Global Entry Strategies,
Joint Ventures, and Alliances
Sources: Dornier et al., GOL, 1998
Flaherty, GOM, 1996
Daniels, Radebaugh, International Business, 8th Ed., Addison-Wesley 1998
Soumen Ghosh, International OM, Lecture Notes, Georgia Tech 1996
Alex Tsai, „A Note on Strategic Alliances,“ HBS 1997
Bleeke, 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
Professional contacts
Trade Journals
Directories
Trading companies
Import brokers
Foreign subsidiary
Trade fairs
Foreign trade offices
Usage
48%
44%
31%
30%
24%
22%
16%
13%
Entry Strategies
Supplier Ratings on a National Basis
Country Avg. QualAvg. Serv.Avg. Price
Canada
5
4
5
Japan
2
5
12
Mexico
12
15
6
Germany
1
1
9
UK
4
3
7
France
6
11
11
India
16
16
14
Sth Korea
9
6
1
Taiwan
10
8
2
South America 13
14
16
Entry Strategies
Trade and Communication Channels / Buying
Channel
Assigned buyer in purchasing unit
Manufacturer‘s representative
Foreign buying office
Import broker
Trading company
Foreign subsidiary
Import merchant
State trading agency
Use [%]
38%
34%
10%
10%
8%
7%
5%
1%
Entry Strategies
Choice of International Entry Mode
Exporting
Tapping 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 Subsidiary
Locating own operations in a foreign site
Entry Strategies
Advantages/Disadvantages of Entry
Modes
Entry ModeControlResource
Dissemination
Commitment
Exporting high
medium
Licensing low
low
Joint Venture medium medium
Subsidiary high
high
Risk
low
high
medium
low
Entry Strategies
Entry Mode Variables
Environmental variables resource commitment
Transaction Variables risk
Country risk
Location familiarity
Demand conditions
Volatility of competition
Value of firm specific
know-how
Tacit nature of knowhow
Strategic variables - control
Extent of national differences
Extent of scale economies
Global concentration
Entry Strategies
Classification of Entry
Strategies
Production
Ownership
Equity
arrangements
Non-equity
arrangements
Production Location
Home Country
Foreign country
Exporting
Wholly owned opns
Partially owned opns
Joint ventures
Equity alliances
Licensing
Franchising
Management contracts
Turnkey operations
Overview
Entry Strategies
Strategic Alliances
Types of Alliances
Contractual Agreements
Equity Arrangements
Traditional
Contracts
Non-Traditional
Contracts
No New
Entity
Creation of
New Entity
Dissolution of
Entity
Arms-length
Joint R&D
Minority Equity
Investments
Joint Venture
Mergers
Buy/Sell Contracts
Franchising
Joint Product Development
Long Term Sourcing
Licensing
Cross-Licensing
Acquisitions
Equity Swaps
Joint Manufacturing
Joint Marketing
Shared Distribution
Shared Service
Standard Setting
Research Consortia
Types of Alliances
STRATEGIC
IMPORTANCE
Acquisition
Minority Interest
High
Joint Venture
Joint Marketing
Joint Development Projects
Medium
Licensing Agreements
Alliance/Consortia
Commercial Contracts
Low
Technology Trials
Low
High
LEVEL OF COMMITMENT
Strategic Alliances
Definition
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 Alliances
Why 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 exchange
Reduce risk and search costs
E.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 resources
New 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 Alliances
Incentives to Enter Strategic Alliances (cont’d)
Economies of scale
Until 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 expansion
International 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 relationshipspecific assets, monitor each other
Effect on market
• Increase in market power by binding upstream suppliers or
downstream distributors => higher entry barrier
Strategic Alliances
Myths
„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 Alliances
Six Types of Alliances
Collisions Between Competitors
Involve the core businesses of two strong direct
competitors
Tends to be short-lived and fail to achieve their
strategic and financial goals
Tend to end in dissolution or a merger
Alliance of the Weak
Hope that together the weak firms will improve their
positions
They usually grow weaker and the alliance fails
Often acquisition by a third party
Strategic Alliances
Six Types of Alliances (cont’d)
Disguised Sales
A weak company combines with a strong company (often a (future)
direct competitor)
The weakling remains weak and is acquired by the stronger fellow
Disguised sales tend to be short-lived, usually less than five years
Bootstrap Alliances
Combination of a strong and a weak company
Weak one tries to improve its capabilities, but usually remains weak
and is acquired by partner
If 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 partners
Competitive 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 Equals
Two 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
Control creatively
Know your partner
Be flexible
Achieve goal and
strategy congruency
Identify conflict points
Make clear rules
Make transactions
transparent
Communicate clearly
and often
Share equitably
Review and revise
Know when to exit