1 Global Marketing Chapter 9 Global Market Entry Strategies: Licensing, Investment, and Strategic Alliances

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-2 Introduction Trade barriers are falling around the world Companies need to have a strategy to enter world markets Starbucks has used direct ownership, licensing, and franchising for shops and products In 2008, Starbucks had 12,000 cafes in 35 countries and sales of $10.8 billion. Its goal is to reach 40,000 units worldwide.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-3 Investment Cost of Marketing Entry Strategies

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-4 Which Strategy Should Be Used? It depends on: –Vision –Attitude toward risk –Available investment capital –How much control is desired

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-5 Licensing A contractual agreement whereby one company (the licensor) makes an asset available to another company (the licensee) in exchange for royalties, license fees, or some other form of compensation –Patent –Trade secret –Brand name –Product formulations

©2011 Pearson Education, Inc. publishing as Prentice Hall Licensing –Under a licensing agreement, one firm, known as the licensor, permits another to use its intellectual property in exchange for compensation designated as a royalty. –Advantages of licensing Capital investment or knowledge or marketing strength is not required. Royalty income provides additional return on research and development investments already incurred. Reduces the risk of R&D failures, the cost of designing around the licensor’s patents, or the fear of patent infringement litigation.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-7 Advantages to Licensing Provides additional profitability with little initial investment Provides method of circumventing tariffs, quotas, and other export barriers Attractive ROI Low costs to implement License agreements should have cross- technology agreements to inequities

©2011 Pearson Education, Inc. publishing as Prentice Hall Licensing –Advantages of licensing Ongoing licensing cooperation and support enables the licensee to benefit from new developments. Reduces the exposure to both government intervention and terrorism. Allows a firm to test a foreign market without major investment of capital or management time. Preempts a market for competition, especially if the licensor’s resources permit full-scale involvement only in selected markets. Increases protection of intellectual property rights.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-9 Disadvantages to Licensing Limited participation Returns may be lost Lack of control Licensee may become competitor Licensee may exploit company resources

©2011 Pearson Education, Inc. publishing as Prentice Hall Licensing –Disadvantages of licensing Licensor gets limited expertise. Licensor creates its own competitor. Allows multinational corporations (MNCs) to capitalize on older technology.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-11 Special Licensing Arrangements Contract manufacturing –Company provides technical specifications to a subcontractor or local manufacturer –Allows company to specialize in product design while contractors accept responsibility for manufacturing facilities

©2011 Pearson Education, Inc. publishing as Prentice Hall Franchising –Contract between a parent company-franchisor and a franchisee that allows the franchisee to operate a business developed by the franchisor in return for a fee and adherence to franchise-wide policies 9-12

©2011 Pearson Education, Inc. publishing as Prentice Hall Licensing Trademark licensing –Permits use of the names or logos of designers, literary characters, sports teams, and movie stars on merchandise such as clothing. –Fees can range between 7 and 12 percent of net sales for merchandising license agreements.

©2011 Pearson Education, Inc. publishing as Prentice Hall Franchising –Product/trade franchising emphasizes the product or commodity to be sold, while business format franchising focuses on ways of doing business. –Reasons for global franchising are market potential, financial gain, and saturated domestic markets.

©2011 Pearson Education, Inc. publishing as Prentice Hall Franchising Franchising concerns –The need for standardization. –Protection of the total business system. –Government intervention. –Selection and training.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-16 Worldwide Franchise Activity

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-17 Franchising Questions Will local consumers buy your product? How tough is the local competition? Does the government respect trademark and franchiser rights? Can your profits be easily repatriated? Can you buy all the supplies you need locally? Is commercial space available and are rents affordable? Are your local partners financially sound and do they understand the basics of franchising?

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-18 Investment Partial or full ownership of operations outside of home country –Foreign Direct Investment Forms –Joint ventures –Minority or majority equity stakes –Outright acquisition IKEA, with affordable furniture and housewares, spent $2 billion in Russia.

©2011 Pearson Education, Inc. publishing as Prentice Hall Foreign Direct Investment (FDI) Foreign direct investment - Investments to create or expand a long-term interest in an enterprise with some degree of control. Portfolio investment - The purchase of stocks and bonds internationally. Foreign direct investors often bring with them imports on an ongoing basis.

©2011 Pearson Education, Inc. publishing as Prentice Hall Foreign Direct Investment Reasons for FDI –Marketing factors Growth and profit motivations. Wider market access to maintain and increase sales. Circumvent barriers to trade. Local customers preference for domestic goods and services. Obtain low-cost resources and ensure their supply. –Derived demand - Results when businesses move abroad and encourage their suppliers to follow them, creating a chain or pattern of direct investment in a market.

©2011 Pearson Education, Inc. publishing as Prentice Hall Reasons for FDI –Government incentives Fiscal incentives - Specific tax measures designed to attract the foreign investor. Financial incentives - Special funding for land or buildings, loans and guarantees, wage subsidies. Non-financial incentives - Guaranteed government purchases; protection from competition through tariffs, import quotas, and local content requirements; and investments in infrastructure facilities. Foreign Direct Investment

©2011 Pearson Education, Inc. publishing as Prentice Hall Positive perspectives on foreign direct investors –Bring in capital, economic activity, and employment. –Transfer technology and managerial skills. –Encourage competition, market choice, and competitiveness. Foreign Direct Investment

©2011 Pearson Education, Inc. publishing as Prentice Hall Foreign Direct Investment Types of ownership - Full ownership –Result of ethnocentric considerations or one of the principles. –May be desirable, but is not necessary for success internationally. –A major concern is the “fairness” of profit repatriation, or transfer of profits, and the extent to which firms reinvest into their foreign operations. –Can be limited either through outright legal restrictions or through measures designed to make foreign ownership less attractive.

©2011 Pearson Education, Inc. publishing as Prentice Hall Negative perspectives on foreign direct investors –Drain resources from host countries. –Starve smaller capital markets. –Discourage local technology development. –Bring in outmoded technology. –Create new competition for local firms. Foreign Direct Investment

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-25 Direct Foreign Investment and the U.S. Top Target Countries for U.S. Investment 1.United Kingdom 2.Canada 3.The Netherlands 2000 cumulative total by U.S. companies = $1.2 trillion Top Foreign Countries Investing in the U.S. 1.United Kingdom 2.Japan 3.The Netherlands 2000 investment by foreign companies in U.S. = $1.2 trillion

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-26 Joint Ventures Entry strategy for a single target country in which the partners share ownership of a newly-created business entity Builds upon each partner’s strengths Examples: Budweiser and Kirin (Japan), GM and Toyota, GM and Russian government, Ericsson’s cell phones and Sony, Ford and Mazda, Chrysler and BMW

©2011 Pearson Education, Inc. publishing as Prentice Hall Joint ventures –Collaborations of two or more organizations for more than a transitory period. –Partners share assets, risks, and profits, though equality of partners is not necessary. –Reasons for joint ventures are governmental and commercial.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-28 Joint Ventures Advantages –Allows for risk sharing– financial and political –Provides opportunity to learn new environment –Provides opportunity to achieve synergy by combining strengths of partners –May be the only way to enter market given barriers to entry Disadvantages –Requires more investment than a licensing agreement –Must share rewards as well as risks –Requires strong coordination –Potential for conflict among partners –Partner may become a competitor

©2011 Pearson Education, Inc. publishing as Prentice Hall Joint Ventures Advantages of joint ventures –Pooling of resources. –Better relationships with local organizations. –The partner’s knowledge of the local market. –Minimize exposure to political risk. –Tap local capital markets. Disadvantages of joint ventures –Different levels of control are required. –Difficulty in maintaining the relationship. –Disagreements over business decisions. –Disagreements over profit accumulation and distribution (profit repatriation).

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-30 Investment via Direct Foreign Investment Start-up of new operations –Greenfield operations or –Greenfield investment Merger with an existing enterprise Acquisition of an existing enterprise Examples: Volkswagen, 70% stake in Skoda Motors, Czech Republic (equity), Honda, $550 million auto assembly plant in Indiana (new operations)

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-31 Global Strategic Partnerships Possible terms: –Collaborative agreements –Strategic alliances –Strategic international alliances –Global strategic partnerships The Star Alliance is a GSP made up of six airlines.

©2011 Pearson Education, Inc. publishing as Prentice Hall Strategic Alliances Types of ownership - Strategic alliances –Arrangement between two or more companies with a common business objective. –Can be formed, adjusted, and dissolved rapidly. –Formed for market development, spreading the cost and risk inherent in production, and blocking or co-opting competitors.

©2011 Pearson Education, Inc. publishing as Prentice Hall Strategic Alliances –Management contract Supplier brings together a package of skills that provides an integrated service to the client without incurring the risk and benefit of ownership. Provides organizational skills that are not available locally, expertise that is immediately available, and management assistance that would be difficult and costly to replicate locally. Lowers the risk of participating in an international venture and allows operational control.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-34 Success Factors of Alliances Mission: Successful GSPs create win-win situations, where participants pursue objectives on the basis of mutual need or advantage. Strategy: A company may establish separate GSPs with different partners; strategy must be thought out up front to avoid conflicts. Governance: Discussion and consensus must be the norms. Partners must be viewed as equals.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-35 Success Factors Culture: Personal chemistry is important, as is the successful development of a shared set of values. Organization: Innovative structures and designs may be needed to offset the complexity of multi-country management. Management: Potentially divisive issues must be identified in advance and clear, unitary lines of authority established that will result in commitment by all partners.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-36 The Nature of Global Strategic Partnerships

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-37 The Nature of Global Strategic Partnerships Participants remain independent following formation of the alliance Participants share benefits of alliance as well as control over performance of assigned tasks Participants make ongoing contributions in technology, products, and other key strategic areas

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-38 Five Attributes of True Global Strategic Partnerships Two or more companies develop a joint long- term strategy Relationship is reciprocal Partners’ vision and efforts are global Relationship is organized along horizontal lines (not vertical) When competing in markets not covered by alliance, participants retain national and ideological identities

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-39 Alliances with Asian Competitors Four common problem areas –Each partner had a different dream –Each must contribute to the alliance and each must depend on the other to a degree that justifies the alliance –Differences in management philosophy, expectations, and approaches –No corporate memory

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-40 Cooperative Strategies in Japan: Keiretsu Inter-business alliance or enterprise groups in which business families join together to fight for market share Often cemented by bank ownership of large blocks of stock and by cross-ownership of stock between a company and its buyers and non-financial suppliers Keiretsu executives can legally sit on each other’s boards, share information, and coordinate prices

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-41 Cooperative Strategies in South Korea: Chaebol Composed of dozens of companies, centered around a bank or holding company, and dominated by a founding family –Samsung –LG –Hyundai –Daewoo

©2011 Pearson Education, Inc. publishing as Prentice Hall st Century Cooperative Strategies: Targeting the Digital Future Alliances between companies in several industries that are undergoing transformation and convergence –Computers –Communications –Consumer electronics –Entertainment

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-43 Beyond Strategic Alliances Next stage of evolution of the strategic alliance –Super-alliance –Virtual corporation

©2011 Pearson Education, Inc. publishing as Prentice Hall Foreign Direct Investment Types of ownership - Government consortia –Takes place at the industry level; characterized by government support or subsidization. –A reflection of escalating cost and a governmental goal of developing or maintaining global leadership in a particular sector. –Research consortia - Pool their resources for research into technologies.

©2011 Pearson Education, Inc. publishing as Prentice Hall 9-45 Market Expansion Strategies Companies must decide to expand by: –Seeking new markets in existing countries –Seeking new country markets for already identified and served market segments