CHAPTER 14

COLLABORATIVE STRATEGIES


Case: Grupo Industrial Alfa

- Mexican-based Grupo Industrial Alfa

- Family Enterprise

- In 1973, the Mexican government sought to counter foreign control of companies by enacting laws that provided fore restrictions on foreign equity in new ventures and on the expansion of existing investments having large foreign ownership.

- Alfa established numerous Mexican companies in which it owned a majority interest, with a foreign partner holding a minority interest.

- Restrictions on foreign ownership in Mexico have largely been lifted



I - INTRODUCTION

International Business may be conducted in various ways.

Companies frequently handle much of their international operations through collaborative forms that lessen their control.

The truly experienced MNE with a fully global orientation usually uses most of the operational forms available, selecting them according to specific product or foreign operating characteristics.


II - MOTIVES FOR COLLABORATIVE ARRANGEMENTS

Companies establish collaborative arrangements for domestic operations, and their motives carry over to their international operations as well.

Keep in mind that each organization participating in a collaborative agreement has its own primary objective for operating internationally and its own motive for collaborating rather than handling the operations independently.

A - Motives for Collaborative Arrangements: General

- Spread and Reduce Costs: sometimes it is cheaper to get another company to handle work, especially:

a) At small volume
b) When the other company has excess capacity

- Specialize in Competencies: licensing can yield a return on a product that does not fit the company's strategic priority based on its best competencies.

- Avoid Competition: sometimes markets are not large enough to justify entry of as many companies as would like to tap that market. Thus, various companies may band together so as not to compete.

- Secure Vertical and Horizontal Linkages: there are potential cost savings and supply assurances from vertical integration, however companies may lack the competence or resources necessary to won and manage the full value-chain of activities.

- Gain knowledge: the motive for many companies' entries into collaborative arrangements is to learn so that their own competencies will broaden or deepen, thus making them more competitive in the future.


B - Motives for Collaborative Arrangements: International

- Gain Location- Specific Assets: cultural, political competitive, and economic differences among countries create barriers for companies that want to operate abroad.

- Overcome Legal Constraints: A company may be constrained in its choice of operating form regardless of its preferences. Collaboration can also be a means of protecting an asset.
To prevent pirating of these proprietary assets, companies sometimes have made collaborative agreements with local companies, which then monitor to ensure that no one else uses the asset locally.

- Diversify Geographically: not only product diversification but also geographic diversification among countries can aid a company in smoothing its sales and profits.

- Minimize exposure in risky environments: political and monetary risk.


III - TYPES OF COLLABORATIVE ARRANGEMENTS

The forms of foreign operations differ in terms of both the amount of resources a company commits to foreign operations and the proportion of the resources located at home rather than abroad.

Control: the more a company deals externally, the more likely it is to lose control over decisions that may affect its global optimization.

Prior expansion of the Company: when a company already has operations in place within a foreign country, some of the advantages of contracting with another company to handle production or sales are no longer as prevalent.

A - LICENSING

Under a licensing agreement, a company grants rights to intangible property to another company for a specified period, and in exchange the licensee pays a royalty to the licensor.

Intangible property: patents, designs, formulas, copyrights, trademarks, franchises, procedures.

- Major Motives: desire for faster start-up, lower costs, or access to additional resources.

- Payments: front-end payment to cover transfer costs and then follow with another set of fees based on actual or projected usage

. Period, regional coverage, product quality requirements, market restrictions.

B - FRANCHISING

Franchising is a specialized form of licensing in which the franchisor not only sells an independent franchise the use of a trademark that is an essential asset for the franchisee's business, but also more than nominally assists on a continuing basis in the operation of business.

Franchisors face a dilemma:

a) the more standardization, the less acceptance in the foreign country
b) the more adjustment to the foreign country the less the franchisor is needed.

C - MANAGEMENT CONTRACTS

One of the most important assets a company may have at its disposal is management talent. The transmission of management skills internationally has depended largely on foreign investments that deploy expatriate managers and specialists to foreign countries.

D - TURNKEY OPERATIONS

Turnkey projects involve a contract for construction of operating facilities that are transferred for a fee to the owner when they are ready to commence operations.

Companies performing turnkey operations are frequently industrial-equipment manufacturers that supply some of their own equipment for the project.

The customer for a turnkey operation is very often a governmental agency.

E - JOINT-VENTURES

A type ownership sharing very popular among international companies is the joint-venture, in which a company is owned by more than one organization.

Equity Alliances

F - PROBLEMS OF COLLABORATIVE ARRANGEMENTS

A - Choosing a Partner the three Cs

- Compatibility: many MNCs talk of alliances in terms of "marriage

(alliance track record, strategy, corporate culture, management practices and organization, manufacturing)

B - Capability

What is their market strength?
What is the state of their technology?
Is the company a leader?

C - Commitment


Chapter 18

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