STRATEGIC ALLAINCES STRATEGIC ALLAINCES AND OTHER MODES OF AND OTHER MODES OF

ENTRYENTRY

Strategic Alliances are agreements to collaborate with either actual or potential competitors

Entry modes address the best means of entering a foreign market

Recent development in Recent development in the use of Strategic the use of Strategic Alliances.Alliances.

Firms used to focus on maintaining control in overseas ventures

Firms used to focus on exploiting competitors vulnerabilities as a means of survival, or leveraging home country advantage

Nowadays firms are more focused on building collaborative relationships as a means of survival.

Why the change in Why the change in focus?focus?

The need to pursue multiple sources of competitive advantage.

The rapid changes in the environment (costs, short PLC, need for scale economies, protectionism)

Inadequate resources and inability of a single MNC to go it alone

The need to simultaneously achieve the three goals of efficiency, flexibility and worldwide learning.

Why Strategic Alliances Why Strategic Alliances are increasingly are increasingly attractive?attractive?

Need for technology exchange (boundaries between industrial sectors are getting blurred, e.g.... lens)

To participate effectively in global competition, using global standards, Learning

Risk reduction by pooling resources together, short PLC, R&D Cost

Protectionism

MNC responseMNC response

We don’t have the human, financial, or technological resources necessary to respond effectively to the reality of global competition.

No longer obsessed with preempting the competition

New focus on building competitive advantage through selective and often simultaneous reliance on both collaboration and competition

Advantages of Strategic Advantages of Strategic AlliancesAlliances

Help get access to a foreign market (CAT in Japan.)

Sharing of fixed costs (Boeing’ SA with Japanese companies)

It helps to bring together firms with complementary skills and assets (France’s Thompson and Japan’s JVC)

Collaboration to help establish industry standards (Phillips and Matsushita in digital compact cassette)

Disadvantages of Disadvantages of Strategic AlliancesStrategic Alliances

Possible exploitation by partners (Bridgestone and Goodyear)

May give partners low cost access to technology and market.

possibility of divided loyalty, increasing managerial cost

Distribution of risks and costs may not be as clear

Different cultural context may make alliances difficult, e.g.... measure of performance in Japan and U.S..

Making alliances workMaking alliances work

About 2/3 of alliances fail Choosing the right partners , financially

solvent, skilled, and share vision of alliance, and not opportunistic e.g... GM and Daewoo in South Korea did not work out. In 2002 GM bought Daewoo

Have realistic expectations ( not appropriate to use same performance measures across national boundaries)

Avoid unnecessary complexity in structure

While it is important to be explicit about control issues, flexibility is very important.

Other Modes of EntryOther Modes of Entry

Other Modes of entryOther Modes of entry

Exporting - initial step into IB avoids costs of establishing

manufacturing overseas. firm establishes location and

experience curve economies faster. high transportation cost, subject to

trade barriers, navigating local channels of distribution.

Turnkey OperationsTurnkey Operations

this is a means of exporting process technology

contractor handles details of every project, and then turns the key over to owner for operation.

common in construction, refining and chemical industries

good entry mode where FDI is restricted

creating competitors no long term presence in a market.

LicensingLicensing

a licensor grants the rights to intangible property to licensee for a period of time for a fee.

intangible property can include patents, process, copyrights, and trademarks

cross-licensing, in addition to royalty payment, the foreign partner licenses a know how. ( Amgen a U.S. biotech firm has such arrangement with Japanese Pharm. company Kirin, and sells Kirin’s drugs in the U.S.

allows for low development costs and reduces risks

lack of control over technology

difficult to coordinate global strategies

difficult to achieve location and experience curve economies.

Licensing has been popular as a means of technology transfer.

FranchisingFranchising

a specialized form of licensing it is for a longer term, and the

franchisee must follow strict rules of doing business.

has same advantages and disadvantages as licensing.

quality control is another problem in franchising.

Joint VenturesJoint Ventures

a firm that is owned by two or more firms (Fuji-Xerox)

allows benefiting from a local partner’s knowledge

allows for sharing of costs and risks, but lack of control

preferable entry mode in many countries

Wholly Owned Wholly Owned SubsidiarySubsidiary

the firms owns 100% of the stock this can be done by acquisition or

internal set up many countries frown upon wholly

owned subsidiary

allows MNC to protect technology allows for control and global

strategic coordination takes advantage of both firm

specific and country specific advantage

it involves a lot of cost and risk, danger of nationalization as in Iran

Which Entry Mode to Which Entry Mode to ChooseChoose

It depends on a lot of variables that are not mutually exclusive

Costs, Level of Risk and control that is manageable

legal requirement of host country nature of assets (technological

complexity) and experience of firm in IB