International Business by Daniels and Radebaugh Chapter 14

International Business by Daniels and Radebaugh Chapter 14 Collaborative Strategies 1

Objectives To explain the major motives that guide managers when choosing a collaborative arrangement for IB To define the major types of collaborative arrangements To describe what companies should consider when entering into arrangements with other companies To discuss what collaborative arrangements succeed or fail To discuss how companies can manage diverse collaborative arrangements 2

Introduction Companies must choose an international operating mode, many of which are collaborative • Collaboration frequently lessens control • MNEs with fully global orientation use most of the operational modes available Strategic alliance—collaboration is of strategic importance to one or more of the companies Collaborations—provide different opportunities and problems than do trade or wholly owned direct investment 3

Collaborative Arrangements as IB Operating Modes EXTERNAL INFLUENCES OPERATIONS OBJECTIVES PHYSICAL AND SOCIETAL FACTORS STRATEGY COMPETITIVE ENVIRONMENT MEANS Functions Modes • Self-handling • Collaborative arrangements Overlaying Alternatives 4

Alternative Operating Modes for Foreign Market Expansion PRODUCTION OWNERSHIP Equity Arrangements PRODUCTION LOCATION Home country a. Exporting Foreign country a. Wholly owned operations b. Partially owned with remainder widely held c. Joint ventures d. Equity alliances Non-equity arrangements a. Licensing b. Franchising c. Management contracts d. Turnkey operations Collaborative arrangements shaded in blue 5

Relationship of Strategic Alliances to Companies’ International Objectives OBJECTIVES OF INTERNATIONAL BUSINESS • Sales expansion • Resource acquisition • Diversification • Competitive risk minimization MOTIVES FOR COLLABORATION General • Spread and reduce costs • Specialize in competencies • Avoid competition • Secure vertical and horizontal links • Gain market knowledge MOTIVES FOR COLLABORATION Specific to international business • Gain location-specific assets • Overcome legal constraints • Diversify geographically • Minimize exposure in risky environments 6

Motives for Collaborative Arrangements Some of the motives for collaboration for domestic operations are both: • The same for international operations • Different for international operations Each participating company has its own primary objective for international operations and its own motive for collaboration General Motives for Collaboration Spread and reduce costs—sometimes it is cheaper to get another company to handle work, especially: • At small volume can spread fixed costs • When the other company has excess capacity – company handling production or sales may lower its average costs • Cooperative ventures may increase operating costs 7

General Motives for Collaboration (cont. ) Specialize in competencies • Resource-based view of the firm—holds that each company has a unique combination of competencies • Large, diversified companies realign to focus on their major strengths – licensing can yield a return on a product that does not fit the company’s strategic priority based on its best competencies Avoid competition—when markets are too small, companies band together so as not to compete • Companies may combine resources to combat larger competitors • Companies may collude to raise everyone’s profits Secure vertical links—companies may lack competence or resources to become fully vertically integrated Secure horizontal links—may provide finished products or components 8

General Motives for Collaboration (cont. ) Gain market knowledge—learn about a partner’s technology, operating methods, or home markets International Motives for Collaboration Gain location-specific assets—collaboration with local firm used to deal with barriers encountered when operating abroad • Foreign companies may gain operational assets when teaming with local companies Overcome legal constraints—country may require foreign companies to share ownership • Collaboration a means of protecting assets – hinders nonassociated companies from pirating the asset Diversify geographically—can smooth its sales and earnings because business cycles differ Minimize exposure in risky environments—reduce base of assets located abroad 9

Types of Collaborative Arrangements Forms of foreign operations differ in the: • Amount of resources committed to the operation • Proportion of resources located abroad Type of collaborative arrangement selected may necessitate trade-offs among objectives Companies with difficult-to-duplicate resource have a wider choice of operating form Some Considerations in Collaborative Arrangements Desire for control over foreign operations • The greater reliance on collaboration, the greater the loss of control over decision making • External arrangements imply the sharing of revenues Prior expansion of the company abroad—may reduce some advantages of more foreign expansion 10

Licensing Licenser grants rights to intangible property to licensee to use in a specified geographic area for a specified period • Licensee ordinarily pays a royalty to licenser • Intangible property includes patents, copyrights, trademarks, franchises, and methods or systems Licensing often has an economic motive—the desire for faster start-up, lower costs, or access to additional resources Cross-licensing—exchange of technology among companies • Reduces competition on products and in markets Payment—varies in amount and type of payment • Several factors determine the payment amount • Bargaining used to establish the price Most licenses granted to companies in which licensee has an ownership stake 11

Determinants of Compensation for International Licensing of Technology AGREEMENT-SPECIFIC FACTORS Affecting the Technology Value • Market restrictions (including exports) • Exclusivity of the license • Limits on production size • Product quality requirements • Grantback provisions • Tie-in provisions • Duration of the agreement • Age of the technology • Duration of the patent • Other constraints on the use of technology ENVIRONMENT-SPECIFIC FACTORS Affecting the Technology Value • Government (of both licensor’s and licensee’s countries) regulation of licensing • Level of competition among alternative suppliers of similar technology • Political and business risks in the licensee’s country • Product and industry norms • Technology-absorbing capacity of the licensee’s country 12

Determinants of Compensation for International Licensing of Technology LICENSEE’S BID PRICE LICENSOR’S OFFER PRICE Upper limit: Smaller of 1. Estimate of licensee’s additional profits from use of technology or 2. Estimate of licensee’s cost of obtaining same or similar technology from alternative sources Bargaining range Lower limit: Estimate of direct transfer costs, opportunity costs, and R&D costs Zero price Upper limit: Smallest of 1. Estimate of additional profits from use of technology or 2. Estimate of cost of developing same or similar technology or 3. Estimate of costs of obtaining same or similar technology from best alternative source Lower limit: Estimate of licensor’s direct transfer costs 13

Franchising Specialized form of licensing—franchisor • Sells an independent franchisee the use of intangible property • Operationally assists the business Franchisor and franchisee—act like a vertically integrated company Organization of franchising • Franchisor enters foreign market by setting up a master franchise that has the authority to open outlets or develop subfranchises • Franchisor may enter market by dealing directly with individual franchisees – easier for known franchisors to attract investors 14

Franchising (cont. ) Operational modifications • Problems faced by franchisor include securing good locations, finding suppliers, and gaining operating permission from the government • Difficult to transfer factors that affect success – the more standardization, the less acceptance in the foreign country – the more adjustment to the foreign country, the less the franchisor is needed Management Contracts Means by which a company may transfer managerial talent • Management personnel assists foreign company • Company gains income with little capital outlay Host country gets assistance without needing direct investment 15

Turnkey Operations Company contracts another to build complete, ready-to-operate facilities • Involve industrial-equipment manufacturers and construction companies • Customer is often a governmental agency • Usually involve very large, expensive contracts Securing contracts entails—public relations, price, export financing, managerial and technological quality, experience, and reputation Joint Ventures More than one organization owns a company • Consortium—more than two organizations participate Management problems increase with more owners • A partner’s control of operations decreases Appeal to companies new at foreign operations 16

Control Complexity Related to Collaborative Strategy Many NUMBER OF PARTNERS Consortium Management contract Turnkey Tight control Medium control Franchise Joint venture License Equity alliance Little control Sales contract Wholly owned None OWNERSHIP CONSORTIUM Equity (more ownership) Sharing Nonequity (less ownership) 17

Equity Alliances Collaborative arrangement in which at least one company takes an ownership position in the other(s) • Each party may take an ownership position in the other partners’ businesses • Helps solidify collaboration Problems of Collaborative Arrangements Many arrangements develop problems that lead partners to renegotiate their relationship • In spite of renegotiated relationships, many agreements break down or are not renewed Collaboration’s importance to partners • One partner may devote more managerial attention to the collaboration – due to differences in size of the partners Differing objectives—partners’ objectives may evolve differently over time 18

Problems of Collaborative Arrangements (cont. ) Control problems • Company loses some control over assets shared with others in collaborative arrangement – may lose control of the extent or quality of use of assets • Even though control is ceded to one of the partners, both may be held responsible for problems • Not clear who controls employees in joint ventures • Without control residing with one of the partners, joint operation may lack direction Partners’ contributions and appropriations • Partners’ capabilities to contribute may change – weak link may cause drag on the relationship • Suspicions may arise about what other partner(s) is taking from the operation 19

Problems of Collaborative Arrangements (cont. ) Differences in culture • Companies differ by nationality in how they evaluate the success of their operations – differences can mean that one partner is satisfied while the other is not • Some companies prefer not to collaborate with companies of very different cultures – joint ventures from culturally distant countries survive at least as well as those between partners from similar cultures • Differences in corporate cultures may also create problems within joint ventures – compatibility of corporate cultures is important in cementing relationships 20

Managing Foreign Arrangements As the arrangement evolves: • Partners will have to reassess certain decisions • Environment likely to change • Must reexamine the fit between collaboration and strategy Dynamics of collaborative arrangements • Companies typically move from external to internal handling of foreign operations – as commitment deepens, cost of switching from one mode of operation to another may be high • Collaboration with local partner provides the company with opportunities to learn about culture and more confidently deepen its commitment to foreign operation • Tensions may develop internally as a company’s international operations change and grow 21

Managing Foreign Arrangements (cont. ) Finding compatible partners—company can: • Seek out a partner foreign operations • Respond to proposals from other companies • Must evaluate compatibility – proven ability to handle similar types of collaboration Negotiating process • Some technology transfer considerations are unique to collaborative arrangements – provisions to not divulge technical information – retention of a key component so that partner will not obtain complete information • Secrecy surrounding the financial terms of collaborative arrangements 22

Managing Foreign Arrangements (cont. ) Contractual provisions—guard against consequences of loss of control of assets or intangible property • Contract should spell out: – terminating the agreement – methods of testing quality – geographical limitations on the asset’s use – management responsibilities of each partner – future commitments of each partner – partner’s disposal of outcomes of collaborative arrangement Performance assessment—when collaborating with another company it is necessary to: • Establish mutual goals • Spell out expectations in the contract • Continue to monitor performance • Determine whether to take over the operations 23