchisors also have the opportunity to obtain information about local markets that they might otherwise have difficulty acquiring. As with licensing, a primary disadvantage of franchising is that profits are shared between the franchisor and the franchisee. International franchising may also be more complex than domestic franchising. The text provides an example of some of the problems McDonald’s had with a franchisee in Moscow. 5.6 SPECIALIZED ENTRY MODES FOR INTERNATIONAL BUSINESS Firms may also use specialized entry modes such as contract manufacturing, management contracts, and turnkey projects. 5.6.1 Contract Manufacturing Contract Manufacturing is used by firms that outsource most or all of their manufacturing needs to other companies in an effort to reduce the amount of resources needed in the physical production of their products. The text notes that both Nike and Mega Toys use contract manufacturing in the production of their goods. 5.6.2 Management Contract A management contract is an agreement whereby one firm provides managerial assistance, technical expertise, or specialized services to a second firm for some agreed-upon time in return for a fee. In many cases, management contracts are arranged as a result of government activities. For example, the text notes that when Saudi Arabia nationalized Aramco, it hired the former owners to manage the firm. Management contracts are attractive because

117 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances they allow firms to earn additional revenues without incurring investment risks or obligations. The text illustrates this concept with an example of Hilton Hotel’s management contracts. 5.6.3 Turnkey Project A turnkey project is a contract under which a firm agrees to fully design, construct, and equip a facility and then turn the project over to the purchaser when it is ready for operation. International turnkey projects typically involve large, complex, multiyear projects such as the construction of a nuclear power plant or airport. In some cases, turnkey projects are used when firms fear difficulties in procuring resources locally. Some firms today are using a B-O-T project in which the firm builds a facility, operates it, and later transfers ownership of the project to another party. The text provides an example of such a project involving the country of Gabon. 5.7 FOREIGN DIRECT INVESTMENT Some firms choose to establish operations in a host country at the beginning of their internationalization effort, while others prefer to use one of the other entry methods initially, and later invest in facilities in the host country. FDI is attractive not only for its profit potential, but also because a firm has increased control over its foreign operations. Control is important to firms because it allows firms to closely coordinate the activities of its foreign subsidiaries to achieve strategic synergies, and because control may be necessary to fully exploit the economic potential of an ownership advantage. FDI is also attractive if host country customers prefer to deal with local factories.

118 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances However, FDI is riskier and more complex than other types of entry strategies. In some cases, government actions encourage firms to invest in local operations (through such policies as the availability of political risk insurance), while in other cases, government actions discourage FDI (through direct controls on foreign capital or repatriation of profits). The three basic methods of FDI are greenfield strategies, whereby a firm builds new facilities; acquisitions strategies (also known as "brownfield strategies"), whereby a firm buys existing assets in a foreign country; and joint ventures. 5.7.1 The Greenfield Strategy A greenfield strategy involves starting from scratch: buying or leasing and constructing new facilities, hiring and/or transferring managers and employees, and launching the new operation. The greenfield strategy is attractive because the firm can select the site that meets its needs best, the firm starts with a clean slate, and the firm can acclimate itself to the new national business culture at its own pace. The main disadvantages of the greenfield strategy include the time and patience necessary for successful implementations; the fact that land in the desired location is not available, or is only available at an unreasonable price; local and national regulations must be complied with during the building of the new factory; the firm must recruit and train a local workforce; and the firm may be perceived as a foreign enterprise. The text provides an example of the difficulties Disney had with some of these issues when it opened its European operations. 5.7.2 The Acquisition Strategy

119 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Acquisition strategies (or brownfield strategies) are popular because, unlike other entry methods, an acquisition quickly gives the purchaser control over the firm’s factories, employees, technology, brand names, and distribution networks. The text provides examples of several recent acquisitions made by firms including Saudi Arabia Oil Co., and Pepsi Co. The main disadvantage of an acquisition strategy is that the purchaser assumes all liabilities of the acquired firm. In addition, the purchasing firm must also spend substantial sums up front. In contrast, a greenfield strategy allows a firm to spread its investment over an extended period of time. 5.7.3 Joint Ventures The joint venture involves an arrangement whereby a new enterprise is created by two or more firms working together for mutual benefit. Joint venture creation is on the rise, in part because of rapid changes in technology, telecommunications, and government policies. 5.8 INTERNATIONAL CORPORATE COOPERATION Strategic alliances, business arrangements whereby two or more firms cooperate for their mutual benefit, can take many forms, including cross-licensing of proprietary information, production sharing, joint research and development, and marketing of each other’s products using existing distribution channels. A joint venture is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents.

120 TOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Strategic alliances are one means of expanding internationally. Other modes of expansion include exporting, licensing, franchising, and FDI . However, a strategic alliance differs from these other modes in that it involves cooperation among firms. A joint venture can be managed in any of three ways: parent companies can jointly manage the venture, one parent can manage the venture alone, or an independent team of managers can be hired to run it. Other types of strategic alliances may involve a more informal management arrangement such as a coordinating committee. Joint ventures are typically broader in scope and have a longer duration than other types of strategic alliances. In fact, nonjoint venture alliances are frequently formed for a specific purpose that has a natural ending. Nonjoint venture alliances are generally less stable than joint ventures because they lack a formal organizational structure and have a narrow mission. The text provides an example of a nonjoint venture alliance involving United Airlines and British Airways. 5.9 BENEFITS OF STRATEGIC ALLIANCES The four potential benefits a firm may realize from a strategic alliance are ease of market entry, shared risk, shared knowledge and expertise, and synergy and competitive advantage. 5.9.1 Ease of Market Entry Strategic alliances may represent a means of overcoming the obstacles to entry that can hinder a firm’s international expansion. (See Chapter 11 for a discussion of the basic factors to consider when assessing a foreign market.)

121 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Strategic alliances may be a way to achieve the benefits of rapid entry while keeping costs down, or to overcome regulations imposed by the host government regarding entry modes. Moreover, strategic alliances may be a means of obtaining information about local customers, distribution networks, and suppliers. The text provides several examples of how various companies have employed strategic alliances to facilitate their global expansion. The text also discusses how joint ventures with local firms are sometimes required by host governments. 5.9.2 Shared Risk Strategic alliances can help a firm minimize or control risk because, by definition, strategic alliances imply that two or more firms work together, and therefore risk is shared. The text provides several examples of firms that have controlled risk via strategic alliances. 5.9.3 Shared Knowledge and Expertise A firm may be able to gain knowledge and expertise that it lacks via a strategic alliance. For example, the text points out that one of the main objectives behind the collaboration of Toyota and GM was cross-learning. 5.9.4 Synergy and Competitive Advantage Synergy and competitive advantage are benefits of strategic alliances that are results of the combination of the other advantages mentioned above. The text provides an example of this concept through a description of the strategic alliance between PepsiCo and a division of Unilever.

122 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances 5.10 SCOPE OF STRATEGIC ALLIANCES The scope of cooperation among firms can vary significantly depending on the basic objectives of each partner. 5.10.1 Comprehensive Alliances Comprehensive alliances involve an agreement by participants to perform multiple stages of the process by which goods and services are brought to market. Because this type of alliance requires that firms mesh functional areas such as finance, production, and marketing, most comprehensive alliances are structured as joint ventures. Comprehensive alliances may be the most rapidly growing form of strategic alliances between MNCs. However, they can be complex to arrange. The text provides an example of how General Mills and Nestle were able to gain synergy by combining resources. 5.10.2 Functional Alliances Strategic alliances that have a narrow scope involving only a single functional area of the business are less complex than comprehensive alliances and therefore may not take the form of joint venture. Typical functional strategic alliances include production alliances, marketing alliances, financial alliances, and R&D alliances. A production alliance is a functional alliance in which two or more firms each manufacture products or provide services in a shared or

123 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances common facility. The text provides several examples of production alliances in the auto and computer industries. A marketing alliance is a functional alliance in which two or more firms share marketing expertise or services. Typically, this type of agreement involves one partner introducing its products or services into a market in which the other partner already has a presence. The established firm provides the newcomer with assistance in this process in exchange for a fee. A financial alliance is a functional alliance of firms that want to reduce the financial risks associated with a project. Financial risk may be reduced when financial contributions toward the project are shared or when one partner provides the bulk of the financing while the other partner provides special expertise or makes other kinds of contributions. The text provides several examples of financial alliances. An R&D alliance involves an agreement whereby the partner agrees to undertake joint research to develop new products or services. This type of arrangement has evolved as a result of short technology life cycles and skyrocketing R&D costs. In most cases, R&D alliances do not take the form of joint ventures, but rather cross-licensing. The text provides an example of the R&D alliance among Intel, Micron Technology, Samsung, Hyundai, NEC, and Siemens to develop the next generation DRAM chips. An R&D consortium is a confederation of organizations that band together to research and develop new products or processes for world markets. Governments play a role in both the formulation and continued operation of R&D consortia. Until recently, U.S. firms were prohibited from entering R&D consortia because of concerns about antitrust. Japanese firms, on the other hand, have been involved in R&D consortia for years. 5.11 IMPLEMENTATION OF STRATEGIC ALLIANCES

124 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Firms, after concluding a SWOT analysis may conclude that strategic alliances are the best means of expanding internationally. Several issues that then must be considered include selecting a partner, deciding on ownership form, and evaluating joint management concerns. 5.11.1 Selection of Partners At least four factors (compatibility, nature of the potential partner’s products or services, the relative safeness of the alliance, and the learning potential of the alliance) should be considered when selecting a partner for collaboration. Compatibility and mutual trust are essential to the success of a strategic alliance. Alliances that lack these elements will probably fail to succeed. For example, the text notes that incompatibilities between General Electric Corporation and Siemens caused their alliance to fail. The nature of a potential partner’s products or services may impact the success of a proposed strategic alliance. Most experts recommend that because it is difficult to cooperate with a firm in one market but battle it in a second market, a firm should align itself with a partner whose products and services are complementary to, rather than directly competitive with, its own. The text provides an example of a strategic alliance in which the partners’ products are complementary and an example of a strategic alliance in which the partners’ products are directly competitive. The Relative Safeness of the Alliance. Strategic alliances should be undertaken cautiously and deliberately as part of the firm’s strategic plan. The process of forming a strategic alliance should include a careful assessment of the potential partner, its previously formed alliances, and its goals and objectives. The text provides a detailed

125 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances example of how Corning, Inc., and Asahi Video Products developed their joint venture. The Learning Potential of the Alliance. The potential to learn from a partner should be assessed prior to forming a strategic alliance. In addition, a firm should be careful not to give away information that would put it at a competitive disadvantage if a strategic alliance failed. 5.11.2 Forms of Ownership Firms considering forming strategic alliances must determine what form of ownership will be involved. The most common form of strategic alliance is the joint venture; however, in some cases joint ventures may not be possible or desirable and limited partnerships may be employed instead. A public-private venture, a special form of joint venture, involves a partnership between a privately owned firm and a government. This type of arrangement may be a result of several factors. Governments may form an alliance with a firm to obtain information related to the development of a particular resource. A firm may be pulled into a joint venture with a government if the country in question does not permit wholly owned foreign operations. A joint venture with an existing state-owned firm can benefit a company because it gains access to the firm’s existing consumers. 5.11.3 Joint Management Considerations There are three obvious means that may be used to jointly manage a strategic alliance: a shared management agreement, an assigned arrangement, or a delegated arrangement.

126 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances Under a shared management agreement, each partner fully and actively participates in managing the alliance. This type of arrangement is difficult to implement because it requires a high level of coordination and near-perfect agreement between participants. The text illustrates this concept with an example of an agreement between Coca-Cola and France’s Groupe Danone. In contrast, under an assigned arrangement, one partner assumes primary responsibility for the operations of the strategic alliance. This type of arrangement avoids the conflict and slowdowns that may be associated with a shared management agreement. Finally, under a delegated arrangement, which is reserved for joint ventures, the partners agree not to get involved in ongoing operations and so delegate management control to the joint venture itself. Executives to run the alliance may be hired from outside the operations, or may be transferred from the parent company, but in either case have real power and autonomy in decision making. 5.12 PITFALLS OF STRATEGIC ALLIANCES The five fundamental sources of problems that threaten the viability of strategic alliances are conflict among partners, access to information, distribution of earnings, potential loss of autonomy, and changing circumstances. 5.12.1 Incompatibility of Partners A primary cause of failure in strategic alliances is incompatibility among partners. Firms may be able to anticipate incompatibility problems if the partners carefully discuss and analyze why the alliance is being formed in the first place. If there is no agreement

127 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances among partners regarding issues such as what the alliance’s strategy should be, how it is to be organized, or how it is to be staffed, the alliance probably will not succeed. 5.12.2 Access to Information Collaboration implies that one firm (or both) may have to share proprietary information with the other firm. This access to information issue may be a real concern if a firm enters an agreement not anticipating having to share certain information and then compromises the agreement when the reality of the situation becomes apparent. The text illustrates this concept with an example of an alliance between Unisys and Hitachi and an example of an alliance between Ford and Mazda. 5.12.3 Conflicts over Distributing Earnings Firms involved in strategic alliances not only share costs and risks, they also share profits. The basic distribution of earnings between partners is usually negotiated as part of the original agreement; however, issues relating to the proportion of earnings that will be reinvested, accounting procedures, and transfer pricing may cause problems that could jeopardize the success of an alliance. The text provides an example of the problems related to the distribution of earnings facing the alliance between Rubbermaid and its Dutch partner DSM Group NV. 5.12.4 Loss of Autonomy

128 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances A strategic alliance implies shared risks and profits and also shared control. This shared control may limit the strategy of each participant. In some cases, a strategic alliance may be the initial step in a takeover. The text provides an example of this type of situation that involved Fujitsu and International Computers, Ltd. 5.12.5 Changing Circumstances Changing circumstances may affect the viability of a strategic alliance. For example, technological advances may make an agreement obsolete or economic changes may alter the circumstances that originally motivated the agreement. The text illustrates this concept by exploring the situation faced by Siemens and Fujitsu’s joint venture. It also mentions the end of the Corning and Asahi joint venture alluded to earlier in the chapter.

129 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances 10 6 1.G N 2 9.C 7.T 8 5 N 3 O N 4 S ACROSS ANSWER : DOWN ANSWER : 1. _____________ strategy, the firm can select the site that best meet its needs and construct modern 6. The loss of autonomy is one of disadvantage in this ____________ strategy 2______________ transfers mean the Company A selling their product/services to an affiliated company to Company A in other countries. For example Digi (Malaysia) export to Bangladesh known as Robi 7. ___________have some limitations which the construction risks usually related with delays and problems with suppliers 3. _____________ advantages the factors that affect the desirability of host country production relative to home country production. 8. The X strategy have maintain more control than licensing. This X strategy refers to ___________ 4. This X have the right to lease the the intellectual property. X is referring to ________ 9.Hilton Hotel may have limitation because the management may unintentionally transfer the proprietary knowledge and techniques to ______ 5. in 1997, Bank of Bumiputra and Commerce Bank in Malaysia have to merge because of the impact Asian Economic crisis. The approach between both bank are called as _____________ 10.In this approach, LOTUS takes primary responsibility to PROTON. This approach known as __________

130 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances

131 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances

132 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances

133 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances

134 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances

135 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances

136 5.9.3 Shared Knowledge and ExpertiseTOPIC 5: Strategies for Analyzing and Entering Foreign Markets and International Strategic Alliances