Download Collaborative Arrangements as IB Operating Modes

International Business
by
Daniels and Radebaugh
Chapter 14
Collaborative
Strategies
© 2001 Prentice Hall
14-1
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
© 2001 Prentice Hall
14-2
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
© 2001 Prentice Hall
14-3
Collaborative Arrangements as IB Operating Modes
OPERATIONS
EXTERNAL INFLUENCES
OBJECTIVES
PHYSICAL AND
SOCIETAL FACTORS
STRATEGY
COMPETITIVE
ENVIRONMENT
MEANS
Function
Modes
• Self-handling s
•Collaborative
arrangements
© 2001 Prentice Hall
Overlaying
Alternatives
14-4
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
a. Licensing
b. Franchising
c. Management
contracts
d. Turnkey
operations
Non-equity
arrangements
Collaborative arrangements shaded in blue
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
14-9
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
© 2001 Prentice Hall
14-10
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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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Determinants of Compensation for International
Licensing of Technology
LICENSOR’S OFFER
PRICE
LICENSEE’S BID 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
© 2001 Prentice Hall
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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 may enter market by dealing directly with
individual franchisees
– easier for known franchisors to attract investors
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
Nonequity
(less ownership)
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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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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Managing Foreign Arrangements (cont.)
Finding compatible partners—company can:
• Seek out a partner for 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
© 2001 Prentice Hall
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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
© 2001 Prentice Hall
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