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Licensing, Strategic Alliances, FDI

Chapter

6

2006 The McGraw-Hill Com anies Inc. All ri hts reserved.McGraw-Hill/Irwin

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Outline

The non-exporting modes of entry

The Licensing Options, including Franchising

Strategic Alliances, including Joint Ventures.

FDI and Wholly Owned Subsidiaries

Marketing Strategy and Optimal Entry Mode

Takeaways

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Non-exporting modes of entry

Three main non-exporting modes of entry

Licensing (including franchising)

Strategic Alliances Wholly owned manufacturing subsidiaries

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STRATEGIC ALLIANCE (J.V.)

Home country

LICENSING

Blueprint : how to do it

WHOLLY-OWNED SUBSIDIARY

Host Country

H

ostCounty

A joint effortA replica of home

Three modes of entry

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The Impact of Entry Barriers

The non-exporting modes of entry basically represent

alternatives for the firm when entry barriers to a foreign

market are high.

These entry barriers involve not only artificial barrierssuch as tariffs, but also involve lack of knowledge of the

foreign market and a need to outsource the marketing to

local firms with greater understanding of the market.

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Licensing

LICENSING refers to offering a firms know-how or other

intangible asset to a foreign company for a fee, royalty,

and/or other type of payment

Advantages for the new exporter

The need for local market research is reduced

The licensee may support the product strongly in the new

market

Disadvantages

Can lose control over the core competitive advantage of the

firm.

The licensee can become a new competitor to the firm.

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Franchising

A form of licensing where the franchisee in a localmarket pays a royalty on revenues - and sometimes aninitial fee - to the franchisor who controls the businessand owns the brand.

The local franchisee typically invests money in the localoperation and has the right to operate under thefranchisors brand name.

The franchisee gets help setting up the operation, usually

according to a well-developed blueprint. The business istypically very standardized (fast food operations is a casein point).

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Franchising Pros and Cons

Advantages

The basic product sold is a well-recognized brand name.

The franchisor provides various market support services to the

franchisee

The local franchisee raises the necessary capital and manages

the franchise

A disadvantage

Careful and continuous quality control is necessary tomaintain the integrity of the brand name.

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Licensing

Original Equipment Manufacturing (OEM)

A company enters a foreign market by selling its

unbranded product or component to another company in

the market country

Examples:

Canon provides cartridges for Hewlett-Packards

laser printers

Samsung sells unbranded television sets , microwaves,and VCRs to resellers such as Sears, Amana, and

Emerson in the U.S.

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Strategic Alliances

Strategic Alliances (SAs)

Typically a collaborative arrangement between firms,

sometimes competitors, across borders

Based on sharing of vital information, assets, and technology

between the partners

Have the effect of weakening the tie between potential

ownership advantages and company control

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Non-equity Strategic Alliances:

Distribution Alliances

Manufacturing Alliances

Research and Development Alliances

Equity Strategic Alliances

Joint Ventures

Equity and Non-Equity SAs

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Equity Alliances: Joint Ventures

Joint Ventures

Involve the transfer of capital, manpower, and usually some

technology from the foreign partner to an existing local

firm.

Examples include Rank-Xerox, 3M-Sumitomo, several

China entries where a government-controlled company is

the partner.

This was the typical arrangement in past alliances the

equity investment allowed both partners to share both risks

and rewards.

Today non-equity alliances are common.

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Rationale for Non-Equity Alliances

Tangible economic gains at lowerrisk

Access to technology

Markets are reached without a longbuildup of relationships in channels

Efficient manufacturing madepossible without investment in a

new plant

SAs allow two companies to undertake missions impossiblefor one individual firm to undertake.

Strategic Alliances constitute an efficient economic responseto changed conditions.

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Distribution Alliances

Also called piggybacking, consortium marketing

Examples

SAS, KLM, Austrian Air, and Swiss Air

STAR Alliance (United Airlines, Lufthansa, Air Canada,

SAS, Thai Airways, and Varig Brazilian Airlines)

Chrysler and Mitsubishi Motors

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Pros and Cons of DistributionAlliances

Advantages

Improved capacity load

Wider product line

Inexpensive access to amarket

Quick access to a market

Assets are complimentary

Each partner canconcentrate on what they

do best

Disadvantages

Time arrangement can

limit growth for the

partners

Can hinder learning more

about the market, creating

obstacles to further inroads

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Manufacturing Alliances

Shared manufacturing examples

Volvo and Renault share body parts and components

Saab engines made by GM Europe

Advantages Convenient

Money saving

Disadvantages

The organization must deal with two principals in charge of

production, harder to communicate customer feedback

Can put constraints on future growth

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R&D Alliances

R&D Alliances

Provide favorable economics, speed of access, and

managerial resources and are intended to solve critical

survival questions for the firm

Used to be seen as particularly risky, since technological

know-how is often the key competitive advantage of a

global firm

The risk of dissipation has become less of a concern,

however, as technology diffusion is growing ever faster

anyway.

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Manufacturing Subsidiaries

Wholly Owned Manufacturing Subsidiaries

Undertaken by the international firm for several reasons

To acquire raw materials

To operate at lower manufacturing costs

To avoid tariff barriers

To satisfy local content requirements

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ADVANTAGES

Local production lessenstransport/import-related costs,taxes & fees

Availability of goods can beguaranteed, delays may beeliminated

More uniform quality of productor service

Local production says that thefirm is willing to adapt products &services to the local customerrequirements

DISADVANTAGES

Higher risk exposure

Heavier pre-decisioninformation gathering &research evaluation

Political risk

Country-of-origin effectscan be lost by manufacturing

elsewhere.

Manufacturing Subsidiaries

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FDI: Acquisitions

Instead of a greenfield investment, the company can enter byacquiring an existing local company.

Advantages

Speed of penetration

Quick market penetration of the companys products

Disadvantages

Existing product line and new products to be introduced mightnot be compatible

Can be looked at unfavorably by the government, employees,or others

Necessary re-education of the sales force and distributionchannels

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marketing control

mode of entry independent agent joint with alliance partner own sales subsidiary

exporting Absolut vodka in the US Toshiba EMI in Japan Volvo in the US

licensing Disney in Japan Microsoft in Japan Nike in Asia

strategic alliance autos in China EuroDisney Black&Decker in China

FDI Goldstar in the US Mitsubishi Motors in US P&G in the EU

Entry Modes and Local Marketing Control

The local marketing can be controlled to varyingdegrees, quite independent of the entry mode chosen. The

typical global firm maintains a sales subsidiary to manage

the local marketing. Examples:

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Companystrategicposture Emerging High-growth Mature Services

Incremental Indirectexports

Indirect exports Direct exports Licensing/Alliance

Protected Joint venture Indirect exports Alliance/

Licensing

Licensing

Control Whollyowned

subsidiary

Acquisition/Alliance

Wholly ownedsubsidiary

Franchising/Alliance/Exporting

Product/Market Situation

Optimal Entry Mode Matrix

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Companystrategicposture Emerging High-growth Mature Services

Incremental Supervaluto Russia

North Americanfish to Japan

Rossignolskis to U.S.

Dialogue toEurope

Protected Pharmaceuticalsin China

Sun Energytechnology to

Europe

Coca-Colabottling;

Toyota-GM

tie-up

Disneylandin Japan

Control New FDIin India

Matsushita inU.S. TV market

IBMWorldwide;

autos in U.S.

Hilton,Sheraton;

McDonalds

Product/Market Situation

Illustrative Entry Strategies

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Trade barriers will typically force the firm to un-bundle its valuechain & engage in non-exporting modes of entry, such as

licensing or strategic alliances -

- or invest in a wholly owned manufacturing subsidiary.

Takeaway

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Licensing & strategic alliances may dilute firm specific

advantages through transfer of know-how, but the need forpartners with local knowledge and the need to reduce a

firms risk exposure offsets this.

Takeaway

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A global marketer needs good interpersonal skills to workeffectively with foreign partners, local subsidiary managers, &licensing/alliance partners who may be competitors in some

product markets.

Takeaway

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The optimal mode of entry is to find a way over entry barriers,then to make trade-offs between strategic posture and the

product/market situation.

Takeaway

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By establishing a sales subsidiary in the

market country, the firm can control thelocal marketing effort quite independentof which particular mode entry mode hasbeen chosen.

Controlling the local marketing effort:

Takeaway