CH14: Participation Strategies

I. General Considerations 1. Market Assessment It starts by formulating targets for individual markets and works backward to decide the location of activity and investment to achieve those targets.

I. General Considerations The selection of target markets requires prediction of demand and competition in the different markets. With different rates and patterns of growth in each market, any simple extrapolation of the current situation would be inappropriate.

I. General Considerations 2. Competitive Assessment Whatever objectives a firm adopts, their achievement will be relative to the achievement of other firms.

I. General Considerations 3. Types of Risk 1. Macro-economic risks: Wars, national disasters, exogenous shifts in market forces 2. Political risks: Taxation, anti-trust legislation 3. Competitive risks: Competitors’ behavior 4. Resources risks: Acquisition of the resource and intermediate inputs.

I. General Considerations 4. MNE’s Responses 1. Reducing its exposure to risk-bearing activities. 2. Insurance 3. Hedging devices.

II. Entry Strategies The choice of entry modes (ownership) by a firm of multiple value-added activities will be primarily decided on economic and strategic ground. It will basically represent a tradeoff between its desire to control and manage these activities, and that of minimizing resource commitment to achieve its objectives.

1. External Factors 1. Host country policies and controls 2. Size and attractiveness of markets 3. Competitive condition in the foreign market 4. Availability of local supply sources in the country

2. Internal Factors 1. Characteristics of technology and products 2. Minimum economic size 3. Availability of capital and managerial resources 4. Company’s willingness to assume risk 5. Long-term corporate goals

III. Entry Modes 1. Exporting 1) Direct Exporting 2) Indirect Exporting 3) Foreign Sales Subsidiary 4) Independent Distributor

IV. Determinants for Entry Mode Decision 1. Transaction Cost Approach: “What ownership structure does the firm want?” 2. Bargaining Power Approach: “What ownership structure can the firm get?” 3. Integrating approach

V. Strategic Alliance It exists whenever two or more independent organizations cooperate in the development, manufacturing, or sale of products or services. Strategic alliances are alliances deliberately designed to advance the sustainable competitive advantage of the participating firms.

V. Strategic Alliance 1. Non-equity Alliance: A cooperation b/w firm is managed directly through contracts, without cross-equity holdings or an independent firm being created. 1) Licensing 2) Franchising 3) Management Contracts 4) Turnkey Operations

V. Strategic Alliance 2. Equity Alliance: Cooperative contracts are supplemented by equity investments by one partner in the other partner. 3. Joint venture : JVs arise whenever two or more sponsors bring given assets to an independent legal entity and are paid for some or all of their contribution from the profits earned by the entity, or when a firm acquires partial ownership of another firm.

VI. Sources of Inter-firm Synergies 1) Exploiting economies of scale 2) Learning from competitors 3) Managing risk and sharing costs 4) Facilitating Tacit Collusion 5) Low-Cost Entry into New Markets 6) Low-Cost Entry into New Industries and New Industry Segments 7) Managing Uncertainty

VII. Major Factors for the Growing Collaborative Arrangements 1. Technology Innovation 2. Conversions of Technologies 3. Globalization

VIII.Strategies to deal with SBAs 1.Avoiding Self-Deception 2.Assessing Risks 3.Managing the Risks of an Evolving Alliance

Avoiding Self-Deception 1 If you find yourself uttering one of the following statements, beware! Your alliance may lead your company toward an unplanned divesture. 1.We’re better off partnering with X than competing against it in our core business

Avoiding Self-Deception 2 2.By joining forces with another second-tier company, we can create a strong company while fixing our problem together 3.We need a strong partner to improve our skills

Avoiding Self-Deception 3 4.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 5.We can use an alliance to raise capital without giving up management control

Assessing Risks 1 1.Initial Strengths and Weaknesses 1) What specific business strengths such as products, technologies, market access, does each partner have? 2) Which of those elements is most important for the venture’s long-term success in the marketplace? 3) Which partner controls the customers that will be served by the venture? 4) Which company will fill more of the venture’s top management positions?

Assessing Risks 2 2. How Strengths Change over Time Bargaining power is strongly affected by the balance of learning and teaching-and that structures the alliance in such as way that it can access and internalize its partner’s capabilities – is likely to become less dependent on its partner as the alliance evolves.

Assessing Risks 3 3. Potential for Competitive Conflict When direct competitors whose product and geographic positions overlap try to forge an alliance, conflict is inevitable. To solve the conflicts and capture the benefits of scale in such cases, the partners usually move toward complete integration by a full merger or an acquisition.

Managing the Risks 1 1.Collisions Between Competitors: These alliances involve the core businesses of two strong companies that are direct competitors. Because of competitive tensions, they tend to be short-lived and fail to achieve their strategic and financial goals. Most collisions between competitors end in dissolution, acquisition by one of the partners, or a merger.

Managing the Risks 2 2.Alliance of the Weak: Two or more weak companies join forces, hoping that together they will improve their positions. But the weak usually grow weaker and the alliance fails, followed quickly by dissolution or acquisition by a third party.

Managing the Risks 3 3.Disguised Sales: In these partnerships, a weak company combines with a strong company, often one that is or will become directly competitive. The weaker player remains weak and is acquired by the stronger player. Disguised sales tend to be short-lived, rarely lasting more than 5 years.

Managing the Risks 4 4.Bootstrap Alliances: The weak company attempts to use the alliance to improve its capabilities. Usually it does not work. In the few cases where this strategy is successful, the partnership develops in an alliance of equals or the partners separate after the weak partner has achieved the ability to compete its own.

Managing the Risks 5 5.Evolutions to Sale: These alliances start with two strong, and compatible partners, but competitive tensions develop or bargaining power shifts, and one of the partners ultimately sells out to the other. However, these alliances often succeed in meeting the initial objectives of the partners and may exceed the 7-year average life span for alliances.

Managing the Risks 6 6.Alliances of Complementary Equals: This type of alliance involves two strong and complementary partners that remain strong during the course of the alliance. These mutually beneficial relationships are likely to last much longer than 7 years.