978-0134129945 Chapter 9 Lecture Note Part 1

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CHAPTER 9

GLOBAL MARKET ENTRY STRATEGIES: LICENSING, INVESTMENT, AND STRATEGIC

ALLIANCES

SUMMARY

A. Companies that wish to move beyond exporting and importing can avail themselves of a

wide range of alternative market entry strategies. Each alternative has distinct

advantages and disadvantages associated with it; the alternatives can be ranked on a

continuum representing increasing levels of investment, commitment, and risk. Licensing

can generate revenue flow with little new investment; it can be a good choice for a

company that possesses advanced technology, a strong brand image, or valuable

intellectual property. Contract manufacturing and franchising are two specialized

forms of licensing that are widely used in global marketing.

B. A higher level of involvement outside the home country may involve foreign direct

investment. This can take many forms. Joint ventures offer two or more companies the

opportunity to share risk and combine value chain strengths. Companies considering joint

ventures must plan carefully and communicate with partners to avoid “divorce.” Foreign

direct investment can also be used to establish company operations outside the home

country through greenfield investment, acquisition of an minority or majority equity

stake in a foreign business, or taking full ownership of an existing business entity

through merger or outright acquisition.

C. Cooperative alliances known as strategic alliances, strategic international alliances,

and global strategic partnerships (GSPs) represent an important market entry strategy

in the twenty-first century. GSPs are ambitious, reciprocal, cross-border alliances that

may involve business partners in a number of different country markets. GSPs are

particularly well suited to emerging markets in Central and Eastern Europe, Asia, and

Latin America. Western businesspeople should also be aware of two special forms of

cooperation found in Asia, namely Japan’s keiretsu and South Korea’s chaebol.

D. To assist managers in thinking through the various alternatives, market expansion

strategies can be represented in matrix form: country and market concentration,

country concentration and market diversification, country diversification and

market concentration, and country and market diversification. The preferred

expansion strategy will be a reflection of a company’s stage of development (i.e. whether

it is international, multinational, global, or transnational). The Stage 5 transnational

combines the strengths of these three stages into an integrated network to leverage

worldwide learning.

LEARNING OBJECTIVES

1 Explain the advantages and disadvantages of using licensing as a market-entry strategy

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2 Compare and contrast the different forms that a company’s foreign investments can take

3 Discuss the factors that contribute to the successful launch of a global strategic partnership

4 Identify some of the challenges associated with partnerships in developing countries

5 Describe the special forms of cooperative strategies found in Asia

6 Explain the evolution of cooperative strategies in the twenty-first century

7 Use the market expansion strategies matrix to explain the strategies used by the world’s biggest

global companies

OVERVIEW

As shown in Figure 9-1, the level of involvement, risk and financial reward increases as a

company moves from market entry strategies such as licensing to joint ventures and ultimately,

various forms of investment.

When a global company seeks to enter a developing country market, there is an additional

strategy issue to address: whether to replicate the strategy that served the company well in

developed markets without significant adaptation.

This is the issue that Starbucks is facing: To the extent that the objective of entering the market is

to achieve penetration, executives at global companies are well advised to consider embracing a

mass-market mindset. This may well mandate an adaptation strategy. Formulating a market

entry strategy means that management must decide which option or options to use in pursuing

opportunities outside the home country. The particular market entry strategy company executives

choose will depend on their vision, attitude toward risk, the availability of investment capital,

and the amount of control sought.

ANNOTATED LECTURE/OUTLINE

LICENSING

(Learning Objective #1)

Licensing is a contractual arrangement whereby one company (the licensor) makes a legally

protected asset available to another company (the licensee) in exchange for royalties, license

fees, or some other form of compensation.

The licensed asset may be a brand name, company name, patent, trade secret, or product

formulation. Licensing is widely used in the fashion industry.

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Licensing is a global entry and expansion strategy, with considerable appeal. It can offer an

attractive return on investment, provided that the necessary performance clauses are included in

the contract. The only cost is signing the agreement and policing its implementation.

There are two key advantages associated with licensing as a market entry mode.

1. Because the licensee is typically a local business that will produce and market the goods

on a local or regional basis, licensing enables companies to circumvent tariffs, quotas, or

similar export barriers.

2. Licensees are granted considerable autonomy and are free to adapt the licensed goods to

local tastes.

Licensing is associated with several disadvantages and opportunity costs.

1. Licensing agreements offer limited market control.

2. The agreement may have a short life if the licensee develops its own know-how and

begins to innovate in the licensed product or technology area.

In a worst-case scenario, licensees—especially those working with process technologies—can

develop into strong competitors in the local market and, eventually, into industry leaders.

To prevent a licensor-competitor from gaining unilateral benefit, licensing agreements should

provide for a cross-technology exchange between all parties. Overall, the licensing strategy must

ensure ongoing competitive advantage.

SPECIAL LICENSING ARRANGEMENTS

Companies that use contract manufacturing provide technical specifications to a subcontractor

or local manufacturer. The subcontractor then oversees production.

Such arrangements offer several advantages.

1. The licensing firm can specialize in product design and marketing, while transferring

responsibility for ownership of manufacturing facilities to others.

2. The licensing firm has limited commitment of financial and managerial resources.

3. The licensing firm has quick entry into target countries, especially when the target

market is too small to justify significant investment.

One disadvantage: Companies may open themselves to public criticism if workers in contract

factories are poorly paid or labor in inhumane circumstances.

Franchising is another variation of licensing strategy. A franchise is a contract between a parent

company/franchiser and a franchisee that allows the franchisee to operate a business developed

by the franchiser in return for a fee and adherence to policies and practices.

Franchising has great appeal to local entrepreneurs anxious to learn and apply Western-style

marketing techniques.

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The following questions should be asked of would-be franchisers before expanding overseas:

• Will local consumers buy your product?

• How tough is the local competition?

• Does the government respect trademark and franchiser rights?

• Can your profits be easily repatriated?

• Can you buy all the supplies you need locally?

• Is commercial space available and are rents affordable?

• Are your local partners financially sound and do they understand the basics of

franchising?

The specialty retailing industry favors franchising as a market entry mode. (The Body Shop is an

example.)

Franchising is a cornerstone of growth in the fast-food industry; McDonald’s reliance on

franchising to expand globally is a case in point.

INVESTMENT

(Learning Objective #2)

After companies gain experience outside the home country via exporting or licensing, the time

often comes when executives desire a more extensive form of participation. In particular, the

desire to have partial or full ownership of operations outside the home country can drive the

decision to invest.

Foreign direct investment (FDI) figures reflect investment flows out of the home country as

companies invest in or acquire plants, equipment, or other assets.

Foreign direct investment allows companies to produce, sell, and compete locally in key markets.

The final years of the 20th century, the top three target countries for U.S. investment were the

United Kingdom, Canada, and the Netherlands. The United Kingdom, Japan, and the

Netherlands were the top three investors in the U.S. during the same period.

Foreign investments may take the form of minority or majority shares in joint ventures, minority

or majority equity stakes in another company, or outright acquisition.

Joint Ventures

A joint venture with a local partner represents a more extensive form of participation in foreign

markets than either exporting or licensing. A joint venture is an entry strategy for a single target

country in which the partners share ownership of a newly created business entity.

By pursuing a joint venture entry strategy, a company can limit its financial risk as well as its

exposure to political uncertainty.

A company can use the joint venture experience to learn about a new market environment.

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Joint ventures allow partners to achieve synergy by combining different value chain

strengths.

A joint venture may be the only way to enter a country or region if government bid award

practices routinely favor local companies, if import tariffs are high, or if laws prohibit foreign

control but permit joint ventures.

The disadvantages of joint venturing can be significant.

Joint venture partners must share rewards as well as risks.

There is the potential for conflict between partners.

A dynamic joint venture partner can evolve into a stronger competitor.

EMERGING MARKETS BRIEFING BOOK

Auto Industry Joint Ventures in Russia

Russia represents a huge, barely tapped market for a number of industries. The number of joint

ventures is increasing. In 1997, GM became the first Western automaker to begin assembling

vehicles in Russia. To avoid hefty tariffs that pushed the street price of an imported Blazer over

$65,000, GM invested in a 25-75 percent joint venture with the government of the autonomous

Tatarstan republic.

GM has achieved better results with a joint venture with AVtoVAZ, the largest carmaker in

Russia. AVtoVAZ is home to Russia’s top technical design center and also has access to low-cost

Russian titanium and other materials. GM intended to assemble a stripped-down reengineered

car based on its Opel model. However, market research revealed that a “Made in Russia” car

would be acceptable only if it sported a very low sticker price; the same research pointed GM

toward an opportunity to put the Chevrolet nameplate on the redesigned domestic model.

Some other recent joint venture alliances are outlined in Table 9-1.

Investment via Ownership or Equity Stake

The most extensive form of participation in global markets is investment that results in either an

equity stake or full ownership. An equity stake is simply an investment. Full ownership means

that the investor has 100 percent control. This may be achieved by a start-up of new operations,

known as Greenfield investment, or by merger or acquisition (M&A) of an existing enterprise.

If government restrictions prevent foreign majority or 100 percent ownership, by foreign

companies, the investing company will have to settle for a majority or minority equity stake. In

China, for example, the government restricts foreign ownership to 51 percent.

An investing company may start with a minority stake and then increase its share.

Large-scale direct expansion by means of establishing new facilities can be expensive and

require a major commitment of managerial time and energy. However, political or other

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environmental factors may dictate this approach (Tables 9 -2, 9-3 and 9-4 provide a sense of how

companies in the automotive industry utilize a variety of market entry options).

What is the driving force behind many of these acquisitions? It is globalization and the

realization that globalization cannot be undertaken independently.

Several advantages of joint ventures also apply to ownership, including access to markets and

avoidance of tariff or quota barriers.

Ownership permits technology transfer and access to manufacturing techniques (e.g., Stanley

Works, a tool maker acquired companies such as a Taiwanese socket wrench manufacturer).

The alternatives discussed here—licensing, joint ventures, minority or majority equity stake, and

ownership—are, points along a continuum of strategies for global market entry and expansion.

A global strategy may call for a combination of strategies.

Competitors within a given industry pursue different strategies.

GLOBAL STRATEGIC PARTNERSHIPS

(Learning Objective #3)

Recent changes in the political, economic, sociocultural, and technological environments of the

global firm have combined to change the relative importance of those strategies. Trade barriers

have fallen, markets have globalized, consumer needs and wants have converged, product life

cycles have shortened, and new communications technologies and trends have emerged.

Although these developments provide unprecedented market opportunities, there are strong

strategic implications for the global organization and new challenges for the global marketer.

Today’s competitive environment is characterized by unprecedented degrees of turbulence,

dynamism, and unpredictability; global firms must respond and adapt quickly.

THE NATURE OF GLOBAL STRATEGIC PARTNERSHIPS

The terminology used to describe the new forms of cooperation strategies varies widely. The

phrases strategic alliances, strategic international alliances, and global strategic

partnerships (GSPs) are frequently used to refer to linkages among companies from different

countries to jointly pursue a common goal.

The strategic alliances discussed here exhibit three characteristics (see Figure 9-2):

1. The participants remain independent subsequent to the formation of the alliance.

2. The participants share the benefits of the alliance as well as control over the

performance of assigned tasks.

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3. The participants make ongoing contributions in technology, products, and other key

strategic areas.

The number of strategic alliances has been growing at the rate of 20 to 30 percent since the mid-

1980s.

The upward trend for GSPs comes in part at the expense of traditional cross-border mergers and

acquisitions. A key driving force is the realization that globalization and the Internet will require

new inter-corporate configurations (Table 9-7).

GSPs are attractive for several reasons:

High product development costs in the face of resource constraints may force a company

to seek one or more partners.

The technology requirements of many contemporary products mean that an individual

company may lack the skills, capital, or know-how to go it alone.

Partnerships may be the best means of securing access to national and regional markets.

Partnerships provide important learning opportunities.

Because licensing agreements do not call for continuous transfer of technology or skills among

partners, such agreements are not strategic alliances.

Traditional joint ventures are basically alliances focusing on a single national market or a

specific problem.

GSPs differ significantly from the market entry modes discussed earlier. A true global strategic

partnership is different; it is distinguished by five attributes:

1. Two or more companies develop a joint long-term strategy aimed at achieving world

leadership by pursuing cost-leadership, differentiation, or a combination of the two.

2. The relationship is reciprocal. Each partner possesses specific strengths that it shares

with the other; learning must take place on both sides.

3. The partners’ vision and efforts are truly global, extending beyond home countries and

the home regions to the rest of the world.

4. The relationship is organized along horizontal, not vertical, lines. Continual transfer

of resources laterally between partners is required, with technology sharing and resource

pooling representing norms.

5. When competing in markets excluded from the partnership, the participants retain

their national and ideological identities.

SUCCESS FACTORS

Assuming that a proposed alliance has the above five attributes, it is necessary to consider six

basic factors deemed to have significant impact on the success of GSPs: mission, strategy,

governance, culture, organization, and management.

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1. Mission. Successful GSPs create win-win situations, where participants pursue objectives

on the basis of mutual need or advantage.

2. Strategy. A company may establish separate GSPs with different partners; strategy must

be thought out up front to avoid conflicts.

3. Governance. Discussion and consensus must be the norms. Partners must be viewed as

equals.

4. Culture. Personal chemistry is important, as is the successful development of a shared set

of values.

5. Organization. Innovative structures and designs may be needed to offset the complexity

of multi-country management.

6. Management. GSPs invariably involve a different type of decision making. Potentially

divisive issues must be identified in advance and clear, unitary lines of authority

established that will result in commitment by all partners.

Companies forming GSPs must keep these factors in mind. Moreover, the following four

principles will guide successful collaborators:

1. Partners must remember that they are competitors in other areas.

2. Harmony is not the most important measure of success – some conflict is to be expected.

3. All employees, engineers, and managers must understand where cooperation ends and

competitive compromise begins.

4. Learning from partners is critically important.

Alliances with Asian Competitors

Western companies may find themselves at a disadvantage in GSPs with an Asian competitor;

especially if the latter’s manufacturing skills are the attractive quality. Manufacturing excellence

represents a multifaceted competence that is not easily transferred.

To limit transparency, some companies involved in GSPs establish a “collaboration section” –this

department is designed to serve as a gatekeeper through which requests for access to people and

information must be channeled. Oftentimes, problems between partners had less to do with

objective levels of performance than with a feeling of mutual disillusionment and missed

opportunity.

The McKinsey study identified four common problem areas in alliances gone wrong. The first

problem was that each partner had a “different dream”; the Japanese partner saw itself emerging

from the alliance as a leader in its business or entering new sectors and building a new basis for

the future; the Western partner sought relatively quick and risk-free financial returns.

A second area of concern is the balance between partners. Each must contribute to the alliance,

and each must depend on the other to a degree that justifies participation in the alliance. The

most attractive partner in the short run is likely to be a company that is already established and

competent in the business.

Another common cause of problems is “frictional loss,” caused by differences in management

philosophy, expectations, and approaches.

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Short-term goals can result in the foreign partner limiting the number of people allocated to the

joint venture.

CFM International, GE, and SNECMA: A Success Story

Commercial Fan Moteur (CFM) International, a partnership between GE’s jet engine division

and Snecma, a government-owned French aerospace company is a frequently cited example of a

successful GSP.

Boeing and Japan: A Controversy

In some circle, GSPs have been the target of criticism. Critics warn that employees of a company

that becomes reliant on outside suppliers for critical components will lose expertise and

experience erosion of their engineering skills. Such criticism is often directed at GSPs involving

U.S. and Japanese firms. One team of researchers has developed a framework outlining the

stages that a company can go through as it becomes increasingly dependent on partnerships:

Step 1 Outsourcing of assembly for inexpensive labor

Step 2 Outsourcing of low-value components to reduce product price

Step 3 Growing levels of value-added components move abroad

Step 4 Manufacturing skills, designs, and functionally related technologies move abroad

Step 5 Disciplines related to quality, precision manufacturing, testing, and future avenues of

product derivatives move abroad

Step 6 Core skills surrounding components, miniaturization, and complex systems integration

move abroad

Step 7 Competitor learns the entire spectrum of skills related to the underlying core competence

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