International Business Class 5 STRATEGIC ALLIANCES

Previous class question The advantages frequently associated with entering a market early are commonly known as.... A.Primary advantages B.First-mover advantages C.Initial-entrant premiums D.Proactive-mover benefits

Previous class question Pioneering costs are…. A.The costs of establishing manufacturing operations in the host country. B.The fixed costs of developing new products or processes. C.Costs that the firm has to bear that a later entrant can avoid. D.The switching costs involved in moving from one market to another

Previous class question A strategic commitment.... A.Has a short-term impact alone B.Is difficult to reverse C.Cannot change the competitive playing field D.Does not have any influence on the nature of competition in a market

Previous class question Which of the following is a disadvantage of licensing? A.It does not help firms that lack capital to develop operations overseas B.It does not give a firm the tight control over strategy that is required for realising experience curve and location economies C.It cannot be used when a firm possesses some intangible property that might have business applications D.The firm has to bear the development costs and risks associated with opening a foreign market.

Selecting a Foreign Market Entry Mode What entry mode do you think would be most appropriate for the following two scenarios: Scenario One: Entry into an unfamiliar country where foreign owned enterprises are discriminated against in the award of government tenders. Scenario Two: Entry into a foreign market, of which a firm has an adequate knowledge, and where the firm’s competitive advantage is rooted in its technological know-how.

Core Competence and Entry Mode Technological Know-How: - firm should avoid utilising licensing and joint venture entry modes to enter foreign markets. This will minimise the firm’s risk of losing control over its technology. A wholly owned subsidiary would be more appropriate in this instance. Management Know-How: - The firm’s brand name is its valuable asset which is usually protected by international trademark laws. Subsidiaries (whether wholly owned or through joint ventures) and franchises are therefore appropriate entry modes in such instances

Greenfield Venture or Acquisition? Greenfield Ventures? Recent research shows that the majority of FDI inflows take the form of a merger or acquisition The choice of entry mode would depend on the particular context of the foreign market as well as the firm’s circumstances

+_ Ventures  the opportunity to establish the type of subsidiary with:  single organisational culture is established.  operating systems established.  Slow to establish  Risky: degree of uncertainty around future revenue and profitability.  Possibility of being pre-empted by global competitors that enter the market quickly through acquisitions Acquisitions  Quick to execute  Provides a means to pre-empt competitors.  Less risky than a venture  Often produce disappointing results.

Acquisitions  Acquisitions often fail due to:  Inadequate pre-acquisition screening  Acquiring firms overpaying for assets of acquired firm  Clash of cultures between the acquiring firm and acquired firm  Integrating the operations of the two firms often takes much longer than anticipated

Global Strategic Alliances “cross-border partnerships between two or more firms from different countries with an attempt to pursue mutual interests through sharing their resources and capabilities” Forms: Formal Equity Joint Ventures - the creation of a separate legal and economic entity by two or more parent firms from different countries Short-Term Contractual Agreements - cooperative joint ventures where profits and responsibilities are assigned to each party according to contractual agreement. Most cooperative joint ventures involve joint activities without the creation of a separate legal entity.

Global Strategic Alliances AdvantagesDisadvantages  May assist entry into a foreign market.  Fixed costs and the associated risks are shared with the strategic partner.  Bring together complementary assets and competencies which neither firm could easily develop on its own.  Could facilitate the development of technological standards for the industry, which would benefit the firm  Provide competitors with a “low cost route to new technology and markets”  Alliances may be risky: a firm could potentially receive less than it gives away.  Alliances may result in benefit to one strategic partner and damage to the other  Loss of autonomy and control may lead to inter-partner conflicts

Factors Impacting the Success of a Strategic Alliance Management of the Alliance Structure Partner Selection

Partner Selection Partner should - provide the complementary skills, competencies, or capabilities that will assist the firm in accomplishing its strategic objectives.” The five criteria which need to be considered in strategic partner selection are: –Compatibility of goals –Complementarities of resources –Cooperative culture –Commitment – Capability

Alliance Structure should ensure that the firm’s risks of giving too much away to the partner are reduced to an acceptable level Alliances may be designed in such a way that: –It is almost impossible to transfer technology which is not meant to be transferred; –The risk of opportunism by the partner is reduced through contractual safeguards being included in the alliance agreement; –All strategic partners may exchange skills and technologies, thereby ensuring gains for all parties.

Management of the Alliance Effective management of an alliance requires: –The management of inter-partner learning; –The exercise of management control; –The heightening of cooperation through inter- personal relationships and the effective management of conflict; –Facilitating the alliance dissolution once the strategic objectives of the alliance have been achieved

Home Assignment Please find and analyze the examples of strategic alliances