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Global Marketing

Warren J. Keegan Mark C. Green

Global Market Entry Strategies: Licensing, Investment and Strategic Alliances

Chapter 9

Global Marketing

Warren J. Keegan Mark C. Green

Global Market Entry Strategies: Licensing, Investment and Strategic Alliances

Chapter 9

Learning Objectives

Trade barriers are falling around the world

Companies need to have a strategy to enter world markets

Starbucks has used direct ownership, licensing, and franchising for shops and products

In 2010, Starbucks had 12,000 cafes in 35 countries and sales of $10.8 billion. Its goal is to reach 40,000 units worldwide.

Starbucks founder and chairman Howard Schultz and his management team have used a variety of market entry approaches—direct ownership, licensing, and franchising—to create an empire of more than 17,000 coffee cafés in 55 countries. In addition, Schultz has

licensed the Starbucks brand name to marketers of non-coffee products such as ice cream. The company has also made forays into movies and recorded music.

Investment Cost of Marketing Entry Strategies

The various entry mode options form a continuum. As shown on this slide, the level of involvement, risk, and financial reward increases as a company moves from market entry strategies such as licensing to joint ventures and ultimately, various forms of investment. When a global company seeks to enter a developing country market, there is an additional strategy issue to address: Whether to replicate the strategy that served the company well in developed markets without significant adaptation. To the extent that the objective of entering the market is to achieve penetration, executives at global companies are well advised to consider embracing a mass-market mind-set. This may well mandate an adaptation strategy.

Which Strategy Should Be Used?

It depends on:

Vision

Attitude toward risk

Available investment capital

How much control is desired

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

Licensing is a contractual arrangement whereby one company (the licensor) makes a legally protected 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 brand name, company name, patent, trade secret, or product formulation.

Some companies that use licensing extensively: Apparel designers (Hugo Boss, Bill Blass, Ralph Lauren), Coca-Cola, Disney, Caterpillar, and the National Basketball Association. Licensing agreements allow companies to extend their brands and generate substantial revenue. It can contribute ROI if performance levels are stated in contracts.

There are two key advantages associated with licensing as a market entry mode. First, because the licensee is typically a local business that will produce and market the goods on a local or regional basis, licensing enables companies to circumvent tariffs, quotas, or similar export barriers discussed in Chapter 8. Second, when appropriate, licensees are granted considerable autonomy and are free to adapt the licensed goods to local tastes.

Licensing allows Disney to create synergies based on its core theme park, motion picture, and television businesses. Its licensees are allowed considerable leeway to adapt colors, materials, or other design elements to local tastes. In China, licensed goods were practically unknown until a few years ago; by 2001, annual sales of all licensed goods totaled $600 million. Industry observers expect that figure to more than double by 2010.

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 inequities

First, because the licensee is typically a local business that will produce and market the goods on a local or regional basis, licensing enables companies to circumvent tariffs, quotas, or similar export barriers discussed in Chapter 8.

Perhaps the most famous example of the opportunity costs associated with licensing dates back to the mid-1950s, when Sony co-founder Masaru Ibuka obtained a licensing agreement for the transistor from AT&T's Bell Laboratories. Ibuka dreamed of using transistors to make small, battery-powered radios. However, the Bell engineers with whom he spoke insisted that it was impossible to manufacture transistors that could handle the high frequencies required for a radio; they advised him to try making hearing aids. Undeterred, Ibuka presented the challenge to his Japanese engineers who spent many months improving high-frequency output. Sony was not the first company to unveil a transistor radio; a U.S.-built product, the Regency, featured transistors from Texas Instruments and a colorful plastic case. However, it was Sony's high quality, distinctive approach to styling and marketing savvy that ultimately translated into worldwide success.

Disadvantages to Licensing

Limited participation

Returns may be lost

Lack of control

Licensee may become competitor

Licensee may exploit company resources

Conversely, the failure to seize an opportunity to license can also lead to dire consequences. In the mid-1980s, Apple Computer chairman John Sculley decided against a broad licensing program for Apple's famed operating system (OS). Such a move would have allowed other computer manufacturers to produce Mac-compatible units. Meanwhile, Microsoft's growing world dominance in both OS and applications got a boost in 1985 from Windows, which featured a Mac-like graphic interface. Apple sued Microsoft for infringing on its intellectual property; however, attorneys for the software giant successfully argued in court that Apple had shared crucial aspects of its OS without limiting Microsoft's right to adapt and improve it. Belatedly, in the mid-1990s, Apple began licensing its operating system to other manufacturers. However, the global market share for machines running the Mac OS continues to hover in the low single digits.

The return of Steve Jobs and Apple's introduction of the new iMac in 1998 marked the start of a new era for Apple. More recently, the popularity of the company's iPod digital music players and iTunes Music Store have boosted its fortunes. However, Apple's failure to license its technology in the pre-Windows era arguably cost the company tens of billions of dollars. What's the basis for this assertion? Microsoft, the winner in the operating systems war, had a market capitalization of nearly $300 billion in 2006. By contrast, Apple’s 2006 market cap was roughly $66 billion.

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

Special Licensing Agreements

Contract Manufacturing – Companies provide technical specifications to a subcontractor or local manufacturer. The subcontractor then oversees production. Such arrangements offer several advantages. The licensing firm can specialize in product design and marketing, while transferring responsibility for ownership of manufacturing facilities to contractors and subcontractors.

Franchising is another variation of licensing strategy. A franchise is a contract between a parent company-franchiser and a franchisee that allows the franchisee to operate a business developed by the franchiser in return for a fee and adherence to franchise-wide policies and practices.

Another advantage of contract manufacturing includes limited commitment of financial and managerial resources and quick entry into target countries, especially when the target market is too small to justify significant investment. One disadvantage, as already noted, is that companies may open themselves to public scrutiny and criticism if workers in contract factories are poorly paid or labor in inhumane circumstances. Timberland and other companies that source in low-wage countries are using image advertising to communicate their corporate policies on sustainable business practices.

Franchising has great appeal to local entrepreneurs anxious to learn and apply Western-style marketing techniques

Franchising Questions

Will local consumers buy your product?

How tough is the local competition?

Does the government respect trademark and franchiser rights?

Can your profits be easily repatriated?

Can you buy all the supplies you need locally?

Is commercial space available and are rents affordable?

Are your local partners financially sound and do they understand the basics of franchising?

The specialty retailing industry favors franchising as a market entry mode. For example, there are more than 2,500 Body Shop stores in 60 countries; 90 percent of the stores are operated by franchisees. Franchising is also a cornerstone of global growth in the fast-food industry; McDonald's reliance on franchising to expand globally is a case in point. The fast-food giant has a well-known global brand name and a business system that can be easily replicated in multiple country markets.

Investment

Partial or full ownership of operations outside of home country

Foreign Direct Investment (FDI)

Forms

Joint ventures

Minority or majority equity stakes

Outright acquisition

IKEA, with affordable furniture and housewares, spent $2 billion in Russia.

Foreign direct investment (FDI) figures 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. Examples of FDI abound: Honda built a $550 million assembly plant in Greensburg, Indiana; Hyundai invested $1 billion in a plant in Montgomery, Alabama.

At the end of 2000, cumulative foreign investment by U.S. companies totaled $1.2 trillion. The top three target countries for U.S. investment were the United Kingdom, Canada, and the Netherlands. Investment in the United States by foreign companies also totaled $1.2 trillion; the United Kingdom, Japan, and the Netherlands were the top three sources of investment.

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: Budweiser and Kirin (Japan), GM and Toyota, GM and Russian government, Ericsson’s cell phones and Sony, Ford and Mazda, Chrysler and BMW

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

Joint venture investment is growing rapidly. China is a case in point; for many companies, the price of market entry is the willingness to pursue a joint venture with a local partner. Procter & Gamble has several joint ventures in China. China Great Wall Computer Group is a joint-venture factory in which IBM is the majority partner with a 51 percent stake.

As one global marketing expert warns, "In an alliance you have to learn skills of the partner, rather than just see it as a way to get a product to sell while avoiding a big investment." Yet, compared with U.S. and European firms, Japanese and Korean firms seem to excel in their ability to leverage new knowledge that comes out of a joint venture. For example, Toyota learned many new things from its partnership with GM—about U.S. supply and transportation and managing American workers—that have been subsequently applied at its Camry plant in Kentucky. However, some American managers involved in the venture complained that the manufacturing expertise they gained was not applied broadly throughout GM. To the extent that this complaint has validity, GM has missed opportunities to leverage new learning. Still, many companies have achieved great successes in joint ventures. Gillette, for example, has used this strategy to introduce its shaving products in the Middle East and Africa.

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)

Large-scale direct expansion by means of establishing new facilities can be expensive and require a major commitment of managerial time and energy. However, political or other environmental factors sometimes dictate this approach. As an alternative to greenfield investment in new facilities, acquisition is an instantaneous—and sometimes, less expensive—approach to market entry or expansion. Although full ownership can yield the additional advantage of avoiding communication and conflict of interest problems that may arise with a joint venture or co-production partner, acquisitions still present the demanding and challenging task of integrating the acquired company into the worldwide organization and coordinating activities.

If government restrictions prevent majority or 100 percent ownership by foreign companies, the investing company will have to settle for a minority equity stake. In Russia, for example, the government restricts foreign ownership in joint ventures to a 49 percent stake. A minority equity stake may also suit a company’s business interests. For example, Samsung was content to purchase a 40 percent stake in computer maker AST. As Samsung manager Michael Yang noted, “We thought 100 percent would be very risky, because any time you have a switch of ownership, that creates a lot of uncertainty among the employees.”

Examples of Market Entry & Expansion by Joint Venture

Examples of Equity Stake

An equity stake is simply an investment; if the investor owns fewer than 50 percent of the shares, it is a minority stake; ownership of more than half the shares makes it a majority.

Examples of Investment to Establish New Operations

Examples of Acquisitions

Global Strategic Partnerships

Possible terms:

Collaborative agreements

Strategic alliances

Strategic international alliances

Global strategic partnerships

The Star Alliance is a GSP made up of six airlines.

Recent changes in the political, economic, sociocultural, and technological environments of the global firm have combined to change the relative importance of those strategies. Trade barriers have fallen, markets have globalized, consumer needs and wants have converged, product life cycles have shortened, and new communications, technologies, and trends have emerged. Although these developments provide unprecedented market opportunities, there are strong strategic implications for the global organization and new challenges for the global marketer. Such strategies will undoubtedly incorporate—or may even be structured around—a variety of collaborations. Once thought of only as joint ventures with the more dominant party reaping most of the benefits (or losses) of the partnership, cross-border alliances are taking on surprising new configurations and even more surprising players.

The Nature of Global Strategic Partnerships

The terminology used to describe the new forms of cooperation strategies varies widely. The phrases collaborative agreements, strategic alliances, strategic international alliances, and global strategic partnerships (GSPs) are frequently used to refer to linkages between companies from different countries who jointly pursue a common goal. A broad spectrum of inter-firm agreements, including joint ventures, can be covered by this terminology. However, the strategic alliances discussed here exhibit three characteristics which are highlighted in this diagram and discussed on the next slide.

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

Five Attributes of True Global Strategic Partnerships

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

Companies forming GSPs must keep these factors in mind. Moreover, successful collaborators will be guided by the following four principles. First, despite the fact that partners are pursuing mutual goals in some areas, partners must remember that they are competitors in others. Second, harmony is not the most important measure of success; some conflict is to be expected. Third, all employees, engineers, and managers must understand where cooperation ends and competitive compromise begins. Finally, as noted earlier, learning from partners is critically important.

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.

Success Factors (Con’t)

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.

Examples of Global Strategic Alliances

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

No corporate memory

Cooperative Alliance in Japan: Keiretsu

Inter-business alliance or enterprise groups in which business families join together to fight for market share

Often cemented by bank ownership of large blocks of stock and by cross-ownership of stock between a company and its buyers and non-financial suppliers

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

Japan’s keiretsu represent a special category of cooperative strategy. A keiretsu is an inter-business alliance or enterprise group that, in the words of one observer, “resembles a fighting clan in which business families join together to vie for market share.” Keiretsu exist in a broad spectrum of markets, including the capital market, primary goods markets, and component parts markets. Keiretsu 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. Further, keiretsu executives can legally sit on each other's boards, and share information, and coordinate prices in closed-door meetings of "presidents' councils." Thus, 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. Several large companies with common ties to a bank are at the center of the Mitsui Group and Mitsubishi Group. These two, together with the Sumitomo, Fuyo, Sanwa, and DKB groups make up the "big six" keiretsu.

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

Hyundai

Daewoo

Like the Japanese keiretsu, chaebol are composed of dozens of companies, centered around a central bank or holding company, and dominated by a founding family. However, chaebol are a more recent phenomenon; in the early 1960s, Korea’s military dictator granted government subsidies and export credits to a select group of companies. By the 1980s, Daewoo, Hyundai, LG, and Samsung had become leading producers of low-cost consumer electronics products. The chaebol were a driving force behind South Korea’s economic miracle; GNP increased from $1.9 billion in 1960 to $238 billion in 1990.

21st Century Cooperative Strategies: Targeting the Digital Future

Alliances between companies in several industries that are undergoing transformation and convergence

Computers

Communications

Consumer electronics

Entertainment

Increasing numbers of companies in all parts of the world are entering into alliances that resemble keiretsu. In fact, the phrase digital keiretsu is frequently used to describe alliances between companies in several industries—computers, communications, consumer electronics, and entertainment—that are undergoing transformation and convergence. These processes are the result of tremendous advances in the ability to transmit and manipulate vast quantities of audio, video, and data and the rapidly approaching era of a global electronic "superhighway" composed of fiber optic cable and digital switching equipment.

Beyond Strategic Alliances

Next stage of evolution of the strategic alliance

Super-alliance

Virtual corporation

The “relationship enterprise” is said to be the next stage of evolution of the strategic alliance. Groupings of firms in different industries and countries, they will be held together by common goals that encourage them to act almost as a single firm. Within the next few decades, Boeing, British Airways, Siemens, TNT, and Snecma might jointly build several new airports in China. As part of the package, British Airways and TNT would be granted preferential routes and landing slots, the Chinese government would contract to buy all its aircraft from Boeing/Snecma, and Siemens would provide air traffic control systems for all 10 airports.

Another perspective on the future of cooperative strategies envisions the emergence of the “virtual corporation.” As described in a recent Business Week cover story, the virtual corporation “will seem to be a single entity with vast capabilities but will really be the result of numerous collaborations assembled only when they’re needed.” On a global level, the virtual corporation could combine the twin competencies of cost effectiveness and responsiveness; thus, it could pursue the “think globally, act locally” philosophy with ease. This reflects the trend toward “mass customization.”

Market Expansion Strategies

Companies must decide to expand by:

Seeking new markets in existing countries

Seeking new country markets for already identified and served market segments

The table illustrates the following strategies:

Strategy 1, country and market concentration, involves targeting a limited number of customer segments in a few countries. This is typically a starting point for most companies. It matches company resources and market investment needs.

Strategy 2, country concentration and segment diversification, a company serves many markets in a few countries. This strategy was implemented by many European companies that remained in Europe and sought growth by expanding into new markets.

Strategy 3, country diversification and market concentration, is the classic global strategy whereby a company seeks out the world market for a product.

Strategy 4, country and segment diversification, is the corporate strategy of a global, multi-business company such as Matsushita. Overall, Matsushita is multi-country in scope and its various business units and groups serve multiple segments.

Looking Ahead to Chapter 10

The Global Marketing Mix–Product and Brand Decisions