CROSS-CULTURAL MANAGEMENT &

COMMUNICATIONS

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 Global Market Entry Strategies:
Licensing, Investment and Strategic
Alliances

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 GLOBAL MARKET ENTRY STRATEGIES
A. Selecting the Target Market
1. A crucial step in developing a global expansion strategy is the
selection of potential target markets.

2. To identify market opportunities for a given product or service

the international marketer usually starts off with a large pool of
candidate countries. To narrow this list down the company
undertakes preliminary screening.

3. The screening process includes:

a. Step 1): Select indicators and collect data.

1). Pick a set of socio-economic and political
indicators which are believed to be critical.

2). The result is to develop an overall measure of

market attractiveness.
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b. Step 2: Determine importance's of country indicators.
1). The purpose of this step is to determine weights of the
different country indicators.

2). One method is the constant-sum allocation technique.

c. Step 3: Rate the countries in the pool on each indicator

1). Give countries a score on each of the indictors.

d. Step 4: Compute overall score for each country.

1). Sum the weighted scores.

2). The higher the scores, the more attractive the

opportunity

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4. When the product has already been launched in some regions, the
firm can substantially reduce the subjectivity by using a variant of the
screening procedure. This alternative method leverages the experience
the firm gathered in its existing markets. The steps might include (the
text uses a specific example for this demonstration):

a. Collect historical data on Asian/ African or European markets.

b. Evaluate the MNC’s post-entry performance in each of its existing

Asian/ African or European European markets.

c. Derive weights for each of the country indicators.

d. Rate the Asian countries in the pool on each indicator.

e. Predict performance in prospective Asian countries.

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B. Choosing the Mode of Entry

1. Decision criteria for mode of entry.

a. Internal (firm-specific) criteria.

b. External (environment-specific) criteria.

2. The major external criteria are:

a. Market size & growth.
b. Risk.
1). Relates to political and economic environments.
c. Government regulations.
1). Trade barriers are major concerns.
d. Competitive Environment.
e. Cultural Distance
f. Local infrastructure

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3. Markets can be classified in five types of countries based on their respective
market attractiveness:

a. Platform countries that can be used to gather intelligence and establish a

network--Singapore or Hong Kong.

b. Emerging countries like India/ Tanzania/Vietnam. Build an initial presence.

c. Growth countries like China, Bangladesh. Early mover advantages often

push companies to build up a significant presence in order to capitalize on
future market opportunities.

d. Maturing and established countries like South Korea, Taiwan, and Japan.
These countries have established middle classes. The prime task is to look
for ways to further develop the market via strategic alliances, major
investments or acquisitions of local or smaller foreign players.

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4. Key internal criteria are listed as

a. Company objectives.

b. Need for control.

c. Internal resources, assets, and capabilities.

d. Flexibility

5. Mode-of-Entry Choice: A Transaction Cost Explanation.

a. The different modes of entry can be classified according

to the degree of control they offer the entrant from low-
control (indirect exporting) to high control modes
(wholly-owned subsidiary).

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B. MNCs are most likely to enter with wholly owned subsidiaries when:

1). The entry involves an R&D-intensive line of business.

2). The entry involves an advertising-intensive line of business.

3). MNCs have accumulated a substantial amount of experience with

foreign entries.

d. MNCs are most likely to prefer a partnership when:

1). The entry is in a highly risky country.

2). The entry is in a socio-cultural distant country.

3). There are legal restrictions on foreign ownership of

assets
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C. Exporting

1. Most companies start their international operations with exporting

2. Indirect Exporting.

a. Indirect exporting happens when the firm sells its products in the
foreign market via an intermediary located in the firm’s home
country.

b. An example would be an export management company (EMC).

c. Advantages include:

1). The firm gets instant foreign market expertise.

2). Very little risk is involved.
3). No major resources have to be committed.
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 d. Disadvantages include
1). No control.
2). Lack of adequate sales support.
3). Product and company image can be damaged by others.
4). Middlemen may have limited experience in handling the
firm’s goods.

3. Cooperative Exporting

a. This is a middle ground between indirect exporting and direct

exporting.

b. Piggyback exporting can be used (use someone else’s distribution

process).

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4. Direct Exporting.

a. The firm sets up its own exporting department and sells its products
via a middleman located in the foreign market.

b. More control is achieved.

c. Responsibility tasks can be high (risk begins to go up).

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D. Licensing

A contractual agreement 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

-Patent
-Trade secret
-Brand name
-Product formulations

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 Advantages to Licensing

•Provides additional profitability with little initial

investment

•Provides method of circumventing tariffs, quotas, and

other export barriers

•Attractive ROI

•Low costs to implement

•License agreements should have cross-technology

agreements to share developments and create
competitive advantage for each party

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 Disadvantages to Licensing

•Limited participation

•Returns may be lost

•Lack of control

•Licensee may become competitor

•Licensee may exploit company resources

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 Special Licensing Arrangements

•Contract manufacturing
– Company provides technical specifications to a
subcontractor or local manufacturer

– Allows company to specialize in product design while

contractors accept responsibility for manufacturing
facilities.

•Franchising
– Contract between a parent company-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.

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 E. Investment

•Partial or full ownership of operations outside of home country

– Foreign Direct Investment (FDI)

•Forms
– Joint ventures

– Minority or majority equity stakes

IKEA spent $2 billion to enter Russia.

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F. Joint Ventures

•Entry strategy for a single target country in which the partners

share ownership of a newly-created business entity

•Builds upon each partner’s strengths

•Examples: Uniqlo and Grameen (Bangladesh)

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 Joint Ventures
•Advantages
– Allows for risk sharing–financial
and political
– Provides opportunity to learn new
environment
– Provides opportunity to achieve
synergy by combining strengths of
partners
– May be the only way to enter
market given barriers to entry
•Disadvantages
– Requires more investment than a
licensing agreement
– Must share rewards as well as
risks
– Requires strong coordination
– Potential for conflict among
partners
– Partner may become a competitor
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 Investment via
Direct Foreign Investment

•Start-up of new operations

– Greenfield operations or
– Greenfield investment

•Merger with an existing enterprise

•Acquisition of an existing enterprise

•Examples: Volkswagen, 70% stake in Skoda Motors,

Czech Republic (equity), Honda, $550 million auto
assembly plant in Indiana (new operations)

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Examples of Market Entry &
Expansion by Joint Venture

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Examples of Equity Stake

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Examples of Acquisitions

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 Global Strategic Partnerships

Possible terms:

-Collaborative agreements

-Strategic alliances
The Star Alliance is made up of six airlines.
-Strategic international alliances

-Global strategic partnerships

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 The Nature of
Global Strategic Partnerships

•Participants remain independent following

formation of the alliance

•Participants share benefits of alliance as well as

control over performance of assigned tasks

•Participants make ongoing contributions in

technology, products, and other key strategic
areas

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 Five Attributes of True Global Strategic Partnerships

o Two or more companies develop a joint long-term

strategy

o Relationship is reciprocal

o Partners’ vision and efforts are global

o Relationship is organized along horizontal lines (not

vertical)

o When competing in markets not covered by alliance,

participants retain national and ideological identities

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 Success Factors of Alliances

•Mission: Successful GSPs create win-win situations,

where participants pursue objectives on the basis of mutual
need or advantage.

•Strategy: A company may establish separate GSPs with

different partners; strategy must be thought out up front to
avoid conflicts.

•Governance: Discussion and consensus must be the

norms. Partners must be viewed as equals.

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•Culture: Personal chemistry is important, as is the
successful development of a shared set of values.

•Organization: Innovative structures and designs may be

needed to offset the complexity of multi-country
management.

•Management: Potentially divisive issues must be

identified in advance and clear, unitary lines of authority
established that will result in commitment by all partners.

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 Examples of
Global Strategic Alliances

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 Alliances with Asian Competitors

•Four common problem areas

– Each partner had a different dream

– Each must contribute to the alliance and each must

depend on the other to a degree that justifies the
alliance

– Differences in management philosophy,

expectations, and approaches

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Cooperative Strategies in South Korea: Chaebol

•Composed of dozens of companies, centered around a bank

or holding company, and dominated by a founding family

– Samsung
– LG
– Hyundai
– Daewoo

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 Strategic Alliances?
A strategic alliance is a type of agreement between two
companies to reap the benefits of a particular project mutually,
wherein, both agree to share resources and thus result in
synergy to execute the project thereby resulting in higher profit
margin. In addition, both companies retain their indepdence
outside the scope of the project.

Examples:

1. Danone and Grameen in Bnagladesh

2. Starbucks and TATA in India.
3.Maruti and Suzuki

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 Reasons behind Forming Strategic Alliance

Businesses create a strategic alliance for various reasons,

and they’re as follows;
•Achieve a competitive edge against the common competitor
•To collect resources to create a larger fund
•Learning the know-how of the new technology
•Achieving a price competitive edge
•Minimizing the risk factor of research and development
•Achieve economies of scale and cost reduction
•Maintaining the top leading role
•Speed up the process of the product development
•Entering into the new market
•Entering into the restricted market like the Chinese market

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 Types of strategic Alliances
# Joint Venture
A joint venture is established when the
parent companies establish a new 
child company. For example, Company A
and Company B (parent companies) can
form a joint venture by creating Company
C.
Google and NASA together
developing google earth, TATA,
In addition, if Company A and Company
and SIA together joint ventured
B each own 50% of the C company, it is
into forming Vistara airlines in
defined as a 50-50 Joint Venture. If
India, Mahindra-Renault also
Company A owns 70% and Company B
formed not so popular and
owns 30%, the joint venture is classified
unsuccessful JV in the
as a Majority-owned Venture.
automobile sector.

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#Equity Strategic Alliance

An equity strategic alliance is created when one company

purchases a certain equity percentage of the other company. If
Company A purchases 40% of the equity in Company B, an equity
strategic alliance would be formed.

Panasonic, in collaboration with Tesla motors (2009) for using

their batteries in the car, Walmart had invested in Indian e-
commerce giant Flipkart.
 

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#Non-equity Strategic Alliance

A non-equity strategic alliance is created when two or more

companies sign a contractual relationship to pool their
resources and capabilities together.

Partnership between Starbucks and Kroger, Maruti-Suzuki

alliance in India.

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A strategic business alliance needs five key components
to be successful.

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A successful strategic alliance:

1.It is critical to the success of a core business goal or

objective.

2.It is critical to the development or maintenance of a core

competency or other source of competitive advantage.

3.Blocks a competitive threat.

4.Creates or maintains strategic choices for the firm.

5.It mitigates a significant risk to the business.

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 Advantages of a strategic alliance

#1. Speed up the entry into a new market:

A strategic alliances is an effective way to enter a new market.

Companies can easily reach the customers and can avoid initial
hardships of new business by getting into alliance with already
existing companies in the market.

#2. Enhance sales:

Companies can increase their sales and expand their business by

getting into alliance with other companies which otherwise is very
difficult for companies.

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#3. Learn new skills and technology:

Companies can learn and obtain skills and technology of other

company to enhance their own business.

#4. Divided fixed costs and resources:

When companies get into an alliance, they work for a common

goal by dividing fixed costs and resources required for the
business.

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#5. Innovative products and services:

When two companies from completely two industries come

together, they develop innovative products which are beneficial for
both companies and help them to enhance their profits.

#6. Enhanced distribution channels:

Companies share their resources when they get into business

alliance this allows companies to establish business relationships
with new distribution channels and in this way, they can increase
the reachability and availability of their products and services.

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#7. Easy to get into the international market:

Usually, it is a complex and difficult process for a company to

enter into the international market. A strategic alliances between
two international companies make it easy for foreign companies
to establish their business. With such an alliance, both companies
take advantage of and boost their business.

#8. Builds the image of the brand:

Strategic alliances with leading companies improves the image of

a company in the market. Customers trust the brand if they know
about the association of a brand with the brand that they already
know.

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 Disadvantages of a strategic alliance

#1. Poor Management of the business alliances:

In a strategic alliances, both companies are responsible for their part

and have no responsibility for other’s business activities, which results
in poor management over the business alliance.

#2. Poor Communication:

There are chances that companies might have poor communication

because of the lack of bonding between the involved companies. Poor
communication can result in poor decisions and loss of the company’s
credibility and business in the market.

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# 3. Benefits are unequal:

It is not necessary that companies which are involved in the alliance get
equal benefits. Sometimes one company gets more benefits than the
other company.
There are chances that one business does not hold up their end of the
deal honestly, which results in profit loss for other company.

#4. The risk to reputation:

There is always a certain percentage of risk of failure of a company no

matter how much you prepare and in strategic alliances, the risk of
failure increases as the reputation of your business is also influenced
by the actions of the alliance company. If they fail in their business
dealings in some way, it also impacts the reputation and profit of your
company.
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#5. Barriers in work culture and language:

This type of problem takes place when two companies from different
nationalities come together to make a strategic alliances. Different
companies have different work culture, and the difference between the
work culture of different companies is huge when they are from different
nations.

This causes conflicts between the employees of the companies and

between the management. In addition to this, language is another barrier
that makes strategic alliance ineffective. Due to language barrier
employees of alliance companies find it hard to communicate with one
another and to convey what they want to convey effectively. Because of
this reason, a strategic alliances is opposed by employees.

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 #6. Risks of conflicts:

The risk of conflicts increases when two companies of different work

culture come together to work on a project. Most of the times, companies
work hard to sort out all the conflicts that might take place in future and
take precautionary actions.
But a problem arises when something unexpected happens and cause
conflicts among the employees of the companies. This can result in the
setbacks in the alliance.

#7. Legal issues:

Lead to legal issues which can damage the image of a company even
when they are not at fault. Both partners will be held liable in a
lawsuit. There are chances that you get into an alliance with a
dishonest partner, and you will end up entangled with legal issues
rather than making a profit from the alliance.

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 Risks Associated with Strategic Alliance

Forming an alliance has it’s own cons/risks associated

with it; they are listed below.

•There are often hidden costs that may not be visible

initially, which will hamper the profitability, or there
may be financial difficulties.
•It is challenging to manage the newly formed entity, as
there will be institutional and cultural differences.
•Any actions taken outside the agreement can affect the
relationship and, thus, the trust of companies forming
the alliance.
•Data confidentiality is at risk as both participating
companies will share sensitive information and can be
easily misused.

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•A company that has commanded in an alliance can misuse its
position and thus deviating from the actual purpose of the
alliance.

•There may be quality issues related to the production of

goods from an effectively formed alliance.

•Due to alliance, a company with a better say in a particular

process may lose control of the operation to the stronger
company in the alliance.

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Challenges

•The cultural difference may be difficult to contain in the

newly formed entity.

•It is usually a difficult task for employees to determine

the actual partnership goals in an alliance.

•Two partners in an alliance might recognize that each

other are not an ideal match to form an alliance.

•There may be differences of opinion among the partners

regarding business decisions.

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Strategy Options for Global Firms

Locating
Locating facilities
facilities Exporting
Exporting
abroad
abroad

Global
Global
International
International Strategy
Strategy Importing
Importing
strategic
strategic alliances
alliances Options
Options

International
International Foreign
Foreign
franchising
franchising licensing
licensing

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 Strategy Options for Global Firms

Exporting
Selling products produced in the home
country to customers in another country.
Low-cost way to expand into
international markets
Ease of selling on the Web has fueled
export activity.

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Exporting Challenges

Communicating in a foreign language

International shipping

Product modification

Governmental regulations and relations

Currency exchange rates and payment methods

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Importing

Selling goods produced in another country

to buyers in the home country.

Success requires finding a good product vendor.

Global Sourcing Strategy

Connecting with overseas suppliers

that can provide products or services
a firm needs to operate successfully.

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Foreign Licensing
Allowing a firm in another country to purchase the right to
manufacture and sell a firm’s products in international
markets.
Licensee—the company buying the licensing rights
Licensor—the company selling the licensing rights
Royalties
Fees paid by the licensee to the licensor for each unit
produced under a licensing contract
Counterfeit activity

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International Franchising

Selling a standard package of products, systems, and

management services to a firm in another country.

International Strategic Alliances

A combination of efforts and/or assets of firm in

different countries for the sake of pooling resources and
sharing the risks of an enterprise.

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Locating Facilities Abroad

Cross-border acquisition

The purchase by a business in one country

of a company located in another country

Greenfield venture

A wholly owned subsidiary formed

“from scratch” in another country

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 Challenges to Global Business

Political Risk

The potential for political forces in a country to

negatively affect the performance of businesses
operating within.

Economic Risk

The probability government mismanagement of the

economy changes the business environment in ways
that hinder the performance of firms operating there.

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Exchange rate—the value of one country’s currency
relative to that of another country. Variations in
currency values affects the profitability of
international trade deals.

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 Financing Assistance for
Global Enterprises

Private Banks

Letter of credit
An agreement issued by a bank to honor a draft or other
demand for payment when specified conditions are met.

Bill of lading
A document indicating that a product has been shipped
and the title to that product has been transferred.

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Where in the World Are Entrepreneurial Companies
Doing Business?

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