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Chapter 6 Instructor Shan A. Garib, Winter 2013

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Overview

This chapter is about entering markets with assistanceSome small companies lack of exporting knowledge or lack of resourcesSA: partnering arrangements between two or more organizations that have a common goal

Situations where consider SADis/AdvantagesStrategies related to transfer or use of resources or info

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What are Strategic Alliances?

Companies work together to meet common objectivesCompanies share advantages and disadvantagesLong or short termRemain independent after alliance is implementedCompanies are mutually independent, ie. The actions of one affect the otherCompanies are often competitors

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What are Strategic Alliances?

Types of SA:1. Shared R&D projects2. Shared purchasing and marketing arrangements3. Distribution arrangements4. JV5. Mergers – although in SA they don’t remain together

TWO main Categories◦ Based on Transfer – 1, 2, 3◦ Based on Investment – 4, 5

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Reasons for Strategic Alliances

Main reason to gain access to other’s knowledge or resourcesAlso to develop new products or to enter a market that neither could enter aloneOther:

◦ Forming EOS◦ Enhancing competitiveness◦ Dividing risks◦ Setting new standards for technology◦ Entering new markets◦ Overcoming the competition in a market◦ Benefiting from the reputation of an established business partner◦ Undertaking very complex projects

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Reasons for Strategic Alliances

Acquiring New Skills and ResourcesWith cooperation companies exchange skills that are typically not for sale

◦ Typical exchange is between, Technological know-how and capital, distribution networks, marketing, and credibility in the market

Companies share technology instead of selling it because over the long-term they can make more profit if they retain partial ownership also, technology might be so new that it might be difficult to sell or lease out

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Reasons for Strategic Alliances

Main reason to gain access to other’s knowledge or resourcesAlso to develop new products or to enter a market that neither could enter aloneOther:

◦ Forming EOS – pool resources to become more efficient and cut costs in order to compete with larger companies

◦ Enhancing competitiveness – in a partnership the companies maintain their core competencies and use other company to fill in gaps

◦ Dividing risks – most often in R&D area, it lowers cost◦ Setting new standards for technology – new standards develop new market

opps. In an alliance, it increases the chance of the standard being adopted in the industry eg ISDN

◦ Entering new markets◦ Overcoming the competition in a market◦ Benefiting from the reputation of an established business partner◦ Undertaking very complex projects

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Reasons for Strategic Alliances

Other:◦ Entering new markets – partners can provide established networks

as well as knowledge of the markets they serve also useful when government policy present market entry barriers

◦ Overcoming the competition in a market – through partnering you can be first in the market preventing competition

◦ Benefiting from the reputation of an established business - partner

◦ Undertaking very complex projects

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Disadvantages of Strategic Alliances

Loss of Freedom:◦ Through the imposition of constraints eg NDA, NonCompete

Loss of Control:◦ Eg in a JV foreign country might be limited to owing 49%

Loss of Profile:◦ The dominant partner might overshadow the other so consumers will identify

the product with the dominant brand onlyDamaged reputation:

◦ From bad actions of a partnerLoss of IP:

◦ Close partnerships might lead to unauthorized leaks of proprietary informationCultural Differences:

◦ Differences in corporate or national eg devoted to tech meets devoted to marketing

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Disadvantages of Strategic Alliances

Complexity:◦ Managing functions between partners can cause problems

Disagreements:◦ Unless a company puts in place mechanisms to anticipate and deal

with conflicts disagreements will paralyze partnershipIncreased Management Time:

◦ Because of complexity of relationships it might take time to sort out disagreements

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Disadvantages of StrategicAlliances

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R&D AlliancesPurpose of developing new products and technologiesUsually work on research side together then develop projects independentlyThey reduce costs associated with researching new technologies, and reduce risks involved with releasing themThey also reduce time getting product to market

Purchasing and Market AlliancesSuppliers alliances benefits:

◦ When familiar with the business suppliers can anticipate problems and develop effective strategies for solving them

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Purchasing and Market AlliancesSuppliers alliances benefits:

◦ Supplier begin to see themselves as stakeholders◦ Suppliers offer trading company advice on improving

internal processes or access to own networks◦ Supplier might give discounts for business so as to

enhance competitiveness◦ Supplier might accept easier terms of payment◦ Idea is to generate a real win-win situation◦ Buyer provide seller info about size of orders and long

term selling strategy and seller benefits because gets guarantee of certain level of service

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Purchasing and Market AlliancesSuppliers alliances benefits:

◦ Buyer-sellers use these systems: Vendor managed inventory (VMI)

Now preferred method of doing business Normally buyer places order with seller when inventory is

down Buyer controls size of order VMI allows buyer to see sellers inventory and sends order

Just in Time (JIT) Linked to VMI Concept is inventory is waste full and expensive Buyers aim to reduce inventory levels to minimum just enough

to maintain customer supplies Electronic Data Interchange (EDI)

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Purchasing and Market AlliancesSuppliers alliances benefits:

Electronic Data Interchange (EDI) Both partners use a common system for exchanging data

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Purchasing and Market AlliancesSuppliers alliances :

◦ Partnerships with suppliers of components Help exporters spread the cost of entering a market Usually occur when one supplier is main supplier Supplier can provided technical advice, samples, and

financial contributions to off-set market development costs and get share of profits in return Suppliers are also financing international trade transactions

more and more

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Purchasing and Market AlliancesSuppliers alliances :

◦ Partnerships with suppliers of services Freight forwarders: used to expedite shipments overseas

They deal with logistics of moving products They provide exporting expertise and have relationships with

others in target country FF will seek partnerships where assured volumes of exports

generate economies of scale Business Advisors: eg lawyers, accountants, lobbyists

Help companies find clients in the target market, deal with taxes and PMT issues

Share risks and costs while securing better service

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Purchasing and Market AlliancesMarketing alliances :

Partnerships between companies with complimentary products aimed at the same markets aka Co-marketing

Aim to build customer awareness of benefits of complimentary products

Collaboration to ensure one product compliments other business’ product

Common in pharmaceutical firms where costs are extremely high eg company A product is marketed using advertising and distribution network of company B for company A’s market. Company B has a product that compliments company A’s line eg headache relief

They can market each other’s product

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Purchasing and Market AlliancesMarketing alliances :

Partnerships used to enter new markets or get technical info

Challenges: Level of competition between the partners When sharing profit, might disagree Legal responsibility, both seller and producer can be sued

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Distribution AlliancesDistribution costs are major costs Partners selling to same market to join together to purchase bulk shipping rates or share storage spaceOr offer guaranteed shipment volume in exchange for lower shipping costs

Licensing and FranchisingCompany sells the rights to a developed product or service in exchange for a specified feeBuyer of tech (licensee) invests capital to use that product/service to sell in local marketLicensee agrees to sell in a defined area, to pay royalty fees, and meet sales targets and non-compete provisionsCan be sub-licensed to local companies

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Licensing and FranchisingTransfers no property rights, only usage rights so licensor has control over productSometimes cross-license

◦ Companies exchange rights to use each other’s product/service

Issues to consider:◦ Company taking on licence will take on expense and risk of production,

marketing and distribution in target market◦ But both companies are not working towards common goals resulting in

a competitor in the local market when licence expires

◦ Licensing agreement s must cover: Exclusivity – who covers what? The scope of the license – can licensee make, use, sell, copy good? The field of use – product size? Segment sold to? Channels sold to? Quantity – limits on number of products produced?

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Licensing and FranchisingIssues to consider:

◦ Licensing agreement s must cover: Territory - where Sublicense – Exporting – allowed? Where? Confidential Info – what to disclose? Trademarks – how used? Training and technical services – who gets training Quality Control – specs? Monetary PMTs – when due? Form?

Franchising◦ Form of licensing selling rights to complete package of trade marks,

processes, technologies, designs and copy rights in order to operate a business

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Licensing and FranchisingFranchising

◦ Holder of franchise brings process technology, a business names or reputation, equipment and support

◦ The buyer of the franchise contributes capital and the effort of setting up and running the business

◦ Franchisee has right to use certain processes and given access to proven systems and full use of trademark

◦ Disadvantages: No profits in first years Make sure product/service works in different countries Failure leads to negative impression on brand

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Licensing and FranchisingFranchising

◦ Ensure that franchisor meets criteria: Successful in domestic market and tested abroad Selected target markets carefully and did research Willing and able to support business partners

Issues to consider:◦ Seek legal advice and consider

Trademark protection - in target market Protection of IP – during training sessions Type of franchise offered – how they will sell franchises in

the foreign market eg unit – one store development – two+ Master – 4’n co. sell to others

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Licensing and FranchisingFranchisingIssues to consider:

◦ Seek legal advice and consider Timeline for development – how many to be started

by what time Sourcing of Supplies – buy supplies from specific

suppliers