Entry Strategies: Japan or Mexico1
Global
Edge
Consultants
Entry Strategies: Japan or Mexico
Lisa A Bartha
Tara Camp
Sonya Kinch-Monyem
Amy M Marks
Kenneth A Willis
Lindsay B Yacavone
AMBA606, Section 9011
Entry Strategies: Japan or Mexico
July 15, 2006
Professor Jane Ross
2
Entry Strategies: Japan or Mexico
Table of Contents
Method of Approach……………………………………………………………..
3
Executive Summary……………………………………………………………… 3
Introduction Joint Venture ……………………………………………………..
5
Joint Ventures Mexico ………………………………………………….
6
Conclusion Joint Ventures……………………………………………… 14
Appendix Joint Ventures……………………………………………….. 16
Introduction to Licensing……………………………………………………..... 19
Licensing – Mexico……………………………………………………... 19
Licensing – Japan………………………………………………………. 24
Conclusion Licensing………………………………………………….
28
Introduction Franchising………………………………………………………
31
Franchising Mexico…………………………………………………….
31
Franchising Japan……………………………………………………… 38
Conclusion Franchising………………………………………………… 42
3
Entry Strategies: Japan or Mexico
4
Entry Strategies: Japan or Mexico
Method of Approach
This study is comprised of six individual papers that focus on the merits and
drawbacks of entering the Japanese and Mexican markets via one of the following three
entry methods; joint venture, licensing, and franchising. As such, the Global Edge
Consultants feel that one comprehensive Executive Summary best explains the work that
is presented as a whole. Within each method of entry section there will be a shared
introduction and conclusion for the two country approaches. In this manner we are able to
minimize redundancy and present the white paper in the most clear and concise manner
possible.
Executive Summary
There are distinct differences between strategic planning and strategic thinking.
Strategic thinking is an emergent process that is flexible and requires long-range vision
with an eye on the qualitative (Mintzberg, 2004). Strategic thinking is about creating
new opportunities and having the courage to pursue them. Now that the Federal courts
have upheld the Lexapro patent, the timing is right for Forest to establish themselves in
a foreign market with a proven product.
This white paper is a component of a more compressive set of recommendations
that will emerge over the next several weeks. Presented in three parts, joint ventures,
licensing, and franchising, this study examines methods of entry strategy and positions
them in the context of Japan and Mexico, the two markets that Forest Labs is considering
for expansion. Each of the strategic choices comes with advantages and disadvantages,
and each differs in the scale of entry.
Entry Strategies: Japan or Mexico

5
Joint ventures, the largest scale commitment examined here, would allow Forest
to minimize their initial investment and risk. An important consideration is the
loss control if there is conflict about the strategic direction of the venture among
the partners. Based on our research this mode of entry is a viable option for both
markets.

Licensing, the smallest scale commitment examined here, is an entry mode with
which that Forest has substantial experience. It would allow Forest to expand into
new markets quickly and at minimal cost. This must be carefully weighed against
the risk of licensing away competitive advantage as well as loss of control of
brand image and quality. Forest will have to determine how this mode of entry fits
with its long-term vision for foreign expansion.

Franchising has somewhat more scale than licensing, but shares the same
advantages and disadvantages. Should Forest consider this option, it must enforce
strict governance to enforce quality standard in marketing and production.
Additionally, franchising does not allow Forest to move monetary support from
one location to another.
Forest must remain flexible in their strategic thinking about these two markets, in
terms of how the timing of entry will be impacted by the recent geopolitical controversy
concerning the Mexican presidential elections and the North Korean missile crisis that
plagues Japan, and in turn, how they should scale their entry.
Entry Strategies: Japan or Mexico
6
Introduction to Joint Ventures
According to Hill (2007) a joint venture is an entry strategy whereby a company
is established that is jointly owned by two existing companies. This is a popular mode of
entry into foreign markets for several reasons. The first is that the entering company can
benefit from the expertise of a local partner. This strategy also mitigates the risk
associated with opening in a foreign market. Lastly, research has suggested that joint
ventures are less likely to be subject to nationalization and other government interference
(Hill, 2007).
Of course, there are also disadvantages to joint ventures as well. Possibly the most
significant risk incurred is the possible loss of intellectual property to a partner if given
too much control. As the Austrade website points out, there is also a potential for partner
disagreement on export markets or other expected benefits of the partnership. In
addition, Barajas and Kozolchyk (2001) note that joint ventures are likely to fail if the
reasons for its development are ill-conceived, if partners’ overestimate each other’s
strengths, or if the formal agreements drafted are inadequate. The Austrade website
suggests considering the '4Cs' when selecting a partner for a foreign joint venture. They
are to find a partner with: complementary skills, cooperative cultures, compatible goals,
and commensurate risk.
In addition to identifying a viable partner, Forest must consider the potential risks
and benefits when deciding whether or not to initiate a joint venture as a market entry
strategy into either Mexico or Japan. The advantages and disadvantages of joint ventures
relative to both countries are discussed below as well as how the politics of each country
may affect joint venture activity.
Entry Strategies: Japan or Mexico
Joint Ventures – Mexico
7
Tara Camp
The trade integration between the U.S. and Mexico as well as Mexico’s proximity
to the United States makes it an ideal market to consider for a joint venture. In fact, joint
ventures have historically been an important component of Mexico’s economic
development (Barajas & Kozolchyk, 2001). In addition to some significant benefits;
however, there are also potential risks associated with creating a joint venture with a
Mexican company. Because the newly created business entity will operate as a Mexican
company under Mexican law, Forest must understand the legal business structure
recognized in the country before evaluating the viability of a joint venture in Mexico.
Business Strategies
The business entity created by a joint venture contract in Mexico is known as an
asociacion en participacion (AP). This type of agreement is a private one that establishes
the business relationship between the partners, but is not publicly listed with the Mexican
Registry of Commerce. The more common option is for the two joint venture partners to
simply create a separate legal entity, as is the practice in American joint ventures.
There are several types of registered companies recognized in Mexico. Their
version of a corporation is called a sociedad and is structured in much the same way as in
the U.S. Other options are to form either a limited liability stock corporation, called a
sociedad anónima (SA), or a limited liability partnership, called a sociedad de
responsabilidad limitada (SRL). Joint ventures that yield a separate entity would be
registered with the Registry of Commerce just as any other company would (Gordon,
2001). According to Abogados (www.solutionsabroad.com) incorporating a business
entity in Mexico requires an Incorporation Permit that can be obtained from the Ministry
Entry Strategies: Japan or Mexico
8
of Foreign Relations. The company must also receive approval from the Foreign
Investments Authorities. In general, foreign investors are permitted to participate in the
capital of a Mexican company at any level.
Joint Ventures with Domestic Partners in Mexico
Based on a search through Pharmaceutical Company Directory
(http://www.pharma-lexicon.com/pharmaceuticalcompanies.php) there are approximately
ten domestic pharmaceutical companies based in Mexico. Several of those have limited
global operations. Partnering with one of these companies could help Forest attain rapid
market entry and enable the company to capitalize on the local skills and competencies of
the Mexican firm as well as take advantage of the domestic firm’s experience with
government authorities. Considering joint ventures in Mexico specifically, Barajas and
Kozolchyk (2001) wrote, “The participation of local venturer may also enhance
perceptions that the enterprise is a local operation, thus encouraging good relations with
local consumers, suppliers, and government” (p. 11).
Although Forest could realize these same fundamental benefits from a joint
venture as in any other market, there are specific disadvantages to joint ventures in
Mexico as well. One significant problem is that of mind set. Thomas Lawson, the
managing director of Deloitte Consulting Mexico, explains that Mexican companies fall
into one of two tiers. Top tier companies are those that have a worldly mindset and are
already competing globally. Second tier companies, even if they engage in exporting, do
not think globally and are uncomfortable with externally driven changes (Sutter, 1998).
As such, partnering with a second tier company could create a host of issues for Forest
including technological differences relating to supply chain management and other
Entry Strategies: Japan or Mexico
9
operations. If Forest does elect to form a joint venture with a Mexican company, it would
be more advantageous to explore one of the multinationals based in Mexico.
A final consideration when exploring a joint venture in Mexico is that of differing
business styles. Americans, for example, tend to use extremely detailed and lengthy legal
agreements that cover all possible contingencies. By contrast, Mexican legal counsels
often opt for more brief agreements, allowing for details to be settled as the business
evolves (Barajas & Kozolchyk, 2001). As such, the development the necessary
agreements and legal documents to form a joint venture could become a considerable
source of conflict and threaten positive relationship development.
Similarly, Barajas and Kozolchyk (2001) explain that while American managers
conduct business in a fairly formal manner, putting emphasis on business plans and
financial statements; Mexican managers though focus on relationship building and value
face-to-face meetings, believing that the individual is the essence of the business. If these
cultural differences are not attended to, it could put a significant strain on any possible
joint ventures.
Joint Ventures with Foreign Partners in Mexico
Another option for Forest is to form a joint venture with an American or European
multinational pharmaceutical company with established operations in Mexico. Among
them are familiar names like Aventis, Bayer, Merck, and Novartis. The benefit here
would be that all of these companies, regardless of their home country, have a very strong
presence in the U.S. market. As such, working with these partners would minimize the
risk of cultural issues that could arise if working with a Mexican company while enabling
Forest to capitalize on their local experience. The disadvantage is that it would likely be
Entry Strategies: Japan or Mexico 10
difficult to provide a benefit to the partner. In order to maintain control of their
intellectual property interests, Forest would need to hold a majority ownership in the joint
venture. This might not prove an attractive prospect to any of these firms, all of which are
larger than Forest.
Political Implications
Exploring foreign market entry of a U.S. firm into Mexico is a timely topic in
light of the country’s recent, and controversial, presidential election. Felipe Calderon of
the center-right National Action Party (PAN) narrowly defeated his opponent, and it
looks as though the results will be contested. Calderon has promised to maintain the probusiness, pro-foreign investment policies of his predecessor. Calderon’s opponent
represents the less developed states in the country, where he argues that foreign
investment and trade agreements like NAFTA are not benefiting the people who need the
help. His platform is to re-direct government spending to aide the citizens in these
impoverished areas (Conteras & Campbell, 2006).
The current political unrest makes any decision to expand into the Mexican
market at this time a significant risk. Even if Calderon maintains his victory, the country
is divided. As evidenced by the upheaval since the election and the subsequent call for a
recount, Obrador’s supporters will not abate. This opens Forest up to significant criticism
and may cause them difficulty in finding a local partner to work with them.
Entry Strategies: Japan or Mexico 11
References
Abogados, S. Joint ventures in Mexico. Solutions Abroad. Retrieved on July 14, 2006
from http://www.solutionsabroad.com/d_jointventuremexico.asp
Barajas, T., and Kozolchyk, B. (2001). Joint ventures in Mexico. National Law Center for
Inter-American Free Trade. Retreived on July 9, 2006 from
http://www.natlaw.com/pubs/spmxbs7.htm
Contreras, J., and Campbell, M. (2006, July 9). Mexican stand off. Newsweek
International. Retrieved in July 9, 2006 from
http://msnbc.msn.com/id/13773672/site/newsweek/
Gordon, G. (2001). Doing Business in Mexico: A Practical Guide. New York, Hawthorne
Press.
Hill, C.W.L. (2007). International Business (6th ed.). New York, McGraw Hill.
Market entry strategies for Australian exporters. Government of Australia. Retrieved
on July 8, 2006 from http://www.austrade.gov.au/australia/layout/0,,0_S2-1_4-2_3_-4_-5_-6_-7_,00.html
Sutter, M. (2998, October 26). Consultants see growth for Mexican manufacturers.
Journal of Commerce, p3A. Retrieved on June 28, 2006 from the ABI/INFORM
global database.
Entry Strategies: Japan or Mexico 12
Joint ventures in the Japanese Market
Sunny Kinch-Monyem
As stated in the previous company overview, Forests current business strategy
includes licensing of products from other companies and collaborating to leverage their
products; therefore, examining joint venture market entry into Japan is warranted.
Reasons for establishing a joint venture are to lower costs, decrease vulnerability, enable
local adaptation, decrease transportation costs, and share equity. GlobalEdge.msu (2004)
asserted “Collaboration can take place at different levels of the value chain and can be
exemplified by:

Joint R&D projects

Technology licensing

Subcontracting production under license

Agency agreements in banking, consulting, accounting, advertising

Marketing agreements; cross licensing; and so on (p. 3)
Collaboration between companies can take place in two ways, as a strategic alliance as a
specific project that may include management contracts, international licensing
agreements, and special joint ventures that all occur for a predetermined timeframe, or as
a conventional equity based joint venture. The key disadvantage of a long-term strategic
alliance is that it creates the risk of losing proprietary information to a potential future
competitor and the commitment of the alliance itself restricts strategic flexibility (Hill,
2007). For the purposes of this study the focus will be on the conventional equity based
joint venture that will create a separate entity, of which Forest will hold at minimum a
fifty-percent share, that will be controlled by the partners.
Entry Strategies: Japan or Mexico 13
In examining joint ventures as an option for entry into the Japanese
pharmaceutical market, it is necessary to look at the timing of this entry into the market.
Forest is not going to benefit from a first-mover advantage, as there are already several
well-established pharma companies there already. They will not be able to beat
competitors to the punch by being early entrants into the market or set low pricing as a
method to gain market share due to regulations. By researching the Japan Pharmaceutical
Reference (JPR, 2005.), we were able to determine that under the therapeutic category
central nervous system agents and sub-classification of psychotropics there are 13 drugs.
Of these, only 3 are indicated as antidepressants: Depas®, Dogmatyl®, and Rize® (JPR,
2005). Therefore, the value of entering this market occurs is in the fact that the market for
central nervous system drugs such as Lexapro® is not saturated, and therefore there is still
enough room for new product. Hill (2007) contended that, “Even though the firm may be
a late entrant …, by benchmarking and then differentiating itself from early movers in
global markets, the firm from the developing nation may still be able to build a strong
international business presence” (p. 485). Secondly, Forest needs to understand the
regulatory intricacies of setting up a joint venture in Japan, and how establishing a joint
venture will provide the benefit of overcoming any of the trade barriers they face in this
challenging market.
Japan’s joint venture business models
The U.S. Department of State (2005) reported, “Japan does not maintain a system
of performance requirements [, and] Japan also maintains no formal requirements for
local management participation or local control in joint ventures or other forms of direct
investment, except in restricted sectors “ (http://www.state.gov/e/eb/ifd/2005/43032.htm).
Entry Strategies: Japan or Mexico 14
There is one form of business set-up in Japan that would be applicable to a joint venture,
that being a subsidiary company, as this is the only form of business that allows for a
percentage of stock shares ownership as is needed. Subsidiary companies are either
Kabushiki-Kaisha (joint-stock corporation) or Godo-Kaisha (limited liability company
(LLC)), and Forest would need to be a Kabushiki-Kaisha (joint-stock corporation)
because there is no possibility of public stock offering under Godo-Kaisha (JETRO,
2006). Furthermore, under the Kabushiki-Kaisha (joint-stock corporation) set-up, large
companies (joint stock corporations with capital of 500 million yen or more or total
liabilities of 20 billion yen or more) are either classified as Kokai Kaisha (publicly
traded) or Kabushiki Joto Seigen Kaisha (not publicly traded and subject to restrictions
on the transfer of issued shares) (JETRO, 2006).
Finding the best partner
As a new venture it is unlikely that it will begin as a publicly traded entity,
however, since the likelihood of this joint venture occurring with a Japanese firm rather
than a foreign firm in the Japanese market is very high, the possibility does exist and
therefore a comparison of the legal set-up requirements in the two classifications has
been prevented in Table 1. Of key importance here are the requirements for the number
of directors and their minimum or maximum term in office.
The challenges and barriers that will face Forest in entering the Japan market
were previously determined to be the cost of entry, cultural differences, corporate
practices such as Keiretsu that also heavily impact access to buyer-supplier networks of
distribution, and the labor requirements for MR’s. The U.S. Department of State (2005)
maintained that these challenges and barriers are more a result of cultural business
Entry Strategies: Japan or Mexico 15
practice rather than government regulation, and as such it is necessary that Forest
employees in this venture have the global attitude and sufficient cultural training
necessary to smooth the way with both their partners and customers. “Business in Japan
is based on long-term relationships and a company’s reputation and credibility” (p. 56),
Alden (1987) stated, and further maintained, “Find the best partners possible. Because so
much business from foreign markets is done with Japanese partners, going this route is
often preferable” (p. 54). Partners will share in the risk; and choosing an existing
Japanese pharmaceutical company as a partner will provide Forest with much-needed
access to a ready established complex distribution network, this is a primary advantage
for using joint venture as a mode of entry. In fact many of the non-tariff trade barriers to
entering the pharmaceutical market in Japan would be overcome using the joint venture
process.
The number of pharmaceutical firms in Japan actually dropped from 1,567 to
1,342, partly as a result of mergers and acquisitions and the top 50 companies having
over 82 percent share of the sales (JETRO, 2005). While there are several global
companies operating in Japan, such as, Aventis, Merck, Roche, Novartis, and Glaxo
Smithkline, the vast majority of the firms are Japanese. Unlike in prior years when
Japanese firms were reluctant to partner with foreign firms, Japanese companies are now
actively seeking foreign companies to partner because they also benefit from the
additional capital and technological know how (Alden, 2001). Selecting a joint venture
mode of entry is a very viable solution for all of the trade barrier issues particularly if a
venture can be established with Sankyo Co. a current U.S. joint venture partner or Daiichi
Pharmaceutical Company Ltd, their parent company (Daiichi Sankyo, 2006). There is
Entry Strategies: Japan or Mexico 16
already a level of respect and trust between these two entities, they are accustomed to
adapting to and sharing technology, and as previously determined, this is a major portion
of the battle in attracting potential Japanese partners. Even if a completely new alliance is
formed the attitude of the parties involved will be critical to the ventures success and
relying on a venture partner to ease the way does not mitigate the obligation of learning
how to function in a new business culture.
Political Risk
As a final note, in light of the current political tensions between Japan and North
Korea, Forest will need to evaluate continuously the economic risks that may result from
sanctions imposed. At present, there is a large ethnic-Korean community in Japan and
there is a substantial amount of import/export trade between the two countries that may
be impacted, as can be evidenced by the halt on shipping (Masaki, 2006). This may
disrupt the availability of supplies available for production and manufacturing and
negatively impact regional trade agreements and opportunities that Forest may be looking
towards in the future. Forming a joint venture will help to minimize the risks that are
inherent not only in entering a new market but also in doing business in this charged
arena.
Joint ventures conclusion
Choosing a joint venture as a market entry strategy has its advantages and
disadvantages in both the Mexican and Japanese markets. By carefully analyzing these
factors, Forest will be able to develop appropriate strategies for market entry (Mintzberg,
2004). In Mexico’s limited pharmaceutical field there are already several global players
who will not likely see a benefit to partnership while the remaining companies lack a
Entry Strategies: Japan or Mexico 17
global mindset and such partnership will be detrimental. Establishing a joint venture in
Japan would greatly facilitate access to the difficult distribution system, but the large
number of pharmaceutical companies, that also includes global companies, is steadily
shrinking.
In either scenario, aside from weighing the risks involved with the type of venture
and those of a political nature, establishing a joint venture requires finding a partner
willing to take a share of fifty-percent or less share of the company. Additionally,
Forest’s management must be able to adapt to the differing cultural business style, both
internally and externally, in order to be successful. Backhaus (2004) emphasized being in
the foreign market allows the partner to learn everything about the culture and the best
methods of optimizing the supply chain, a joint venture market entry strategy provides
the means.
Entry Strategies: Japan or Mexico 18
Appendix
Table 1
Comparison regarding directors of Kabushiki-Kaisha (joint-stock corporations)
(if no committee is established)
Large companies
(joint stock corporations with capital of 500 million yen or more or total
liabilities of 20 billion yen or more)
Kokai Kaisha
Kabushiki Joto Seigen Kaisha
(publicly traded joint-stock
(joint-stock corporations subject to
corporations that are not Kabushiki
restrictions on the transfer of issued shares)
Joto Seigen Kaisha)
Appointment of 1 or more required.
Executive officer with right of representation Appointment of 3 or more required
No.
if no representative director is appointed(*1).
Directors
2 years in principle. Extendable up to 10
2 years
Term
years.
Establishment optional. Establishment
Board of directors
Establishment required
required if board of auditors is established.
(3 directors or more)
Appointment possible if 2 or more directors Appointment of 1 or more
required. Executive officer with
Representative director(s) appointed. Executive officer with right of
representation(*1).
right of representation(*1).
Appointment not possible
Executive officers
Appointment of 1 or more required
Appointment of 3 or more required
No.
Auditors
4 years in principle.
4 years
Term
Extendable up to 10 years.
Board of auditors
Establishment possible
Establishment required
(3 or more auditors)
Appointment necessary
Accounting Appointment
auditor
1 year
Term
Appointment
Appointment possible
possible
Accounting
councilor(*2)
2 years in principle.
2 years
Term
Extendable up to 10 years.
(*1) At least one director with the right of representation must have an address in and reside in Japan.
(*2) An agent of a company newly established under the Corporate Law who must be a certified public tax
attorney or certified public accountant. An auditing councilor prepares financial documents in association with the
directors, and may not hold another position as well, such as director, auditor, or accounting auditor.
Extracted from Table 1.2 (JETRO, 2006)
References
Entry Strategies: Japan or Mexico 19
Alden, V. (1987). Who says you can’t crack Japanese markets? Harvard Business Review.
Retrieved on July 6, 2006 from Business Source Premier database.
Backhaus, W., (2004). A conceptual overview of globalist versus international business market
entry considerations. Overview: Week 9- Global business entry: Strategies and alliances.
Retrieved on July 10, 2006, from AMBA 606 Toolbox
Daiichi Sankyo. (2006). U.S. Subsidiaries Join Together to Form Daiichi Sankyo, Inc. Retrieved
on June 8, 2006, from
http://www.sankyopharma.com/news/pdfs/IntegrationRelease04032006.pdf
GlobalEdge.msu. (2004). Modes of entry Part II: Joint ventures – Collaborative venture.
Retrieved on July 10, 2006, from http://globaledge.msu.edu/academy/courses.asp#
Hill, C.W.L. (2007). International business with Global Resource CD, PowerWeb and World
Map (6th ed.). New York: McGraw Hill.
Japan Pharmaceutical Reference (2005). Retrieved on June 9, 2006, from, http://www.esearch.ne.jp/~jpr/jpr_db/eindex.html
JETRO (2005, August). Industrial Report: Trends in the pharmaceutical industry. JETRO Japan
Economic Monthly. Retrieved on June 6, 2006, from
http://www.jetro.go.jp/en/market/trend/industrial/index.html/pdf/jem0509-2e1.pdf
JETRO. (2006). Investing in Japan: Laws & regulations on setting up business in Japan.
Retrieved on July 7, 2006, from http://www.jetro.go.jp/en/invest/setting_up/section1
Masaki, H., (2006, July 6). N Korea's missiles met by Japanese sanctions. Asia Times Online.
Retrieved on July 14, 2006, from, http://www.atimes.com/atimes/Korea/HG06Dg02.html
Entry Strategies: Japan or Mexico 20
Mintzberg, H. (2004). The fall and rise of strategic planning. In J. Kurtzman, G. Rifkin & V.
Griffith (Eds.), MBA in a Box, practical ideas from the best brains in business (pp. 119133). New York: Crown Business.
U.S. Department of State. (2005). 2005 investment climate statement- Japan. Retrieved on July
5, 2006, from, http://www.state.gov/e/eb/ifd/2005/43032.htm
Entry Strategies: Japan or Mexico 21
Introduction - Licensing
In a licensing agreement, the licensor, grants the rights to intellectual property, such as
patents, formulas, designs, copyrights or some other non-physical asset, to a licensee for a
defined period. The licensee pays a royalty for this privilege. In cross licensing agreements two
firms’ license rights to one or more of each other’s intangible assets (Hill, 2007). This section
describes the advantages and disadvantages of licensing agreements as a foreign market entry
strategy and positions the viability of this approach for Forest Labs in Japan and Mexico. This
discussion calls out key management and technological focus areas and the implications of
licensing agreements on export/import and re-import should Forest deploy this strategy.
Licensing - Mexico
Amy M Marks
Advantages of Licensing
When considering expansion into Mexico the option to license out the Lexapro patent
may prove to be lucrative to the organization. It opens the doors to expand business while
gaining additional market recognition without weighing down Forest financially.
Since this entry mode would require a time limitation with respect to the agreement made
with a second entity, Forest could use the opportunity to see how the industry in Mexico would
handle a new foreign product with little expense to Forest. The primary advantage of this
approach is the low costs involved in development. The licensee that Forest would establish a
relationship with would typically be responsible to invest the necessary capital. This could be a
very attractive option for Forest, as it would provide them the ability to keep the organizations
capital untied in Mexico’s market. Thus offering the company financial freedom to pursue other
ventures.
Entry Strategies: Japan or Mexico 22
Along the same lines, Forest could use this approach as a way to get involved and learn
how the Mexican pharmaceutical industry and government operate. As with any foreign market
entrance, there are many risks and unknowns, by licensing out the Lexapro® patent, Forest will
help relieve the burden of those risks. As discussed in the prior report, there are some Mexican
laws that would act as barriers for Forest, such as the regulation that states all foreign facilities
must be inspected prior to receiving a patent from the Mexican government. However, the law
also states that Mexican officials are unable to enter facilities that are located outside the
Mexican borders. By licensing, these types of barriers can be avoided and offer Forest the
prospect of successfully doing business in Mexico.
Disadvantages of Licensing
As with any method or entry mode the flip side to advantages are the disadvantages.
There are three major drawbacks to licensing: the loss of control in manufacturing and
marketing; inefficiency in global competitive advantage; and inability to engage in strategic
coordination.
The typical process for a licensee is to set up his or her own manufacturing operations in
the country of entry. As a result of this process Forest would ultimately lose most control over
the manufacturing, marketing, and strategy of Lexapro. These elements are critical when
realizing experience and location economies; therefore Forest will have to rely on the licensee to
provide those results. (Hill, 2007) Having to relinquish that control could be an issue for the
direction Forest would like to move into, especially if the licensee does not have the same goals.
The second concern with this approach is the lack of potential competitive advantage.
When expanding operations globally, firms can be required to utilize profits from one countries
operation plant to support competitive attacks in another country. This becomes an issue when a
Entry Strategies: Japan or Mexico 23
licensee is the operations in one country. Often times they are not interested in throwing profits
to support the efforts of the licensor operations. For Forest this would not be an immediate
concern, however it is important to bear in mind that this situation may arise in the future if
licensing is successful for Forest.
Due to the licensing process, many firms lose their technological know-how to the
licensee, which ultimately causes a loss in control in competitive advantage. This would be a
consideration Forest must take into account. This is true because the loss and misdirection
would inevitably affect the foreign direct investment (FDI). Hodges (2004) points out
“businesses are generating revenues and profits not only by exporting and importing goods and
services, but also by investing abroad and/or attracting inward FDI to make their business model
more competitive”. The loss of technological know-how to a firm who does not have the same
global goals would affect the position of Forest negatively.
In the case for Forest the most important disadvantage is the regulation in Mexico
regarding compulsory licensing. Compulsory licensing is “government authorization to use a
patent without the permission of the patent holder” (U.S. Embassy). The Mexican government
differs significantly with other countries on this topic. This would be a concern that Forest needs
to take very seriously, as the government dictates which patents are not protected by the U.S.
patent standards. Currently the Mexican senate is determining whether to grant compulsory
licenses for AIDS and Cancer drugs. “That means the government could grant local laboratories
licenses to churn out cheap copies of patented drugs” (Smith, 2003). If this is pushed through,
many pharmaceutical companies will take a huge hit to their profits. Before Forest attempts to
enter Mexico, it must be determined whether profits would be affected significantly enough
where it would be a counter productive venture. At this point, the consideration is only on life-
Entry Strategies: Japan or Mexico 24
saving medications however, if approved it may make the task simpler to obtain compulsory
licensing for other drugs, such as Lexapro.
Entry Strategies: Japan or Mexico 25
References
Hill, C.W.L. (2007). International business with Global Resource CD, PowerWeb and
World Map (6th ed.). New York: McGraw Hill.
Hodges, G. (2004, March). Trade in Evolution: the Emergence of Integrative Trade.
Retrieved on July 11, 2006 from
http://www.edc.ca/search/search.asp?slang=e&target=Glen+Hodgson&rc=25&fr=51
Smith, G. (2003, Aug 11). Drug Makers Feel the Heat in Mexico. Business Week.
(3845).
U.S. Embassy. Glossary of Trade Terms. Retrieved on July 11, 2006 from
www.usembassy.at/en/us/glossary.htm
Entry Strategies: Japan or Mexico 26
Licensing Agreements: Japan
Lisa Bartha
Advantages of Licensing Agreements
In a licensing agreement, the licensee is responsible for funding the effort. This makes it
an attractive entry mode for capital sensitive firms looking to enter a foreign market. In the past,
Forest Labs has typically played the role of licensee. Forest’s value add to these licensing
agreements include, (1) superior sales and marketing capabilities, (2) established relationships
with companies that have desirable products and (3) scientific development and regulatory
approval capacity. These capabilities enable Forest to drive drug development to completion,
approval and commercialization that make Forest an attractive partner (Solomon, 2006). As a
result, Forest is familiar with the terms and conditions of licensing agreements.
Now let’s consider Forest as a licensor. We can assume that a Japanese licensee will be
able to leverage Forest's competence in pre-clinical and clinical trials. To the degree that market
segments cross over between the U.S. and Japan, a partner may also be able to leverage Forest's
market research on the product.
Forest’s management team acknowledges that it must augment profits in the near term
since exclusive rights to drugs has a shelf life. They must also fund the development of pipeline
products in various stages of development, and approval. The prospect of licensing Lexapro® to
a Japanese drug maker could provide Forest with an additional revenue stream and expand the
Lexapro® brand geographically, without taking its focus from other strategic choices. Forest has
successfully collaborated with other Japanese firms in the past such as Sankyo for the cross
marketing of Benicar® (frx.com). This would also help Forest to turn domestic Japanese
competitors into partners, which Hill (2007) sites as a key advantage to licensing.
Entry Strategies: Japan or Mexico 27
Disadvantages of Licensing Agreements
Forest must weigh the risk of losing control over product promotion, positioning and
pricing decisions. It will not be able to gain scale economies and it will not gain significant tacit
knowledge about operating in Japan. Neither will they gain significant knowledge of supply
chain within the market. Japanese Kieretsu, a complex network of business affiliations serve to
complicate the navigation of the supply chain in Japan. Licensing does not help Forest to gain
direct experience with the Japanese supply chain that could be detrimental if Forest pursues
larger scale entry at a later date (Hill, 2007).
Although licensing may allow Forest to expand its global reach, and provide royalty
revenue to fund pipeline projects, this approach may prove detrimental to Forest if the proper
governance is not in place to guard their proprietary technology capital and intellectual property.
Forest must negotiate terms and conditions so that shareholders rights to a fair return on
investment are not harmed by the potential loss of intellectual property (Eun-Resnick, 2004).
Strategic Management Considerations
Forest's management team must consider how licensing Lexapro with a Japanese partner
supports its long-term strategic direction. Forest must link a decision to license in Japan with its
globalization drivers. The choice must support a more deliberate strategy for the Asia Region by
contemplating expansion into new markets, lower manufacturing and production costs,
increasing global strategic alliances, capitalizing on improved trade relations between Japan and
the U.S (Kedia and Mukherjee, 1999). Forest must position initial entry within the context of its
long-term vision and aspirations for what it will become (Mintzberg, 2004). As we have seen,
Forest has its eye set on earlier involvement in the drug development process and increasing its
involvement developing novel molecules (Solomon, 2006).
Entry Strategies: Japan or Mexico 28
New foreign market entry through contractual alliance such as licensing would create less
volatility to Forest’s stock price than other riskier modes such as setting up a wholly owned
subsidiary or merger/acquisition (Ernst & Halevy, 2000). This is both an advantage to licensing
and an important management consideration in light of Forest’s Fiscal year results that closed
March 31, 2006. Revenues decreased by 6% and net income by 16% driven by the expiration of
Celexa’s exclusivity (One Source). Earnings per share decreased by only 8% due to the stockbuy-back program that helped to buoy shareholder value (Solomon, 2006). This sends a clear
message that Forest must be opportunistic about market expansion opportunities while patent
exclusivity is strong.
Speed and fervor of entry are strategic choice (Bates, et.al., 2001). Licensing will not
provide Forest with and overly aggressive entrance into the Japanese market.
Timing of Entry
The Japanese market players have recently increased their size through merger. Merger
activity during 2005 includes the joining of Sankyo with Daiichi to create Japan’s number two
drug company, Daiichi-Sankyo and the merger of Fujisawa with Yamanouchi to create the
number three drug company, Astellas Pharma (mofo.com). Some see this as an effort by Japan’s
major pharmaceuticals companies to better position their size against global drug companies.
Otherwise, Japan’s subsidized drug, industry has been slow to globalize and slow to grow (1.4 %
in 2005) (Data monitor, 2005) and (Rosen, 2005). Global Edge Consultants views the mergers as
a signal that Japan’s drug industry is ready to globalize. This signals opportunity for a foreign
company seeking market entry.
Before entering Japan, Forest should conduct a political risk assessment of the region in
light of the unrest stemming from the recent North Korean Missile tests. Some politicians in
Entry Strategies: Japan or Mexico 29
Japan are calling for a pre-emptive strike against North Korea as well as economic sanctions
(McCurry, 2006). As temperatures flare in the region, multi-national firms must understand the
potential for interference with operations, money transfer and ownership (Griffin & Putsay,
2003).
Qualitative Considerations
Forest must identify an apt partnership in which there are reciprocal benefits and mutual
commitment. The idiosyncrasies of Japanese business culture do work to Forest’s advantage.
Japanese culture is deeply rooted in “Confucian dynamism” (Hill, 2004, p. 113), which
emphasizes affiliation, reciprocity, honor and loyalty, is carried into business relationships. This
value is consistent with Forest’s corporate value of creating strong relationships with business
partners.
Cross-licensing agreements, common in the pharmaceuticals industry are an option. This
type of agreement helps to mitigate risk to loss of intellectual capital (Hill, 2007). For Forest,
cross licensing can provide the foundation for a joint venture relationship in which both licensor
and licensee have an equity stake in the relationship. As we have seen in Kinch-Monyem (2006)
a joint venture is also a highly palatable entry strategy for Forest in Japan.
Implications of Licensing Agreements on Export/Import and Re-import
As discussed in Global Edge Consultant’s June 2006 white paper on anti competitive
practices, Japan issued guidelines for regulating unfair trade practices in relation to Patent and
Know-how and licensing agreements. Two guidelines that significantly affect export/import and
re-import are (1) Licensor cannot restrict the price or resale price of goods in domestic markets,
(2) Licensor cannot place restrictions on parties to the transaction, (3) Cannot use cross-license
agreements as unreasonable constraint to trade (OECD, 1998).
Entry Strategies: Japan or Mexico 30
Forest Labs and the Japanese licensee could find themselves competing against each
other in another geographic market. Even though, the Bank of Japan just instituted an interest
rate of .25 per cent up from zero, Japan’s Yen is weaker than the dollar this would make the
licensed version cheaper in export markets that are currently served by Forest (Hill, 2006) and
(McCurry, 2006). Currently, the EU Central Bank’s short-term interest rate is 2.75 and the US
Federal Reserve’s rate is at 5.25, which makes Japan’s advantage obvious (McCurry, 2006). It
would be counter to Forest’s strategic stance to create a competitor in export markets through
licensing.
Joint Conclusion - Licensing
Licensing Lexapro in the Japanese market is a viable option. However, Mexican laws
such as compulsory licensing would make this mode of entry a challenge in that market.
However, the advantages and disadvantages must the compared to alternatives. The best fit will
be determined by how closely it supports Forest’s long-term vision for globalization. Forest must
be careful to do not harm to its long-term vision by taking advantage of short-term opportunity
for cash flow.
Entry Strategies: Japan or Mexico 31
References
Bates, M., Rivizi, S.H.S., Tewari, P., Vardhan, D. (2001) How fast is too fast? The McKinsey
Quarterly. Number 3. Retrieved July 11, 2006 from
http://www.mckinseyquarterly.com/article_print.aspx?L2=21&L3=34&ar+1082
Ernst, D., Halevy, T.,(2000). When to think alliance. The McKinsey Quarterly, Number 4,
Retrieved July 11, 2006
fromhttp://www.mckinseyquarterly.com_print.aspx?L2+21&L3+1&ar=941
Eun, C., & Resnick, G. (2004). Corporate governance around the world. International
financial management (pp. 472-495). New York: McGraw Hill.
Griffin, R.W., & Pustay, M.W. (2003). Political Risk. In R.W. Griffin & M.W. Pustay,
International business: A managerial perspective (pp. 72-82). New Jersey: Prentice-Hall.
Hill, C.W.L.(2007). International business with Global Resource CD, Power Weband World
Map (6th ed.). New York: McGraw Hill
Kedia, B.L., & Mukherji, A. (1999). Global managers: developing a mindset for global
competitiveness. Journal of World Business, 34(3).
McCurry, J. (July, 14, 2006). North Korea rebuffs china over missiles. The Guardian Unlimited.
Retrieved, July 15, 2006 from
http://www.guardian.co.uk/international/story/0,,1820009,00.html
McCurry, J. (July 15, 2006). Japan lifts interest rates from 0 and tries to forget ‘lost decade’ of
stagnation. Guardian Unlimited. Retrieved July 16, 2006 from
http://www.guardian.co.uk/japan/story/0,,1821156,00.html
Entry Strategies: Japan or Mexico 32
Mintzburg, H. (2004). The fall and rise of strategic planning. In J. Kurtzman, G. Rifkin & V.
Griffith, MBA in a Box, practical ideas from the best brains in business (pp.119-133).
New York: Crown Business.
Mofo.com (2006). Practices and Industries. Retrieved, July 11, 2006 from
http://www.mofo.com/interbnational/JP_en/practice/industry.sciences.html
OECD (September, 1998) Competition policy and intellectual property rights.
Retrieved,
June 15, 2006 from
http://www.oecd.org/searchResult/0,2665,en_2649_201185_1_1_1_1_1,0 0.html
One Source, (2006). Retrieved July 11, 2006 from
http://globalbb.onesource.com/sharescripts/Reports/GetReports.asp?KeyI
D=12351&proce...
Posen, A. (Winter, 2006). Deflationary lessons: What japans deflation did and did not do. The
International Economy. Retrieved from Business Source Premier Online Database, July
1, 2006.
Rosen, M.(2005). Japan’s pharma mergers will trickle to the Midwest. Wisetechnology.com
retrieved July 11, 2006 from http://wisetechnology.com/article.php?id=1600
Solomon, Howard (2006). Chairman’s message. Forest Labs.com Retrieved July 14 from
http://ir.frx.com/phoenix.zhtml?c=83198&p=irol-chairmanMessage
Entry Strategies: Japan or Mexico 33
Introduction to Franchising
We recognize that for many firms, franchising has emerged throughout the world as a successful
approach to conducting and expanding business. It is clear that mode of entry has developed into
a strong force within the international marketplace; nonetheless, Forest must conduct a
significant amount of research and preparation in choosing to employ this mode of entry (Swartz,
1997). The potential for long-term growth and profitability must be accurately weighed against
the risks of entering the foreign markets of Japan and Mexico. As a firm, we have determined
the general disparities that exist between franchising and licensing, the advantages and
disadvantages of franchising in both Japan and Mexico, the relationship that exists between
franchising and international trade agreements, as well as the cultural considerations that must be
taken into account prior to engaging in franchising. It is our feeling that this information will
assist us in determining whether the franchising mode of entry is a viable option for corporate
expansion within Japan or Mexico.
Franchising in Mexico
By: Kenneth Willis
Utilizing franchising arrangements, as a mode of foreign expansion is another viable tool
that executives at Forest must consider as they contemplate entering the Mexican pharmaceutical
market. Over the years, franchising has emerged internationally as a successful approach to
expanding business and entering new markets. However, with all forms of foreign expansion,
the potential for long-term growth and profitability must be weighed against the risks of entering
the foreign market. To help executives at Forest decide the appropriate mode of entry, this
analysis will first offer definitions for franchising and licensing. Next, it will discuss how
Entry Strategies: Japan or Mexico 34
franchising differs from licensing, noting their advantages and disadvantages respectively.
Finally, it will consider the ways in which franchising is adaptable to corporate expansion into
Mexico
Definitions
Hill (2007) defines licensing as, “…an arrangement whereby a licensor grants the rights
to intangible property to another entity (the licensee) for a specified period, and in return, the
licensor receives a royalty fee from the licensee” (p. 489). Forest is very familiar with licensing
mechanisms, as a key component of its business model is predicated on the licensing of
pharmaceuticals at various stages of development and using their regulatory expertise to bring
them to market. Hill (2007) defines franchising as, “…a specialized form of licensing in which
the franchiser not only sells intangible property [normally and trademark] to the franchisee, but
also insists that the franchisee agree to abide by strict rules as to how it does business” (p. 490).
Using these definitions, the advantages and disadvantages of each mode of entry will be
discussed later in this analysis.
Franchising vs. Licensing
While franchising and licensing are potentially both viable modes of market entry into
the Mexican pharmaceutical market, it is important to understand that differences do exist.
Forest must consider these similarities and differences as well as the advantages and
disadvantages of each mode of market entry in context with their business model and appetite for
risk versus reward. In general, franchising and licensing share the primary advantage of limiting
the amount of upfront development capital, costs, and associated risks needed to enter a foreign
market. They put the onus on franchisee or licensee respectively to build a profitable operation
within a timely manner. In addition, both franchisers and licensors receive royalty fees for the
Entry Strategies: Japan or Mexico 35
use of their intellectual property, which is typically a percentage of the franchisee or licensee’s
revenues. Thus, Forest could enter the Mexican pharmaceutical market with minimal expense,
allowing them to develop a market presence quickly with little upfront costs.
Franchising and licensing also share some disadvantages. Both limit the ability of a firm
to strategically use profits earned in one country to support competitive attacks in another (Hill,
2007, p. 489). Forest would be prohibited from supporting its European operations from profits
earned in Mexico under franchising or licensing. Franchising and licensing also share the
dubious distinction of ceding a certain amount of control to franchisees and licensees. Under
licensing, licensors seed control over the manufacturing, marketing and strategy of their product
or service, and are exposed to the potential piracy of technological know-how by the licensee.
Under franchising, firms stand to lose control over the quality of their product or service, as
franchisees may not be as concerned or have different perceptions of quality. The
aforementioned can be mitigated somewhat through cross-licensing agreements and the
development of a solid franchise agreement.
While a number of common elements exist in franchising and licensing, notable
differences include the type of businesses that engage in these entry modes, the duration of
agreements, and the level of intervention. Service firms normally pursue franchising, while
manufacturing firms pursue licensing. In this context, it is common for franchisers to assist
franchisees with running the business. Through a franchise agreement and assisting the
franchisee with running of the business, franchisers have the ability to set standards that help
safeguard the value of the intellectual property and the reputation of the firm. Franchising is
often a longer commitment as well.
Entry Strategies: Japan or Mexico 36
Adaptability to Mexican Market
The advantages and disadvantages of franchising and licensing relative to the Mexican
pharmaceutical market are similar to those that exist in the United States. This is primarily a
result of government reforms and the alignment of trade through the North American Free Trade
Agreement (NAFTA). Mexico’s proximity to the United States also makes it a suitable market
to consider franchising and licensing opportunities. Given Forest’s proven competencies in
licensing, from this point forward, this analysis will specifically focus on the adaptability of
franchising to the Mexican pharmaceutical market.
The viability and expansion of franchising in Mexico can be traced back to legal reforms
made to its intellectual property laws in the 1980s encouraged by the Mexican Franchise
Association. The reforms fortified the intellectual property laws and revamped the structure of
franchise agreements under Mexican law, making the process of setting up a franchise more
transparent and secure. This is an important consideration for Forest, as it has a significant
amount of intellectual property at various stages of development that must be safeguarded.
Prior to the reforms, upon termination of a franchise agreement, the intellectual property
reverted back to the franchisee, giving them rights to use it as they wished. Farver (1993)
reports, “Prior to the change, a franchise relationship was considered a sale and was not
encouraged” (p. 34). Combined with the Mexican government’s intrusion into negotiations and
setting restrictive limits on franchising agreements, many franchises started as joint ventures
(Farver, 1993, p. 34). In this context, one of the advantages of franchising in Mexico is the
mindset the nation has created with regard to developing as a free market economy. Structurally,
Forest would benefit from amendments to Articles 142 and 65 of the Mexican Industrial Property
Law, which redefined what constitutes a franchise, and what disclosures are required of
Entry Strategies: Japan or Mexico 37
franchisors respectively. The amendments also imposed a 30-day cooling-off period between
franchisers and franchisees and streamlined the process of registering trademarks (Maria, 2006,
p. 93). As a result, Mexico possesses a comfortable business culture conducive to franchising.
Currently, there are more than 800 franchises and 72 concepts. Tocatli (2006) reports,
“Franchises grew 17 percent during 2005 and 2006 the expectation is around 15 percent to 17
percent” (p. 24). Tocatli (2006) also reports, “The World Franchise Council has ranked Mexico
among the first 10 countries with more franchises in operation” (p. 24).
With an improved business climate, enhanced legislation, and a growing number of
pharmaceutical companies, Forest could advantage themselves of franchising arrangements with
developed companies, mitigating significant costs upfront. However, not being physically onsite
exposes Forest to the potential of losing control over its product and how it may be positioned
within the marketplace from an advertising perspective. If consumers are unable to determine
the value proposition, the product will not sell, and thus Forest will not receive their projected
royalty fees.
Notwithstanding the amendments that provide enhanced legality, and security for
franchisers and franchisees, in practice, the process of executing a franchising agreement can be
complex. This is potentially a disadvantage, in that the average franchising agreement takes
approximately one year to execute, which could mitigate any first-mover advantages Forest
would hope to gain. The complexities compel foreign firms to proceed slowly and to critically
evaluate their franchise agreements in context with Mexican law. Failure to provide franchisees
with the appropriate disclosures within the required time frame can lead to penalties and delay
executing the franchise agreement. The disclosures set the basis for the law, timing, and
truthfulness of the franchise arrangement.
Entry Strategies: Japan or Mexico 38
While the Mexican market has developed into a market conducive to franchising, Forest
must also consider the economical, social, and political conditions that change as a result of the
macro environment. Welsh, Alon, & Falbe (2006) point to the level of economic development,
economic growth, and market governance as key indicators regarding the business climate for
franchising (p. 134). Forest must also be concerned with how they will be perceived as a
franchiser by stakeholders, including consumers and the general public. According to Welsh,
Alon, & Falbe (2006), “The company must take into account not only the shareholder and
ultimate consumers, but also any group directly or indirectly affected by the firm’s business
maneuvers” (p. 134).
Entry Strategies: Japan or Mexico 39
References
Business Mexico. (1993, August). Franchising frenzy. Business Mexico, (3)8, 34 –36.
Retrieved July 11, 2006, from ABI/Inform Global database.
EIU ViewsWire. (2005, October). Mexico: licensing and intellectual property. Economist
Intelligence Unit. Retrieved from ABI/Inform Global database
Franchising World. (2006, March). Mexican franchising at its peak. Franchising World, (38)3,
23-24. Retrieved July 11, 2006, from Business Source Premier database.
Franchising World. (2006, May). Mexico modifies its franchise laws. Franchising World, 93 -97
Retrieved July 11, 2006, from Business Source Premier database.
Hill, C.W.L. (2007). International business with Global Resource CD, PowerWeb and World
Map (6th ed.). New York: McGraw Hill.
Welsh, D.H.B., Alon, I, & Falbe M. C. (2006). An examination of International Retail
Franchising in emerging markets. Journal of Small Business Management 44(1), pp. 130
–149.
Entry Strategies: Japan or Mexico 40
Franchising
Lindsay Yacavone
Franchising in Japan
We recognize that for many firms, franchising has emerged throughout the world as a
successful approach to conducting and expanding business. It is clear that mode of entry has
developed into a strong force within the international marketplace; nonetheless, Forest must
conduct a significant amount of research and preparation in choosing to employ this mode of
entry (Swartz, 1997). As a firm, we have determined the general disparities that exist between
franchising and licensing, the advantages and disadvantages of franchising in Japan, the
relationship that exists between franchising and international trade agreements, as well as the
cultural considerations that must be taken into account prior to engaging in franchising.
Franchising vs. Licensing
Prior to determining the most beneficial mode of entry into the Japanese pharmaceutical
market, it is essential to clarify the differences that exist between franchising and licensing.
Simply stated, “franchising is a specialized form of licensing in which the franchiser not only
sells intangible property to the franchisee, but also insists that the franchisee agree to abide by
strict rules as to how it does business” (Hill, 2007, p.492). A more extensive definition of
franchising is, “a grouping of current and future assets organized and delivered to the market in a
way that creates superior value” (Hohn & Leif, 2000). Quite often, the franchiser will assist the
franchisee in running the business. Franchising is similar to licensing in the sense that the
“franchiser typically receives a royalty payment, which amounts to some percentage of the
franchisee’s revenues” (Hill, 2007, p.492). This mode of entry differs from licensing in the
sense that franchising often involves longer-term commitments. In addition, manufacturing
firms undertake licensing most often, while service firms employ franchising most often.
Entry Strategies: Japan or Mexico 41
Advantages of Franchising in Japan
The primary advantages associated with franchising as an entry mode include the
following: 1) Forest would find relief from many of the costs and risks of independently opening
the market in Japan. For instance, if Forest sold its trademark to a franchisee in Japan, that party
would assume the majority of the costs and risks. Furthermore, the franchisee would have a
substantial incentive to establish a profitable operation in a timely manner. 2) In utilizing this
strategy, Forest would have the ability to develop a strong global presence while simultaneously
minimizing the costs and risks.
Moreover, Hohn & Leif (2000) explain, “a franchise-driven approach to managing a
pharmaceutical company's assets and resources yields many benefits. For example, this
approach can result in faster internal decision-making. From the R&D perspective, management
of the strategic franchise means…concentrating R&D in areas with the most promise for
successful products, and building or acquiring key capabilities that will support research in those
areas.” Based upon this information, it appears as though franchising allows firms to focus on
the development of specific product lines that will make the greatest contribution to their
competitive advantage.
Disadvantages of Franchising in Japan
In addition to the advantages associated with franchising, it is imperative to examine the
primary disadvantages associated with this mode of entry. The most significant problem that
exists is the inability of the franchiser to monitor and control the quality of goods and services
being rendered. For instance, it would take a great deal of additional resources to establish a
system that is capable of effectively monitoring the quality and safety of the drugs being
produced in a Japanese franchise. As Sowinski (2000) states, “product consistency is vital.
Entry Strategies: Japan or Mexico 42
Multinational clients want to be assured that the [products, services, and know-how] offered in
one country will be of the same high quality offered in other countries. At the same time,
cultural, competitive, and legal differences sometimes require customizing the product and the
sales and marketing materials” (p.44). Clearly, customers throughout the world must have
access to safe, effective, and consistent products. It is essential to the reputation and long-term
success of every firm.
Despite the obvious drawbacks that franchising presents, it is evident that the
establishment of a wholly-owned subsidiary in Japan, or a joint venture with a Japanese
company may help alleviate these challenges. As Hill (2007) explains, “the subsidiary assumes
the rights and obligations to establish franchises throughout the particular region or country”
(p.492). If Forest decides to pursue this mode of entry, it may find that the establishment of a
“master franchisee” along with several smaller franchisees will lead to the reduction of quality
control problems. In addition, “because the master franchisee is at least partly owned by the
firm, it can place its own managers in the subsidiary to help ensure that it is doing a good job of
monitoring the franchises” (Hill, 2007, p.493).
Franchising and Corporate Expansion in Japan: Trade Pacts and Business Relationships
As the acceptance of franchising continues to strengthen throughout Asia, particularly in
countries such as Japan, China, Singapore, Malaysia, and the Philippines, Forest may uncover an
increased number of opportunities associated with this mode of entry. The establishment of a
strong franchising system may lead to the development of a dominant international presence
prior to market saturation by other local and international competitors. As Hohn & Leif (2000)
suggest, “companies that learn to strategically manage clearly defined and organized franchises
Entry Strategies: Japan or Mexico 43
will create a competitive advantage through a focused approach to developing and
commercializing products.”
As Sowinski explains, “choosing the best countries for franchising historically has been
based on geographical proximity to the home market and perceptions of cultural similarity. Other
factors can be equally important, though, such as preferential trade pacts and existing business
relationships” (2000, p.44). Both the U.S. and Japan are current members of the Asia Pacific
Economic Cooperation (APEC) that was founded in 1990. According to Hill (2007), the 18
member states collectively account for half of the world’s GNP, 40 percent of world trade, and
the majority of the growth in the world economy (p.290). In the future, there is a possibility that
APEC might transform into the world’s largest free trade area. If in fact this does occur, it would
facilitate the proliferation of Forest franchises throughout Japan as well as other Asian countries.
Franchising and Corporate Expansion in Japan: Cultural Considerations for Business
As Forest considers franchising in Japan, it must also factor in the social and cultural
implications for the conducting business. Generally speaking, the Japanese franchising market is
highly competitive. Consumer demand is very strong; therefore, “franchisors must constantly
make improvements on the quality of their products and services to stay competitive”
(Franchising World, 1993). Furthermore, the Japanese tend to be very strict when selecting
business partners. It is essential that contract partners are honest, trustworthy, and capable, and
are willing to commit to long-term planning. As Swartz (1997) explains, “[Japan] has different
customs, cultures, languages and laws - making cross-border expansion a challenging and unique
option. [Forest] must first determine if [its] products and services are acceptable in [Japan].
Second, [it] must identify a well-known partner that is socially and economically appropriate.
Finally, [it] must have the ability to transfer knowledge and to provide support and necessary
Entry Strategies: Japan or Mexico 44
systems to franchisees.” Based on these considerations, it is clear that Forest must thoroughly
research and investigate all aspects of the Japanese pharmaceutical market prior to engaging in
this mode of entry.
The Future of Forest Laboratories
In closing, we would like to acknowledge the fact that “strategy making needs to function
beyond the boxes, to encourage the informal learning that produces new perspectives and new
combinations. As the saying goes, life is larger than our categories” (Mintzberg, 2004, p.121).
In the weeks that follow, Forest Laboratories must make a concerted effort to review and analyze
previous strategic planning processes. In doing so, the firm will be able to achieve its greatest
potential through the development and implementation of innovative strategic processes that are
grounded in strategic thinking, rather than strategic planning.
Joint Conclusion - Franchising
In summary, both Mexico and Japan have suitable business environments for franchising.
As an entry mode, the ability to enter either market with little invested capital is attractive and a
potential advantage that must be considered. However, the risk of losing control over the
product and its positioning within the marketplace, along with technological know-how is
significant. The risks, rewards, and tradeoffs related to the advantages and disadvantages of
franchising must be carefully analyzed in context with Forest’s business model and objective to
have a global presence.
Entry Strategies: Japan or Mexico 45
References
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15-17. Retrieved July 10, 2006, from Business Source Premier database.
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?direct=true&db=buh&an=9309096154
Hill, C.W.L. (2007). International business with Global Resource CD, PowerWeb and World
Map (6th ed.). New York: McGraw Hill.
Hohn, B., & Leif, G. (2000, November). Rx are us: maximizing value with product franchises.
Pharmaceutical Executive, (20)11, 68-72. Retrieved July 10, 2006, from ProQuest
database.
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id=64316725&sid=4&Fmt=4&clientId=8724&RQT=309&VName=PQD
Mintzberg, H. (2004). The fall and rise of strategic planning. In J. Kurtzman, G. Rifkin & V.
Griffith (Eds.), MBA in a Box, practical ideas from the best brains in business (pp. 119133). New York: Crown Business.
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