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 Franchising World. (1993, May/June). Franchising around the world. Franchising World, (25)3, 15-17. Retrieved July 10, 2006, from Business Source Premier database. http://ezproxy.umuc.edu/login?url=http://search.epnet.com.ezproxy.umuc.edu/login.aspx ?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. http://ezproxy.umuc.edu/login?url=http://proquest.umi.com.ezproxy.umuc.edu/pqdweb?d 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. Sowinski, L.L. (2000, April). Exporting American know-how. World Trade, (13)4, 42-51. Retrieved July 5, 2006, from Business Source Premier database. http://ezproxy.umuc.edu/login?url=http://search.epnet.com.ezproxy.umuc.edu/login.aspx ?direct=true&db=buh&an=2907841 Swartz, L. N. (1997, March/April). Exploring global franchising trends. Franchising World, (29) 2, 7-11. Retrieved July 10, 2006, from Business Source Premier database. http://ezproxy.umuc.edu/login?url=http://proquest.umi.com.ezproxy.umuc.edu/pqdweb? did=11340691&sid=2&Fmt=4&clientId=8724&RQT=309&Vname=PQD