! Explain the major motives that guide managers when they choose a collaborative arrangement for international business.
! Define the major types of collaborative arrangements.
! Describe some considerations for not entering into arrangements with other companies.
! Discuss what makes collaborative arrangements succeed or fail.
! Discuss how companies can manage diverse collaborative arrangements.
Collaborative strategies allow firms to spread both assets and risk across countries by entering into contractual agreements with a variety of potential partners. Chapter 14 first discusses the motives that drive firms to engage in collaborative arrangements. It then examines the various types of possible arrangements, including licensing, franchising, joint ventures and equity alliances. It goes on to explore the various problems that may arise in collaborative ventures and concludes with a discussion of the various methods for managing these evolving arrangements.
OPENING CASE: Cisco Systems [See Map 14.1]
Globalization has pushed Cisco Systems into a broader range of markets in order to follow the expansion patterns of its customers, solicit new business and study new ideas and products. Cisco’s worldwide alliances spur the company to continue learning and to refine its competencies. They enable it to meet customer needs that fall outside its areas of core competencies, while simultaneously permitting Cisco and its partners to enhance their competitiveness by focusing on their respective competencies. Alliances have also permitted Cisco to limit its capital outlays in potentially lucrative but risky ventures. Cisco believes alliances improve its processes, reduce its costs and expose it to the best competitive practices. The firm’s official Strategic Alliances Team manages crucial partnerships with industry-leading technology and integrator firms, and it is the driving force behind the collaborative development effort to accelerate new market opportunities. Cisco has generally standardized the mechanics of partnership agreements. However, it continues to work to improve the odds of collaborative success by better managing the matters of trust, commitment and culture that shape what Cisco calls “interwoven dependencies and relationships” with its partners.
Teaching Tip: Review the PowerPoint slides for Chapter 14 and select those you
find most useful for enhancing your lecture and class discussion. For
additional visual summaries of key chapter points, review the figures in the
text. Also, note the reference to the CultureQuest video regarding
collaborative ventures in
Many of the modes of entry from which firms may choose involve some form of collaboration with other companies, i.e., a formal, long-term contractual agreement between or among partners. A strategic alliance represents a collaborative agreement between firms that is of strategic importance to one or both partners’ competitive viability.
II. MOTIVES FOR COLLABORATIVE ARRANGEMENTS
Each participant in a collaborative arrangement has its own basic objectives for operating internationally as well as its own motives for collaborating with a partner.
A. Motives for Collaborative Arrangements: General
Companies collaborate with other firms in either their domestic or foreign operations in order to spread and reduce costs, to specialize in particular competencies, to avoid or counter competition, to secure vertical and/or horizontal linkages and to learn from other companies.
1. Spread and Reduce Costs. When the volume of business is small, or one partner has excess capacity, it may be less expensive to collaborate with another firm. Nonetheless, the costs of negotiation and technology transfer must not be overlooked.
2. Specialize in Competencies. The resource-based view of the firm holds that each firm has a unique combination of competencies. Thus, a firm can maximize its performance by concentrating on those activities that best fit its competencies and relying on partners to supply other products, services, or support activities.
3. Avoid Competition. When markets are not large enough for numerous competitors, or when firms need to confront a market leader, they may band together in ways to avoid competing with one another or combine resources to increase their market presence.
4. Secure Vertical and Horizontal Links. If a firm lacks the competence and/or resources to own and manage all of the activities of the value-added chain, a collaborative arrangement may yield greater vertical access and control. At the horizontal level, economies of scope in distribution, a better smoothing of sales and earnings through diversification and an ability to pursue projects too large for any single firm can all be realized through collaboration.
5. Gain Market Knowledge. Many firms pursue collaborative arrangements in order to learn about their partners’ technology, operating methods, or home markets and thus broaden their own competencies and competitiveness over time.
B. Motives for Collaborative Arrangements: International
Companies collaborate with other firms in their foreign operations in order to gain location-specific assets, overcome legal constraints, diversify geographically and minimize their exposure in high-risk environments.
1. Gain Location-Specific Assets. Cultural, political, competitive and economic differences among countries create challenges for companies that operate abroad. To overcome such barriers and gain access to location-specific assets (e.g., distribution access or a competent workforce), firms may pursue collaborative arrangements.
2. Overcome Legal Constraints. Countries may prohibit or limit the participation of foreign firms in certain industries, or discriminate against foreign firms via tax rates and profit repatriation. Firms may be able to overcome such barriers via collaboration with a local partner.
3. Diversify Geographically. By operating in a variety of countries, a firm can smooth its sales and earnings; collaborative arrangements may also offer a faster initial means of entering multiple markets or establishing multiple sources of supply.
4. Minimize Exposure in Risky Environments. The higher the risk managers perceive with respect to a foreign operation, the greater their desire to form a collaborative arrangement.
III. TYPES OF COLLABORATIVE ARRANGEMENTS
While collaborative arrangements allow for a greater spreading of assets across countries, the various types of arrangements necessitate trade-offs among objectives. Finding a desirable partner can be problematic. A firm has a wider choice of operating forms and partners when there is less likelihood of competition and when it has a desired, unique, difficult-to-duplicate resource.
A. Some Considerations in Collaborative Arrangements
Two critical variables that influence the choice of collaborative arrangement are a firm’s desire for control over its foreign operations and its prior expansion into foreign ventures.
1. Control. The loss of control over flexibility, revenues and competition is a critical variable in the selection of forms of foreign operation. The more a firm depends on collaborative arrangements, the more likely its control will be lessened over decisions regarding quality, new product directions and production expansion.
2. Prior Expansion of the Company. If a firm already owns and controls operations in a foreign country, the advantages of collaboration may not be as attractive as otherwise.
Under a licensing agreement, a firm (the licensor) grants rights to intangible property to another company (the licensee) to use in a specified geographic area for a specified period of time; in exchange, the licensee ordinarily pays a royalty to the licensor. Such rights may be exclusive or nonexclusive. Usually the licensor is obliged to furnish technical information and assistance, while the licensee is obliged to exploit the rights effectively and pay compensation to the licensor. Intangible property may be classified as:
· patents, inventions, formulas, processes, designs, patterns
· copyrights for literary, musical, or artistic compositions
· trademarks, trade names, brand names
· franchises, licenses, contracts
· methods, programs, procedures, systems.
1. Major Motives for Licensing. Licensing often has an economic motive, such as the desire for faster start-up, lower costs, or access to additional property rights (e.g., technology). For the licensor, the risks and costs of a given venture are lessened; for the licensee, costs are less than if it had to develop a product or process on its own. Cross-licensing represents the situation in which companies in various countries exchange technology rather than compete with each other with every product in every market.
2. Payment. (See Figure 14.4) The amount and type of payment for licensing arrangements may vary. Each contract tends to be negotiated on its own merits; the bargaining range is based on dual expectations. Both agreement-specific and environment-specific factors may affect the value of a license.
3. Sales to Controlled Entities. Many licenses are given to firms owned in part or in whole by the licensor. From a legal standpoint, subsidiaries are separate companies; thus, a license may be required in order to transfer intangible property.
Franchising represents a specialized form of licensing in which the franchisor not only sells an independent franchisee the use of the intangible property essential to the franchisee’s business, but also operationally assists the business on a continuing basis. In a sense, the two partners act like a vertically integrated firm because they are interdependent and each produces a part of the product that ultimately reaches the customer.
1. Organization of Franchising. A franchisor may penetrate a foreign country by dealing directly with its foreign franchisees, or by setting up a master franchise and giving that organization the right to open outlets on its own or to develop sub-franchises in the country or region.
2. Operational Modifications. Franchise success is derived from three factors: product standardization, effective cost control and high recognition. Nonetheless, franchisors face a classic dilemma: the more they standardize on a global basis, the lower the potential for product acceptance in a given country; the more they permit adaptation to local conditions, the less the franchisor can offer the franchisee, the higher the costs and the less the control by the franchisor.
D. Management Contracts
A management contract represents an arrangement in which one firm provides management personnel to perform general or specialized functions to another firm for a fee. A firm usually pursues such contracts when it believes a partner can manage certain operations more efficiently and effectively than it can itself.
E. Turnkey Operations
Turnkey operations represent a type of collaborative arrangement in which one firm contracts with another to build complete, ready-to-operate facilities. Usually, suppliers of turnkey facilities are industrial-equipment and construction companies; projects may cost billions of dollars; customers most often are government agencies or large MNEs.
F. Joint Ventures
A joint venture represents a direct investment in which two or more partners share ownership. As a firm’s share of the equity declines, its ability to control a given operation also declines. A consortium represents the joining together of several entities (e.g., companies and governments) to combine resources and/or to strengthen the possibility of pursuing a major undertaking. Other forms of joint ventures include:
· two firms from the same country joining together in a foreign market
· a foreign firm joining with a local firm
· firms from two or more countries establishing an operation in a third country
· a private firm and a local government
· a private firm joining a government-owned firm in a third country.
G. Equity Alliances
An equity alliance represents a collaborative arrangement in which at least one of the collaborating firms takes an ownership position (usually a minority) in the other(s). The purpose of an equity alliance is to solidify a collaborating contract, thus making it more difficult to break.
IV. PROBLEMS OF COLLABORATIVE ARRANGEMENTS
Dissatisfaction with the results of collaboration can cause an arrangement to break down. Problems arise for a number of reasons.
A. Collaboration’s Importance to Partners
One partner may give more attention to the collaboration than the other—often because of a difference in size. An active partner will blame the less active partner for its lack of attention, while the less active partner will blame the other for poor decisions.
B. Differing Objectives
Although firms may enter into collaborative arrangements with complementary capabilities and objectives, their views regarding such things as reinvestment vs. profit repatriation and desirable performance standards may evolve quite differently over time.
C. Control Problems
When no single party has control of a collaborative arrangement, the venture may lack direction; if one party dominates, it must still consider the interests of the other. By sharing assets with another firm, a company may lose some control over the extent and/or quality of the assets’ use. Further, even when control is ceded to one of the partners, both may be held responsible for problems.
D. Partners’ Contributions and Appropriations
One partner’s ability to contribute technology, capital and other assets may diminish (at least on a relative basis) over time. Further, in almost all collaborations the danger exists that one partner will use the others’ contributed assets, or take more than its fair share from the operation, thus enabling it to become a direct competitor. Such weaknesses may cause a drag on a venture and even lead to the dissolution of the agreement.
E. Differences in Culture
Differences in both national and corporate cultures may cause problems with collaborative arrangements, especially joint ventures. Firms differ by nationality in terms of how they evaluate the success of an operation (e.g., profitability, strategic market position and/or social objectives). Nonetheless, joint ventures from culturally distant countries tend to survive at least as well as those between partners from similar cultures.
V. MANAGING FOREIGN ARRANGEMENTS
As a collaborative arrangement evolves, partners need to reassess certain decisions in light of their resource bases and external environmental changes.
A. Dynamics of Collaborative Arrangements
The evolutionary costs of a firm’s foreign operations may be very high as it switches from one operational mode to another, especially if it must pay termination fees. Thus, a firm must develop the means to evaluate performance by separating the controllable and uncontrollable factors at its various profit centers.
B. Finding Compatible Partners
A firm may actively seek a partner for its foreign operations, or it can react to a proposal from another company to collaborate with it. Potential partners should be evaluated both for the resources they can offer and their willingness to work together. The proven ability to handle similar types of collaboration is a key professional qualification.
C. Negotiating Process
Certain technology transfer considerations are unique to collaborative arrangements; often pre-agreements are set up to protect concerned parties. The secrecy of financial terms, especially when government authorities consult their counterparts in other countries, is an especially sensitive area. Market conditions may dictate the need for different terms in different countries.
D. Contractual Provisions
To minimize potential points of disagreement, contract provisions should address the following factors:
· the termination of the agreement if parties do not adhere to its directives
· methods of testing for quality
· the geographical limitations on the asset’s use
· which company will manage which parts of the operation
· the future commitments of each partner
· how each partner will buy from, sell to, or use intangible assets that come from the collaborative arrangement.
E. Performance Assessment
All parties should establish mutual goals so all involved understand what is expected, and a contract should spell out expectations. In addition to the continuing assessment of the venture’s performance, a firm should also periodically assess the possible need for a change in the type of collaboration.
When What’s Right for One Partner Isn’t Right for the Other Partner
One potential problem arising from collaborative arrangements is a firm’s skirting of unethical practices by having a partner handle them; a second is that a firm might treat its partner unethically. How should a company deal with foreign partners whose practices on pollution, labor relations and bribery are different from those in its home country? Increasingly, NGOs criticize firms for what their suppliers do. All partners put resources into collaborative arrangements. Can any partner ethically take resources from an operation that are not specified in an agreement?
LOOKING TO THE FUTURE:
Why Innovation Breeds Collaboration
Because the cost of invention is often so high, it follows that firms of considerable size will carry out most innovation. Although firms can become ever larger through mergers and acquisitions, collaborative arrangements are likely to be increasingly important in the future as governments opt to restrict such activities because of antitrust concerns. At the same time, collaborative arrangements will bring forth both opportunities and problems as firms move simultaneously into new countries and to new types of contractual arrangements with new partners. The more partners in a given alliance, the more strained the decision-making and control processes will likely be.
Teaching Tip: Visit www.prenhall.com/daniels for additional information and links relating to the topics presented in Chapter 14. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter 14.
CLOSING CASE: International Airline Alliances [See Map 14.2]
1. Discuss a question raised by the manager of route strategy at American Airlines: Why should an airline not be able to establish service anywhere in the world simply by demonstrating that it can and will comply with the local labor and business laws of the host country?
When considering either the international or simply the domestic environment, a major consideration is whether economic interests in the airline industry are better served through regulation via the market. Proponents of deregulation argue that competition has forced carriers to become efficient or else go out of business, instead of being subsidized by regulated route and fare structures. Proponents also argue that the survival of mega-carriers leads to economies of scale in handling passengers and cargo. Opponents argue that local interests are often ill-served by deregulation since airlines are free to discontinue service and to wage predatory price wars that put competitors out of business, at which point the survivors will then raise prices. Opponents also raise fears there may eventually be too few survivors to allow for the competition that was envisioned by the proponents of deregulation; the high barriers to entry in the industry further exacerbate this situation. Another major consideration deals with the political dimensions of the question. Because most governments see airlines as a key national industry, they oppose giving foreign carriers access to domestic routes on grounds of both national security and consumer welfare.
The president of
It is very difficult to separate profits and losses on a route-by-route basis. While fares and loads on certain routes may seem to be low, they may in fact be generating marginal revenues that make major routes profitable. A second issue is that of price elasticity. If governments were to set prices above the equilibrium point, traffic and revenues, and hence profitability, would all fall. A third issue is that of ownership. If privately owned carriers abandon routes to government-owned airlines, they could well give advantages to those airlines that could then be used against them on other routes. Finally, the issue of profitability raises the question of subsidies. It is nearly impossible to determine whether dumping is taking place when competitors receive so many direct and indirect subsidies.
3. What will be the consequences if a few large airlines or networks come to dominate global air service?
The consequences would be both positive and negative. On the positive side, passengers should be able to travel almost anywhere in the world on a single airline (or network). That in turn should minimize the risk of missed connections and lost baggage. Operating economies should be realized as a result of the higher utilization of airport gates and ground equipment—consequent savings may or may not be passed along to passengers through lower prices. On the negative side, it is quite possible that minimal competition would lead to poor service and/or high prices. In addition, competition among the destinations associated with particular airlines would likely decline, as would the special services offered by the “niche” airlines.
Some airlines, such as Southwest and
When there is
sufficient traffic on the city pairs that a route serves, there is little need
to have feeder or connecting routes for an airline to be profitable. In fact,
without the need for hubs to make connections, some airlines can operate in
smaller but closer-to-downtown airports, such as Midway in
Additional Exercises: Collaborative Strategies
Exercise 14.1. Ask students to name companies, both domestic and foreign, that operate internationally. Then ask them to discuss the potential types of collaborative arrangements they feel would be appropriate for the various firms. Conclude the discussion by examining the list of firms and asking students if there are particular industries that seem to lend themselves to particular types of collaborative arrangements more readily than others. Be sure the students discuss why this might be so.
Exercise 14.2. Identify the various home countries of students in your class. Then lead the class in a discussion of the likely types of collaborative arrangements foreign firms might pursue in those countries. Be sure students cite the various economic, political and cultural factors that would influence decisions regarding viable collaborative strategies.
Exercise 14.3. While offering desirable advantages, licensing agreements also limit the amount of control a licensor can exercise over a foreign production process. Engage the students in a discussion of the type of firm that would most likely be willing to allow a licensee to use its established brand name, and the type of firm that would not be willing to do so. Explore the reasons for each position as well as the reasons a licensee would be willing to accept a license that did not include rights to the use of the associated brand name.