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

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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 alliancecollaboration is of strategic importance to
one or more of the companies
Collaborationsprovide different opportunities and problems
than do trade or wholly owned direct investment

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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

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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

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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

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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 costssometimes 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

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General Motives for Collaboration (cont.)

Specialize in competencies
Resource-based view of the firmholds 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 companys strategic priority based on its
best competencies
Avoid competitionwhen 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 everyones profits
Secure vertical linkscompanies may lack competence or
resources to become fully vertically integrated
Secure horizontal linksmay provide finished products or
components

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General Motives for Collaboration (cont.)

Gain market knowledgelearn about a partners technology,
operating methods, or home markets

International Motives for Collaboration

Gain location-specific assetscollaboration 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 constraintscountry may require foreign
companies to share ownership
Collaboration a means of protecting assets
hinders nonassociated companies from pirating the
asset
Diversify geographicallycan smooth its sales and earnings
because business cycles differ
Minimize exposure in risky environmentsreduce base of
assets located abroad

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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 abroadmay reduce some
advantages of more foreign expansion

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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 motivethe desire for faster
start-up, lower costs, or access to additional resources
Cross-licensingexchange of technology among companies
Reduces competition on products and in markets
Paymentvaries 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

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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 licensors and licensees
countries) regulation of licensing
Level of competition among alternative
suppliers of similar technology
Political and business risks in the licensees
country
Product and industry norms
Technology-absorbing capacity of the
licensees country

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Determinants of Compensation for International

Licensing of Technology
LICENSORS OFFER
PRICE

LICENSEES BID PRICE

Upper limit: Smaller of

1. Estimate of licensees
additional profits from
use of technology
or
2. Estimate of licensees
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 licensors direct
transfer costs

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Franchising
Specialized form of licensingfranchisor
Sells an independent franchisee the use of intangible
property
Operationally assists the business
Franchisor and franchiseeact 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

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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

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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 entailspublic relations, price, export
financing, managerial and technological quality, experience,
and reputation

Joint Ventures
More than one organization owns a company
Consortiummore than two organizations participate
Management problems increase with more owners
A partners control of operations decreases
Appeal to companies new at foreign operations

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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
Collaborations importance to partners
One partner may devote more managerial attention to
the collaboration
due to differences in size of the partners
Differing objectivespartners objectives may evolve
differently over time

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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

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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

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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 companys
international operations change and grow

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Managing Foreign Arrangements (cont.)

Finding compatible partnerscompany 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

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Managing Foreign Arrangements (cont.)

Contractual provisionsguard 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 assets use
management responsibilities of each partner
future commitments of each partner
partners disposal of outcomes of collaborative
arrangement
Performance assessmentwhen 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

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