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Strategic Alliance :

Definition :
An agreement between two or more individuals or entities stating that the involved parties will act in a certain
way in order to achieve a common goal. Strategic alliances usually make sense when the parties involved
have complementary strengths.

Components Of Strategic alliance :

1) Exporting
2) Turnkey Projects
3) Licensing
4) Franchising
5) Joint Ventures
6) Wholly Owned Subsidiaries

1) EXPORTING :
sale of products produced in one country to residents of another country

Advantages:
• Avoids cost of establishing manufacturing operations
• May help achieve experience curve and location economies

Disadvantages:
• May compete with low-cost location manufacturers
• Possible high transportation costs
• Tariff barriers
• Possible lack of control over distribution channels

2) TURNKEY PROJECTS:
contractor agrees to handle design, construction, and start-up of project, including training of personnel. At
completion of contract, foreign client is handed the “key” to the project.

Examples:
construction of an oil refinery, electric power plant,
housing development

Advantages:
• Can earn a return on knowledge asset
• Less risky than conventional FDI

Disadvantages:
• No long-term interest in the foreign country
• May create a competitor

3) LICENSING:
A company (licensor) licenses the right to use intangible property (intellectual property), including patents,
inventions, formulas, designs, copyrights, trademarks, work systems, work methods, technology, etc. to
another firm (licensee). In return for giving this permission to licensee, licensor collects a royalty fee on every
unit the licensee sells.
Example:
sodas, pharmaceuticals, Mickey Mouse toys

Advantages:
• Overcomes restrictive investment barriers.
• Increases profitability.
• Extends profitability, product life cycle, and applications of intangible property
• Allows firms with inadequate capital to participate in global arena.

Disadvantages:
• Lack of tight control over activity in a market.
• Limits flexibility of a firm to obtain most benefit from experience curves and learning effects
Can help to create future competitors.

Example:
Pharmaceuticals
At Bayer, we've increased research productivity more than 50% over the past five years. We've implemented
new technologies like Pharmaco- and Toxicogenomics to refine our drug development process. We've
launched new drugs while continuing to support cornerstone products like Cipro®, Avelox®, and the classic
Bayer Aspirin line. We've become the recognized leader in clinical trial standards, ensuring greater safety for
the patients who use our drugs. And our partners helped us every step of the way.
Our collaborations help us discover new therapies smarter and faster. That's why our International Cooperation
and Licensing Group (ICL) is always looking to develop new partnerships that enhance our internal
capabilities. Whether through research, licensing, or marketing agreements, together we can form an alliance
that truly impacts human health.

4) FRANCHISING:
Reasons for FDI
WHEN TO CHOOSE HORIZONTAL FOREIGN DIRECT INVESTMENT

How high are Low


transportation costs and Export
tariffs? No
High Horizontal FDI
Is know-how amenable to
licensing?
Yes Yes
Horizontal FDI
Is tight control over foreign
operation required?

No No
Can know-how be protected by Horizontal FDI
licensing contract?
Yes
Then license
5) JOINT VENTURES :
Joint venture: cooperative undertaking between two or more firms, usually to create a completely new,
separate legal entity. The partners involved usually assume equity positions in the joint venture.

Example:
NUMMI (j.v. between Toyota and GM),Fuji-Xerox

Advantages:
• Benefit from local partner’s knowledge.
• Shared costs/risks with partner.
• Reduced political risk.

Disadvantages:
• Risk giving control of technology to partner.
• May not realize experience curve or location economies. Shared ownership can lead to conflict

6) WHOLLY-OWNED SUBSIDIARIES:

• A subsidiary in which a company owns 100%


• Subsidiaries can be established through either Green-field investments or acquisitions.

Examples:
Starbuck’s purchases Seattle Coffee chain in Great Britain; Disney Corp. builds Euro Disney in Paris

Advantages:
• No risk of losing technical competence to a competitor.
• Tight control of operations.
• Realize learning curve and location economies.

Disadvantage:
• Bear full cost and risk.
• Greater economic and political risks.
• Greater uncertainty.

International Strategic Alliances :

• Cooperative agreements between potential or actual competitors in different countries.


• Scope of strategic alliances: complete or by function (e.g. production, marketing, R & D, financial)
• Nature of strategic alliances: from joint ventures to loose, short-term contractual agreements.

Advantages:

• Facilitate entry into market.


• Share fixed costs.
• Bring together skills and assets that neither company has or can develop.
• Establish industry technology standards.

Disadvantages:
• Competitors get low cost route to technology and markets, opportunism of alliance partner prevails.

Strategic Alliances Results :

• Many companies find that Strategic Alliances are a good way to:
• Get access to foreign markets
• Learn without the entire risk
• Participate in markets when a company may not have the skill, resources, or people to do it alone
• Avoid the high cost of technology development
• But, there is a high rate of failure and difficulty in achieving the desired success.

Strategic Alliances: Approach

• Partner Selection.
• Get as much information as possible on the potential partner.
• Collect data from informed third parties.
• Former partners.
• Investment bankers.
• Former employees.
• Get to know the potential partner before committing.
• Managing the Alliance.
• Build trust.
• Relational capital.
• Learning from partners.
• Diffusion of knowledge.
• Focus on quality, clarity, and frequency of communication.

Example :

General Mills and Nestle created Cereal Partners Worldwide, a joint venture.
Nestle had: established plants, well-known brand name, strong distribution in Europe.
General Mills:
cereal technology, proven cereal brands, and solid marketing.
Results: so successful( #2 on European continent), they plan to extend to other market areas outside of
Europe