Global Entry Strategies,

Joint Ventures, and Alliances

Sources:
Dornier et al., GOL, 1998
Flaherty, GOM, 1996
Daniels, Radebaugh, International Business, 8th Ed., Addison-Wesley 1998
Soumen Ghosh, International OM, Lecture Notes, Georgia Tech 1996
Alex Tsai, A Note on Strategic Alliances, HBS 1997
Bleeke, Ernst, Is Your Strategic Alliance Really a Sale?, HBR (Jan-Feb 1995) 97-105

Overview
Entry Strategies
Strategic Alliances

Entry Strategies
Information Sources about Overseas Suppliers
Source
Usage
Professional contacts 48%
Trade Journals
44%
Directories
31%
Trading companies
30%
Import brokers
24%
Foreign subsidiary
22%
Trade fairs
16%
Foreign trade offices 13%

Entry Strategies
Supplier Ratings on a National Basis
CountryAvg. QualAvg. Serv.Avg. Price
Canada
5
4
5
Japan
2
5
12
Mexico
12
15
6
Germany
1
1
9
UK
4
3
7
France
6
11
11
India
16
16
14
Sth Korea
9
6
1
Taiwan
10
8
2
South America
13
14
16

Entry Strategies
Trade and Communication Channels / Buying
Channel
Use [%]
Assigned buyer in purchasing unit
38%
Manufacturers representative 34%
Foreign buying office
10%
Import broker
10%
Trading company
8%
Foreign subsidiary
7%
Import merchant
5%
State trading agency
1%

Entry Strategies
Choice of International Entry Mode
Exporting
Tapping foreign markets through marketing channels
Licensing (also Franchising)
Operations granted to the licensee in exchange for lump
sum payment, per unit royalty fee, or proportion of profits
Joint Venture (also Management Contract)
Ownership split agreement
Wholly Owned Subsidiary
Locating own operations in a foreign site

Entry Strategies
Advantages/Disadvantages of Entry Modes
Entry Mode
Control
Dissemination
Commitment
Risk
Exporting high
Licensing low
Joint Venture
Subsidiary high

medium
low
medium
high

Resource

low
high
medium
low

medium

Entry Strategies
Entry Mode Variables
Environmental variables - resource
commitment
Country risk
Location familiarity
Demand conditions
Volatility of competition

Strategic variables - control

Extent of national differences
Extent of scale economies
Global concentration

Transaction
Variables - risk
Value of firm specific
know-how
Tacit nature of knowhow

Entry Strategies
Classification of Entry Strategies

Production
Ownership
Equity
arrangements

Non-equity
arrangements

Production Location
Home Country
Foreign country
Exporting

Wholly owned opns

Partially owned opns
Joint ventures
Equity alliances
Licensing
Franchising
Management contracts
Turnkey operations

Overview
Entry Strategies
Strategic Alliances

Types of Alliances
Contractual Agreements

Equity Arrangements

Traditional
Contracts

Non-Traditional
Contracts

No New
Entity

Creation of
New Entity

Dissolution of
Entity

Arms-length

Joint R&D

Minority Equity
Investments

Joint Venture

Mergers

Buy/Sell Contracts
Franchising

Joint Product Development

Long Term Sourcing

Licensing
Cross-Licensing

Acquisitions
Equity Swaps

Joint Manufacturing
Joint Marketing
Shared Distribution
Shared Service
Standard Setting
Research Consortia

Types of Alliances
STRATEGIC
IMPORTANCE

Acquisition
Minority Interest

High

Joint Venture
Joint Marketing
Joint Development Projects

Medium

Licensing Agreements
Alliance/Consortia
Commercial Contracts

Low

Technology Trials
Low

High

LEVEL OF COMMITMENT

Strategic Alliances
Definition
Strategic Alliance = Cooperative Agreement
Long-term, explicit agreement between at least
two firms
Exchange can involve financial renumeration,
goods/services, information, or a combination of
the three

Strategic Alliances
Why do Firms Enter into Strategic
Alliances?
Transaction Cost Theory:
Transactions either through hierarchies (i.e., within the firm) or
through markets (i.e., externally)
If transactions occur more often, parties may be better off
negotiating a long-term contract
Uncertainties when contract complex => contract incomplete/
re-negotiation; also holds if investment in assets are made for only
one (potential customer)
As external market transactions become more costly, a firm is more
apt to internalize its activities to economize on transaction costs
(excludes the possibility of opportunistic behavior by partner)

Strategic Alliances
Incentives to Enter Strategic Alliances
Information exchange
Reduce risk and search costs
E.g., Technology transfer or technological complementarity
SMEs: cut risk through research sponsored by multiple big firms
Big firms: mitigate risk by supporting multiple innovative SMEs
Complementary resources
New entrant gains access to efficient production facilities,
established channels of marketing and distribution, custr loyalty
Existing competitor may share new technology for rapid expansion of
market share in response to revolutionary innovations

Strategic Alliances
Incentives to Enter Strategic Alliances (contd)
Economies of scale
Until a new entrant has reached it own econs of scale in
prodn, it is at a significant cost disadvantage => take part
in competitors econs of scale
Competitor may reduce average unit cost and create addl
entry barrier
International expansion
International expansion through a domestic partner at
reduced risk (e.g., for commercialization)
May be appropriate if speed of deployment important
Often chosen by small firms (less capital intensive) or as a
result of trade laws/restrictions

Strategic Alliances
Types of Strategic Agreements between Firms
R&D Licensing Agreement
Joint Venture
Effect on cooperating firms

New legal entity

Operating (own facilities) vs. non-operating (admin) joint venture
Mutual hostage position by combining real & financial assets
=> Incentives to share technology and info, invest in relationshipspecific assets, monitor each other

Effect on market
Increase in market power by binding upstream suppliers or
downstream distributors => higher entry barrier

Strategic Alliances
Myths
Were better off partnering with X than competing against it in
our core business
By joining forces with another second-tier company, we can
create a strong company while fixing our problems together
We need a strong partner to improve our skills
By partnering with another company in our industry, we can
access its new products and technologies while minimizing our
investments in core products and technologies
We can use an alliance to raise capital without giving up
management control

Strategic Alliances
Six Types of Alliances
Collisions Between Competitors
Involve the core businesses of two strong direct competitors
Tends to be short-lived and fail to achieve their strategic and
financial goals
Tend to end in dissolution or a merger
Alliance of the Weak
Hope that together the weak firms will improve their
positions
They usually grow weaker and the alliance fails
Often acquisition by a third party

Strategic Alliances
Six Types of Alliances (contd)
Disguised Sales
A weak company combines with a strong company (often a
(future) direct competitor)
The weakling remains weak and is acquired by the stronger fellow
Disguised sales tend to be short-lived, usually less than five years
Bootstrap Alliances
Combination of a strong and a weak company
Weak one tries to improve its capabilities, but usually remains
weak and is acquired by partner
If successful, the partnership evolves into an alliance of partners

Strategic Alliances
Six Types of Alliances (contd)
Evolutions to a Sale
Two strong and compatible partners
Competitive tensions develop, bargaining power shifts,
one of the partners ultimately sells out to the other
Often success in meeting the initial objectives
May exceed a seven-year period
Alliances of Complementary Equals
Two strong and complementary partners
Partners remain strong during the course of the alliance
Mutually beneficial, likely to last much longer than
seven years

Relationship Management
Carefully assess
complementarity
Know your partner
Achieve goal and strategy
congruency
Identify conflict points
Make clear rules
Make transactions
transparent
Communicate clearly and
often

Control creatively
Share equitably
Be flexible
Review and revise
Know when to exit