CHAPTER NINE: Global Market Entry Strategies: Licensing,

Investment, and Strategic Alliances

Overview

The saga of AT&T and BT in the global marketplace illustrates the fact that every firm faces
a broad range of strategy alternatives. Executives may fail to appreciate the alternatives open
to them and employ only one strategy. They fail to consider the strategy alternatives open
to their competitors and set themselves up as victims. AT&T’s existence was not in question,
but there were signs that the company was adrift. It took a management change plus the
arrival of an attractive alliance partner to set the stage. The AT&T-BT alliance is intended to
get the company back on course.

Some companies make the decision to go global for the first time; others seek to expand their
share of world markets. Companies in either situation face the same basic sourcing issues.
They must also address issues of marketing and value chain management before deciding to
enter or expand their share of global markets by means of licensing or some form of direct
investment. The entry strategy executives choose depends on their vision, attitude toward
risk, how much investment capital is available, and how much control is sought.

Objectives

· To examine the wide range of market entry strategies, considering advantages and
disadvantages.

· To see that alternatives can be ranked on a continuum representing increased levels

of investment, commitment, and risk.

· To examine licensing and two specialized forms of licensing, contract

manufacturing, and franchising.

· To examine foreign direct investment in the form of joint ventures, which offer
two or more companies the opportunity to share risk and combine value chain strengths.

· To examine foreign direct investment in the form of greenfield investment, a minority

or majority equity stake in a foreign business, or ownership through merger or
acquisition.

· To consider global strategic partnerships (GSPs) ambitious, reciprocal, cross-border

alliances; two special forms of cooperation found in Asia include Japan’s keiretsu and
South Korea’s chaebol.

· To examine market expansion strategies represented in matrix form: country and

market concentration, country concentration and market diversification,

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 country diversification and market concentration, and country and market
diversification.
· To understand that an expansion strategy reflects a company’s stage of development.

Lecture/Outline
P.P. 1

The market entry strategy executives choose depends on their vision, attitude
P.P. 2
toward risk, how much investment capital is available, and how much control is sought.
P.P. 3

Licensing
P.P. 4

Licensing is as a contractual arrangement 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.

The licensed asset may be a patent, trade secret, brand name and product formulation, or
company name.

Licensing is a global market entry and expansion strategy with considerable appeal.
P.P. 5

A company with advanced technology, expertise, or a strong brand image can use
licensing to increase profitability with little initial investment.

Licensing can circumvent tariffs, quotas, or similar export barriers.

Licensing can offer an attractive return on investment; the only cost is signing the
agreement and policing its implementation (e.g., Sanofi SA, a French
pharmaceutical company, pursues licensing to help defray research costs).

Trademarks are the basis of licensing (e.g., Coca-Cola and Disney license trademarked
names to toy producers).

Licensing has disadvantages and opportunity costs because it is a limited form of

P.P. 6
participation.

Licensing technology risks a financial loss because the licensor lacks control over the
licensee’s marketing program.

The agreement may be short lived if the licensee develops its own expertise.

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Licensees may become competitors or industry leaders (e.g., glass industry leader
Pilkington saw its position erode as competitors achieved better efficiency and lower
costs).

The failure to license can lead to dire consequences (e.g., Apple’s failure to license its
technology in the pre-Windows era arguably cost the company over $300 billion).

Licensing agreements should provide for a cross-technology exchange between all

parties.

The licensing strategy must ensure ongoing competitive advantages such as export
market opportunities, low-risk manufacturing relationships, and diffusion of new
products.

Discussion Question #1: What are the advantages and disadvantages of using licensing as a
market entry tool? Give examples of companies from different countries that use licensing as
a global marketing strategy.

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Special Licensing Arrangements

P.P. 7

Contract manufacturing provides technical specifications to a subcontractor or local

manufacturer.

The licensing firm can specialize in product design and marketing, while contractors accept
responsibility for manufacturing facilities.

Advantages include limited commitment of financial and managerial resources and

quick entry into target countries.

A disadvantage is that companies attract public criticism due to low wages and inhumane
working conditions.

Franchising is a licensing strategy. A franchise is a contract between a 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 and practices.

Franchising appeals to local entrepreneurs anxious to apply Western-style marketing

techniques.

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There are more than 450 U.S. franchisors with 40,000 global franchises (e.g., I Can’t
Believe It’s Yogurt has hundreds of outlets in dozens of countries).

Franchising is a cornerstone of global growth in the fast-food industry (e.g., McDonald’s

global expansion is built on franchising).

Discussion Question #2: The president of XYZ Manufacturing Company of Buffalo,

New York, comes to you with a license offer from a company in Osaka. In return for
sharing the company’s patents and know-how, the Japanese company will pay a license
fee of 5 percent of the ex-factory price of all products sold based on the U.S. company’s
license. The president wants your advice. What would you tell him?

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Investment
P.P. 8

The desire for partial or full ownership outside the home country drives the decision to
invest.

Foreign direct investment (FDI) reflect investment flows out of the home country as
companies invest in or acquire plants, equipment, or other assets.

Foreign direct investment allows companies to produce, sell, and compete locally in key
markets (e.g., United Parcel Service (UPS) plans to invest more than $1 billion in
Europe).

At the end of 2000, foreign investment by U.S. companies totaled $1.2 trillion; the top
three target countries were the United Kingdom, Canada, and the Netherlands.

Investment in the U.S. by foreign companies also totaled $1.2 trillion; the United
Kingdom, Japan, and the Netherlands were the top three investors.

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AT&T’s Global Strategy: The Rest of the Story

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 The enthusiasm that followed the announcement of the alliance between the two
telephone titans was tempered by the realization that similar alliances had been
disappointing. Industry observers believed the AT&T-BT linkup made sense. The new
alliance gave both companies “a single vehicle to provide true end-to-end service for
their customers.” From the customer’s point of view, that meant buying “seamless,”
reliable service from a single corporate entity.

Q: What advantages and disadvantages did AT&T reap from the alliance?

A: The upstart companies had built state-of-the-art fiber optic networks, which were
faster and more efficient than the circuit switching used by AT&T and BT. By joining
forces, the companies could reap economies of scale. As the partners prepared for their
new company, AT&T announced that WorldPartners would be dismantled and indicated
it would withdraw from Unisource by July 2000. Communication, lengthy negotiations,
and high start-up costs among partners soured the partnership and became disadvantages.

Foreign investments may be minority or majority shares in joint ventures, equity stakes
in another company, or a combination (e.g., UPS has made more than 16 acquisitions in
Europe and expanded its transportation hubs).

Joint Ventures P.P.

9

A joint venture is an entry strategy for a single target country in which the partners share
ownership of a newly-created business entity.

This strategy is attractive for several reasons:

P.P. 10

· First is the sharing of risk. A company can limit its financial risk and exposure to
political uncertainty.
· Second, a company can learn about a new market environment. If it becomes an insider,
it may increase the level of commitment.
· Third, joint ventures allow partners to achieve synergy by combining different value
chain strengths. One company with in-depth knowledge of a local market might find
a foreign partner possessing well-known brands.
· Finally, a joint venture may be the only way to enter a country if governments favor
local companies, and impose high tariffs or foreign control (e.g., companies like
Anheuser-Busch faced barriers in entering the Japanese market).

Joint venture investment in the big emerging markets (BEMs) is growing rapidly (e.g.,
Procter
& Gamble has several joint ventures in China).

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Russia represents a huge, barely tapped market and joint ventures are increasing (e.g.,
GM formed a joint venture with the Russian government to assemble sport utility
vehicles).

A disadvantage of a joint venture is that partners must share risks as well as rewards.

Another disadvantage is that a company incurs significant costs associated with control
and coordination issues.

There is the potential for conflict between partners, often due to cultural differences (e.g.,
the failed $130 million joint venture between Corning Glass and Vitro, Mexico’s largest
industrial manufacturer).

Conflict can arise when a joint venture is a source of supply for third-country markets.

A dynamic joint venture partner can evolve into a stronger competitor (e.g., Daewoo
terminated its joint venture with GM because the agreement prevented the export of cars
with the Daewoo name).

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· Investment via Ownership or Equity Stake P.P. 11

The most extensive form of participation is majority or 100 percent ownership, achieved
by start-up of new operations, known as greenfield operations or greenfield investments,
or by merger or acquisition (M&A) of an existing enterprise.

M&A deals worth nearly $3 trillion were made in 2000; one third of these were cross-border
transactions.

M&A activity in Europe and Latin America grew at a faster rate than in the United
States.

Ownership requires the greatest commitment of capital and managerial effort and offers
the fullest means of participating in a market.

Companies move from licensing or joint ventures to ownership to achieve faster

expansion
in a market, greater control, or higher profits.

Government restrictions may prevent foreign majority ownership, leaving the investing
company with a minority stake (e.g., the Russian government restricts foreign ownership
to
49 percent).

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An investing company may start with a minority stake and then increase its share (e.g.,
Volkswagen started with a 31 percent share in the Czech auto industry and then increased
to
70 percent).

Large-scale direct expansion with new facilities can be expensive and require managerial
time and energy; however, political or other environmental factors may dictate this
approach.

Acquisition is an instantaneous—and even less expensive—approach to market entry

or expansion.

Full ownership avoids communication issues and conflict, whereas acquisitions must
integrate the acquired company and coordinate activities.

The driving force behind acquisitions is the realization that globalization cannot be
undertaken independently.

Several advantages of joint ventures also apply to ownership, including access to

P.P. 12
markets and avoidance of tariff or quota barriers.

Ownership permits technology transfer and access to manufacturing techniques (e.g.,

Stanley Works, a tool maker, acquired companies such as a Taiwanese socket wrench
manufacturer).

Global Marketing in Action: Ford Bets Billions on Jaguar

In 1989, the Ford Motor Company acquired Jaguar for $2.6 billion. The chairman of Ford
of Europe said the acquisition fulfilled “a longtime strategic objective of entering the
luxury car market in a significant way.” Ford lacked a high-end luxury model for both the
U.S. and European markets, and the company was betting it could leverage an exclusive
nameplate by launching a new, less expensive line of Jaguars. The challenge was to
execute this strategy without diminishing Jaguar’s reputation. As an auto industry expert
noted, the Ford name is synonymous with “bread and butter” cars.

Q: What challenges did Ford face in this acquisition?

A: In 1988, Jaguar sold fewer than 50,000 cars worldwide. Ford set a target of 150,000
cars by the end of the 1990s. The Jaguar acquisition coincided with the global recession,
and a 10 percent luxury tax in the U.S. scared off potential buyers. Despite Jaguar’s

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image, the cars were also legendary for their unreliability. Because Jaguar was one of the
worst manufacturing operations, Ford invested heavily to update and upgrade Jaguar’s
plant facilities and improve productivity. By 2000, Jaguar sold 90,000 cars worldwide. In
2001, the long-awaited “baby Jaguar,” the X-type, was launched.

The alternatives —licensing, joint ventures, minority or majority equity stake, and
ownership—are points along a continuum of strategies for global market entry and
expansion.

A global strategy may call for a combination of strategies (e.g., Avon uses acquisition
and joint ventures to enter developing markets).

Sometimes competitors within a given industry pursue different strategies.

Discussion Question #3: What is foreign direct investment (FDI)? What forms can FDI take?

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Global Strategic Partnerships

Changes in the political, economic, sociocultural, and technological environments have

changed the importance of entry strategies, and cross-border alliances are assuming new
configurations.

Environmental trends may render traditional competitive strategies obsolete; firms face
intense competition, turbulence, dynamism, and unpredictability.

Today’s firm must be equipped to respond to mounting economic and political pressures.

The firm of tomorrow must develop a flexible organizational capability, innovate

continuously, and revise its strategy to “entrepreneurial globalization.”

Managers will have to acquire new skills for global strategic partnerships.

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The Nature of Global Strategic Partnerships

P.P. 13

The phrases collaborative agreements, strategic alliances, strategic international

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alliances, and global strategic partnerships (GSPs) refer to linkages between
companies
to pursue a common goal.

Strategic alliances exhibit three characteristics:

P.P. 14
· Participants remain independent subsequent to the formation of the alliances.
· Participants share the benefits of the alliance as well as control over the
performance of assigned tasks.
· Participants make ongoing contributions in technology, products, and other key
strategic areas.

Globalization and the Internet require inter-corporate configurations; 1996 saw 5,200
new strategic alliances form and almost double that amount by 2000.

A partnership is a quick and cheap way to develop a global strategy.

GSPs have some disadvantages: partners share control over tasks, which creates P.P.
15
management challenges.

There are potential risks associated with strengthening a competitor from another country.

Reasons for forming GSPs include: P.P.

16

· Enables firms to share high costs for a project (e.g., Boeing’s partnership with a Japanese
consortium to develop a new jet)
· Accommodates a lack of skills and resources within a company by forming an alliance
with a company with those resources.
· Provides access to national and regional markets
· Provides learning opportunities

A global strategic partnership has five attributes: P.P.

17

· Two or more companies develop a 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 the alliance, participants retain
national and ideological identities

Discussion Question #4: Do you agree with Ford’s decision to acquire Jaguar? What was more
valuable to Ford—the physical assets or the name?

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Success Factors
P.P. 18
Six factors have an impact on the success of GSPs: mission, strategy, governance,
culture, organization, and management.

· Mission. Successful GSPs create win-win situations

· Strategy. Must be thought out up front to avoid conflicts.
· Governance. Discussion and consensus must be the norms.
· Culture. Personal chemistry and shared values are important.
· Organization. Innovative structures and designs must offset complexity.
· Management. Divisive issues must be identified and lines of authority established.

Successful collaborators follow four principles:

P.P. 19
· While partners in some areas, partners are still competitors in other areas.
· Harmony is not the most important measure of success.
· Everyone must understand where cooperation ends and competitive compromise
begins.
· Learning from each other is critically important.

The challenge is to share skills while preventing a wholesale transfer of core skills.

Discussion Question #5: What is meant by the phrase global strategic partnership? In
what ways does this form of market entry strategy differ from more traditional forms
such as joint ventures?

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· Alliances with Asian Competitors

Western companies may be at a disadvantage in GSPs with an Asian competitor, especially if
the competitor’s manufacturing skills are the attractive quality.

Non-Asian managers must think of themselves as students, not teachers, and be less eager
to show off proprietary lab and engineering successes.

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 To limit transparency, companies establish a “collaboration section” to serve as a
gatekeeper through which access must be channeled.

A study by McKinsey and Co. identified four common problem areas:

· “Different dreams”
· The balance between partners
· Different philosophies, expectations, and approaches
· Short-term goals limit the number of people in the joint venture

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· CFM International, GE, and Snecma: A Success Story

A partnership between GE’s jet engine division and Snecma, a government-owned
French aerospace company, is a successful GSP.

GE was motivated by the desire to gain access to the European market, but development
costs were too high for GE.

GE focused on system design and high-tech work, and the French handled fans, boosters,
and
other components.

The alliance got off to a strong start because of the personal chemistry between two top
executives.

The partnership thrives despite each side’s differing views regarding governance,
management, and organization.

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· AT&T and Olivetti: A Failure

AT&T and Italy’s Olivetti’s collective mission was to capture a major share of the global
market for information processing and communications.

Olivetti had a strong presence in the European market; AT&T executives had set their
sights on overseas growth.

AT&T promised $260 million and access to microprocessor and telecommunications

technology.

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AT&T would sell Olivetti’s computers in the U.S and Olivetti would sell AT&T
computers and switching equipment in Europe.

There was no strength in Olivetti in the computer market, and Olivetti had no capability
in communications equipment.

Sales did not reach expected levels; communication and cultural differences lead to the
breakdown of the alliance by 1993.

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· Boeing and Japan: A Controversy

Critics warn that reliance on outsiders will make employees lose expertise.

A proposed alliance between Boeing and a Japanese consortium to build a new fuel-
efficient airliner, the 7J7, generated controversy.

The $4 billion price tag was too high for Boeing. The Japanese contributed funding in
return for manufacturing and marketing techniques from Boeing.

Although the project was shelved, a new aircraft was developed with 20 percent of the
work subcontracted out to Mitsubishi, Fuji, and Kawasaki.

Critics envision a scenario in which the Japanese learn to build their own aircraft and
compete directly with Boeing, a major exporter.

Researchers show how a company becomes increasingly dependent on partnerships:

1: Outsourcing of assembly for inexpensive labor

2: Outsourcing of low-value components to reduce product price
3: Growing levels of value-added components move abroad
4: Manufacturing skills, designs, and technologies move abroad
5: Disciplines related to quality, manufacturing, testing, and product derivatives move abroad
6: Core skills surrounding components, miniaturization, and systems integration move abroad
7: Competitor learns skills related to the underlying core competence

Yoshino and Rangan describe the interaction and evolution of the various P.P.
20
market entry strategies in terms of cross-market dependencies.

The success of Japanese firms in the automobile and consumer electronics industries can
be traced to an export drive (e.g., Nissan, Toyota, Honda)

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An export-driven strategy gives way to an affiliate-based one.

Investment strategies—equity stake, investment to establish new operations, acquisitions,

and joint ventures—create interdependence.

Firms transfer production from place to place, depending on exchange rates, resource
costs, or other considerations.

The most complex stage comes with full integration and a network of shared knowledge
from different country markets.

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International Partnerships in Developing Countries

Central and Eastern Europe, Asia, India, and Mexico offer opportunities to enter gigantic
and largely untapped markets.

Potential partners trade market access for expertise.

Joint ventures in the transition economies of Central and Eastern Europe could evolve at an
accelerated pace.

Russia is an excellent location for an alliance because the workforce is well-educated,

and quality is important to consumers.

Disadvantages include organized crime, supply shortages, and outdated regulatory and
legal systems.

Hungary has the most liberal financial and commercial system in the region plus
investment incentives to Westerners, especially in high-tech industries.

Still, this former communist economy has problems (e.g., Digital’s joint venture was
formed
to sell computers in Hungary, but also to stop cloning of Digital’s equipment).

Cooperative Strategies in Japan: Keiretsu

P.P. 21

P.P. 22
Japan’s keiretsu is an interbusiness alliance or enterprise group in which business
families join together to vie for market share.

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Relationships are often cemented by bank ownership of large blocks of stock and by
cross-ownership of stock between a company and its buyers and nonfinancial suppliers.

Keiretsu executives can legally sit on each other’s boards, and share information, and
coordinate prices.

Keiretsu are essentially cartels that have the government’s blessing. While not a market
entry strategy per se, keiretsu played an integral role in the international success of
Japanese companies as they sought new markets.

One dispute charges that keiretsu impact market relationships and claim that they
primarily serve a social function.

Others acknowledge past preferential trading but assert that influence is now weakening.

Global competition in the era of keiretsu means that competition exists not only among
products, but between different systems of governance and industrial organizations.

Large companies with ties to a bank are at the center of the Mitsui Group and Mitsubishi Group.

These two, plus Sumitomo, Fuyo, Sanwa, and DKB, constitute the “big six” keiretsu,
which vie for a strong position as intra-group relations involve shared stockholdings and trading.

Annual revenues total hundreds of billions of dollars.

These horizontal alliances block foreign suppliers and result in higher prices to Japanese
consumers, but also result in corporate stability, risk sharing, and long-term employment.

Other keiretsu have new configurations. Vertical (i.e., supply and distribution) keiretsu
are hierarchical alliances between manufacturers and retailers or automakers and
suppliers (e.g., Toyota).

The keiretsu system ensures that high-quality parts are delivered on a just-in-time basis, a
key factor in Japan’s high quality auto industry.

As U.S. and European automakers close the quality gap, larger Western parts makers
operate at lower costs than their Japanese counterparts (e.g., at Nissan, a French
management team divested some of the1,300 keiretsu investments).

Do keiretsu violate antitrust laws? The U.S. Federal Trade Commission launched
investigations of price fixing, price discrimination, and exclusive supply arrangements at
Hitachi and Canon.

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· How Keiretsu Affect U.S. Business: Two Examples

In the 1980s, Nissan looked for a supercomputer to use in car design and considered
Cray,
the world leader, and Hitachi.

The Cray computer sale was stopped when Hitachi called for solidarity since Nissan and
Hitachi belonged to the same big six keiretsu, the Fuyo group.

Hitachi mandated that Nissan show preference to Hitachi, but a coalition within Nissan
preferred Cray; U.S. pressure on Nissan and the Japanese government gave the sale to
Cray.

Because keiretsu relationships affect the American market, U.S. companies must be
concerned with keiretsu.

In 1990, Mazda dropped Tenneco as a supplier to its plant in Kentucky and shifted
business to a Japanese member of the Mazda keiretsu and a non-keiretsu Japanese
company.

A Japanese auto executive explained, “First choice is a keiretsu company, second choice
is a Japanese supplier, third is a local company.”

Discussion Question #6: What are keiretsu? How does this form of industrial structure affect
companies that compete with Japan or that are trying to enter the Japanese market?

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Cooperative Strategies in Korea: Chaebol P.P.

23

South Korea has its own corporate alliance groups, known as chaebol.

Chaebol are composed of dozens of companies, centered around a central bank or

holding company, and dominated by a founding family.

Chaebol are a recent phenomenon; in the early 1960s, Korea’s military dictator granted
government subsidies and export credits to a group of companies.

Daewoo, Hyundai, LG, and Samsung became leading producers of low-cost consumer
electronics products.

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The chaebol were a driving force behind South Korea’s economic miracle

Since the economic crisis of 1997, however, South Korean president Kim Dae Jung has
pressured chaebol leaders to initiate reform.

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Cooperative Strategies in the United States: Targeting the Digital Future

P.P. 24

Many U.S. companies are entering into alliances that resemble keiretsu.

The phrase digital keiretsu describes alliances between companies in several industries
undergoing transformation and convergence—computers, communications, consumer
electronics, and entertainment.

These processes result from the transmission and manipulation of vast quantities of
audio, video, data, fiber optic cable, and digital switching equipment.

One U.S. technology alliance, Sematech, results form government policy, which subsidized a
consortium of 14 technology companies.

The consortium’s task was to save the U.S. chipmaking equipment industry from Japanese
competition, and by 1991, Sematech reversed the market share slide of the semiconductor
industry.

Tele-Communications, Inc. (TCI), the largest U.S. cable TV operator, developed into a
“home-grown” keiretsu, forging agreements with Time Warner to develop hardware and
software standards for interactive TV.

The company would combine TCI’s programming and distribution with Bell Atlantic’s
switching technology, but this proposed merger was cancelled. In 1998, TCI was acquired by
Time Warner.

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· Beyond Strategic Alliances P.P.
25
The “relationship enterprise” is said to be the next stage of evolution of the strategic
alliance.

Groupings of firms in different industries and countries will be held together by common
goals and act as a single firm (e.g., Boeing, British Airways, Siemens, TNT, and Snecma
might jointly build airports in China).
Relationship enterprises will be super-alliances, with revenues of $1 trillion and the
ability to draw on extensive cash resources, circumvent antitrust barriers, and enjoy the
political advantage of being “local.”

This alliance is driven by the political necessity of having multiple home bases.

Another perspective on future cooperation is the “virtual corporation,” combining cost

effectiveness and responsiveness

As noted in The Virtual Corporation, “The success of a virtual corporation will depend on
its ability to gather and integrate a massive flow of information throughout its organizational
components and intelligently act upon that information.”

The virtual corporation will produce “virtual products”—products that exists before they are
manufactured (e.g., Nokia’s cell phones).

Why has the virtual corporation burst onto the scene? Distributed databases, networks, and open
systems make the data flow required possible.

Data flows permit “supply chain management” (e.g., for its “world car,” Ford linked computer
workstations of designers and engineers on three continents).

Market Expansion Strategies P.P. 26

Companies must decide whether to expand by seeking new markets in existing countries
or seeking new country markets for already identified and served market segments.

· Strategy 1 concentrates on a few segments in a few countries, matching company

resources and market investment needs.

· Strategy 2 is country concentration and segment diversification whereby a company

serves many markets in a few countries.

The majority of U.S. companies pursue strategies 1 or 2.

· Strategy 3, country diversification and market segment concentration, is the classic

global strategy whereby a company seeks out the world market for a product.

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· Strategy 4, country and segment diversification, is the corporate strategy of a global,
multibusiness company such as Matsushita.

Success in overseas markets can boost a company’s total volume and lower its cost position.

Discussion Question #7: Which strategic options for market entry or expansion would
a small company be likely to pursue? A large company?

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Discussion Questions

1. What are the advantages and disadvantages or using licensing as a market entry tool? Give
examples of companies from different countries that use licensing as a global marketing
strategy.

Licensing:
Advantages:
· Low cost entry alternative
· Allows licensor to circumvent tariffs, quotas, or similar export barriers
· Limits political risk and risk of expropriation
Disadvantages:
· A limited form of participation; licensor generally has no control over marketing programs
associated with products produced under license
· Financial upside limited by royalty rate
· Licensees can become competitors

2. The president of XYZ Manufacturing Company of Buffalo, New York, comes to you
with a license offer from a company in Osaka. In return for sharing the company’s
patents and know-how, the Japanese company will pay a license fee of 5 percent of the
ex-factory price of all products sold based on the U.S. company’s license. The president
wants your advice.
What would you tell him?

Assuming XYZ is a small manufacturer with limited international experience, and if

the picture for both market and sales (market share) potential are promising, licensing
can be an attractive entry mode. Entry into the Japanese market could possibly be
expedited by following this approach, especially if distribution would be a problem.
However, XYZ must carefully study the geographic scope of the agreement. Should
licensed products be marketed only in Japan? Another concern for XYZ is that the
licensee will become a stronger competitor once it has absorbed XYZ’s know-how.

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 XYZ may wish to investigate other potential licensees before making a final decision.
XYZ must also ensure that its patents are protected in Japan.
Overall, as Root (1994, 119) notes, “managers can rationally choose licensing as a
primary entry mode only when they compare the expected profitability of a proposed
licensing venture with the expected profitability of alternative entry modes.” Root
suggests profit contribution analysis based on projections of incremental revenues and
incremental costs associated with the licensing agreement.

Incremental revenues (excluding royalty revenues) for life of agreement:

· Lump-sum royalties
· Technical-assistance fees
· Engineering/construction fees
· Equity shares in licensee
· Dividends on equity shares
Incremental costs for life of agreement:
Opportunity costs:
· Loss of current export revenues (if company currently exports)
Start-Up Costs:
· Target market research
· Acquisition of local patent/trademark protection
· Negotiation of licensing agreement
· Training licensee’s employees
Ongoing Costs:
· Periodic training/updating of licensee
· Maintaining local patent/trademark protection
· Quality supervision and tests

Source: Adapted from Franklin R. Root, Entry Strategies for International Markets (New York:
Lexington Books), 1994.

3. What is foreign direct investment (FDI)? What forms can FDI take?

Joint Ventures:
Advantages:
· Allows for sharing of risk and combining complementary strengths, especially local
market knowledge of target market partner.
· May be the entry mode most strongly supported by target market government.
Disadvantages:
· Corporate cultures and other interests of foreign partner and local partner may clash.
· Lack of mutual understanding frequently leads to “divorce.”
· Sharing means less control than in 100 percent ownership.

Direct Investment/Acquisition/Ownership:
Advantages:
· Acquisition can profit from instant market access.

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· Provides opportunities for technology transfer to parent.
Disadvantages:
· Problems may arise from efforts to integrate acquisitions into parent company.
· Requires greatest commitment of capital and managerial effort.
· Investment and ownership may evoke suspicion about foreign company exploitation.
American companies in particular may be targets of accusations about “cultural
imperialism.” Political risk is higher compared with other entry modes.

4. Do you agree with Ford’s decision to acquire Jaguar? What was more valuable to
Ford—the physical assets or the name?

The Jaguar acquisition has been very expensive. In addition to the original investment,
Ford spent $2.5 billion to modernize the production facilities and develop new cars, a
figure that suggests the physical assets were not worth much. In 1994, the United
Kingdom Department of Trade and Industry (DTI) offered Ford a $15 million grant to
ensure that a new mid-sized
Jaguar sedan—the X200—would be built in the U.K. instead of a low-wage country. In
1995,
the DTI extended an additional $76 million grant for X200 production.

Some observers expressed concern that Ford would dilute Jaguar’s heritage. Evidence
that these fears are unfounded can be seen in 1995 worldwide sales of nearly 40,000
vehicles, a 33% increase over 1994. Quality—Jag’s Achilles heal—has improved. As a
unit of Ford, Jaguar can get volume discounts on parts, cutting costs for some
components by 20 to 30 percent. Moreover, because Ford has so much power as a buyer,
suppliers will be anxious to please Ford by performing top-notch design and engineering
work for Jaguar.

In the final analysis, the proof is “in the pudding.” On October 3, 1996, a new model, the XKB,
was unveiled to unanimous critical acclaim. It is the first Jaguar completely designed and
developed during the Ford era, and the first to feature a V8 engine. As Alex Trotman also told
reporters “I can’t give you any data that show Ford has been helped by owning Jaguar. However,
it is like chicken soup. It can’t be bad.”

Source: USA Today (Sept. 9, 1996), p. 2B.

5. What is meant by the phrase global strategic partnership? In what ways does this form
of market entry strategy differ from more traditional forms such as joint ventures?

The three key characteristics are: independence subsequent to the formation of the
alliance, a sharing of benefits as well as control over task performance, and ongoing
contributions by both participants to technology-to-technology and other key strategic
areas.

The type of joint ventures described in the chapter represent market entry strategies for a
particular country market. For example, a great deal of the foreign direct investment in

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joint ventures in emerging markets such as India and China is for the purpose of gaining
market access and serving the local market. GSPs such as Snecma are designed to serve
world markets. The partners pool information, technology, and resources.
According to Perlmutter and Heenan, in a true GSP:
· Two or more companies develop long-term strategies for achieving world leadership.
· The relationship is reciprocal.
· Vision and efforts are truly equal.
· Lateral transfer of resources is essential.
· Participants continue to compete as distinct entities in markets not included in the
agreement.

The success factors discussed in the chapter include the following:

· Mission that creates a win-win situation
· One company may form different GSPs with various partners; strategy must be
thought out in advance
· Partners must be on equal footing in matters of governance.
· Differences in corporate cultures must be explicitly recognized and managed
accordingly. Some conflict is to be expected.
· Innovative designs (matrix, etc.) may be required
· Appropriate decision-making processes must be adopted.

6. What are keiretsu? How does this form of industrial structure affect companies that
compete with Japan or that are trying to enter the Japanese market?

In its most general sense, the word keiretsu refers to connections between different
companies. Japanese keiretsu consists of a group of large companies with ties to a
powerful bank, such as Mitsubishi Group. In Japan’s automobile industry, keiretsu take
the form of vertical hierarchical relationships between the automakers and various
component-manufacturing groups. Toyota is cited as an example in the chapter; other
keiretsu include Nissan and Honda. In the consumer electronics industry, keiretsu
alliances are forged between manufacturers and retailers. Matsushita is a case in point;
other keiretsu in the electronics industry are the Hitachi Group, the Toshiba Group, and
the Sony Group.

The presence of keiretsu can make it difficult for foreign companies to gain access to
the Japanese market; in the $720 billion global auto parts industry, for example, access
by outside companies can be limited. As an indication of the complexity of the
keiretsu relationships, it should be noted that the vertical keiretsu are often members of,
or linked to, the Big Six horizontal keiretsu. For example, the Toyota Group also has
ties to the Mitsui Group, and the Nissan Group is a member of the Fuyo Group.
Similarly, among electronics keiretsu, Hitachi is a member of three groups: Guyo,
Sanwa, and DKB.

7. Which strategic options for market entry or expansion would a small company be
likely to pursue? A large company?

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Companies must address issues of marketing and value chain management before
deciding to enter or expand their share of global markets by means of licensing or some
form of direct investment. The particular market entry strategy company executives
choose depends on their vision, attitude toward risk, how much investment capital is
available, and how much control is sought.

Teaching Tools and Exercises

I. As an outside assignment, students will read the following article for class discussion
or a
1-2 page written summary:

Chang, Sea-Jin and Philip M. Rosenzweig. “The Choice of Entry Mode in Foreign Direct
Investment.” Strategic Management Journal 22, no. 8 (August 2001), pp. 7447-776,

II. Internet Exercise: A new strategic alliance has been formed by Kodak, Fuji Photo
Film, Minolta Camera, Canon, and Nikon to create a new photography system that will
enable users to take better pictures. Find out about this cooperative effort and report to
the class.
www.kodak.com/global/en/

III. Debate: The Merits of the Keiretsu. Divide the class into two teams. Team A: The
keiretsu violates anti-trust laws because it is anti-competitive. Team B: American
companies should increase alliances patterned after the Japanese keiretsu because of
Japanese success in the auto and electronics industries. Each team has 10 minutes to
prepare, 5 minutes to present its arguments, and 5 minutes to refute the opposing team.

IV. Students will find an example of a company that has been altering its strategy to
compete in the global market. Students will explain why the strategy is being changed.

Case 9-1: Federal Express Encounters Turbulence in the Global Package

Express Business

Update: Fedex is now one unit of FDX Corporation, a holding company formed in
1998 after Federal Express acquired Caliber Systems Inc. The international
economic crisis that began in 1997 has stifled FedEx’s plans for further overseas
expansion.

1. Why did FedEx decide to “go global”? Do you agree with the decision?

FedEx’s decision, like McDonald’s, was fueled by the maturing of the U.S. market and
increased domestic competition. FedEx’s experience was different from McDonald’s,
however, in that the company faced entrenched competition outside the U.S. FedEx was
also the victim of technological change, as fax machines supplanted overnight delivery

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for documents. There can be little doubt that global opportunities exist for FedEx;
however, it is likely that sources of competitive advantage will be different than those
that helped FedEx achieve its initial success in the U.S.

2. Evaluate FedEx’s European entry strategy. What mistakes did management make?

Fred Smith used both acquisitions (Tiger International) and investment as market entry
strategies. Unfortunately, FedEx fell victim to ethnocentricism and the self-reliance
criterion, much as Disney’s management did. Smith assumed that the highly successful
hub-and-spokes approach could be duplicated in Europe. In fact, the competitive
environment in Europe was already much different than it had been during FedEx’s start-
up years in the United States. Market research should have been used to develop more
accurate demand forecasts and to better localize the service offerings.

3. Formulate a new European entry strategy for FedEx.

The last paragraph of the case suggests a new strategic direction for FedEx, namely,
increased utilization of electronic communications technology to grow its business. In
1996, FedEx announced plans to give away copies of its proprietary BusinessLink
software to business-to-business marketers. Companies can build sites on the World
Wide Web in conjunction with FedEx’s Web page; FedEx provides distribution for
goods sold in this manner. In essence, the coming era of electronic commerce presents
FedEx with the opportunity to transform itself from a company that exploits cyberspace
for competitive advantage in the rapidly evolving area of logistics. This approach
represents a form of partnership in which FedEx offers both electronic information
services and physical distribution. Such a strategy entails risks. Instead of UPS and
DHL, competitors would include companies like Microsoft.

Another strategic option that has specific appeal for Europe would entail some form of
cooperation with newly-privatized national posts. In 1996, KPN, the Dutch post and
telecom, announced a $1.5 billion bid for TNT. Writing in the Financial Times, Peter
Martin noted that this deal “backs the global ambitions of the merged global express
business with the stable profits of a domestic postal service. The resulting ‘global leader
in time-sensitive distribution and logistics’ is buttressed still further by the 23% profit
margin of KPN’s PTT Telecom, the Dutch telephone company.”

4. What are the future prospects for FedEx, DHL, and UPS around the world?

In many countries, postal service is slow. As noted privatization trend will offer
opportunities for FedEx and other international delivery companies to participate in this
portion of the industry. Demand for logistics and inventory management services is
likely to increase; FedEx could also consult on infrastructure improvement projects in
developing countries. Profit margins will be slim because of intense price competition.
Industry leadership will be determined by the level of investment in technology, to
improve customer service and drive down costs. One recent development was the
announcement by UPS that it would use its planes for charter passenger flights on

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 weekends. Industry growth will likely come from operations in the fast-growing
economies of Asia.

Case 9-2: Airlines Take to the Skies in Global Strategic Alliances

1. Identify some of the immediate benefits for an American airline company forming an
alliance with a European one.
As the industry globalizes, alliance partners with access to the biggest global route
networks are likely to dominate the market. One clear benefit is code sharing, a feature
of partnerships that gives international travelers the impression they are on one airline
even though they may change carriers when they make an international connection.
Another clear benefit is access to hubs in major European cities such as London and
Frankfurt through which the U.S. carriers can offer connections to Moscow, New Delhi,
and other emerging markets. Alliance partners can also set prices jointly and coordinate
schedules, which can lead to operating efficiencies.

2. How is the global strategic alliance between KLM and Northwest different
from a traditional joint venture?

A joint venture is an entry strategy for a single target country in which the partners
share ownership of a newly-created business entity. This strategy is attractive for several
reasons.
First is the sharing of risk. A company can limit its financial risk and exposure to political
uncertainty. Second, a company can learn about a new market environment. If it becomes an
insider, it may increase the level of commitment. Third, joint ventures allow partners to
achieve synergy by combining different value chain strengths. One company with an in-
depth knowledge of a local market might find a foreign partner possessing well-known
brands. Finally, a joint venture may be the only way to enter a country if governments favor
local companies, or impose high tariffs or foreign control.

A key difference is that the alliance seeks to serve the world rather than a single country
market. Strategic alliances exhibit three characteristics:
· Participants remain independent subsequent to the formation of the alliances.
· Participants share the benefits of the alliance as well as control over the
performance of assigned tasks.
· Participants make ongoing contributions in technology, products, and other key
strategic areas.

Reasons for forming GSPs include:

· Enables firms to share high costs for a project
· Accommodates a lack of skills and resources within a company by forming an alliance
with a company with those resources
· Provides access to national and regional markets
· Provides learning opportunities

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 A global strategic partnership has five attributes:
· Two or more companies develop a 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 the alliance, participants retain
national and ideological identities

3. What are some of the internal issues that could yet emerge and threaten the relationship?
between KLM and Northwest in the future?

The cultural issues alluded to in the case are also factors in the executive suite. Compatibility
issues between the key executives can be an issue, as can a clash of corporate cultures. As
discussed in the chapter, the GE/Snecma alliance grew out of mutual respect of the top
executives. Although the KLM/Northwest alliance is a financial success, generating $200
million in annual operating profits, behind the scenes it is a different story. Writing in
Fortune, Shawn Tully called the alliance “a marriage from hell, an eye-gouging, rabbit-
punching slugfest, with accusations flying like dinner plates.” Gary Wilson and Al Checchi,
U.S. financiers who own 44 percent of Northwest, are engaged in a power struggle with
KLM President Pieter Bouw. Wilson himself has called the U.S./Dutch relationship
“dysfunctional.”

Bouw attributes the problems to “the European way versus the American way.” On paper,
the deal has been good, and Wilson and Checchi have done well: Northwest is now worth $1
billion. Differing views of this deal have contributed to the discord. In general, Europeans
tend to be disdainful of wheeler-dealer finance types who emphasize cash flow and make a
killing with OPM (“other people’s money”). For their part, Wilson and Checchi view the
Europeans as risk-averse, slow-moving bureaucrats who are too conservative about matters
such as debt. (While CEO at Disney, Wilson had a hand in creating the debt structure at Euro
Disney.)

4. Who do you think benefits more from an airline alliance, the airlines themselves or the
customers they serve?

The members of an airline alliance intend to make their purchases jointly, with a resulting
cost savings. Star Alliance has named a full time coordinator to work with purchasing teams;
the alliance members have spent more than $100 million on information technology.
Ultimately, the members expect to save $1 billion annually. Presumably, air fare for
travelers will decrease as a result of lower costs. However, the chairman of Lufthansa, a Star
Alliance member, believes that the main benefit to customers currently is “seamless transport
to more than 700 destinations” thanks to coordinated schedules. Flyers also benefit because
they can accumulate frequent flyer miles (e.g., United’s Mileage Plus) whenever they fly
with any alliance member.

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Suggested supplemental readings: Jong-Hun Park and Anming Zhang, "An Empirical
Analysis of Global Airline Alliances: Cases in North Atlantic Markets," Review of Industrial
Organizations 16, no. 4 (June 2000), pp. 367-385.

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