Cooperative Modes of Market Entry

1. Strategic Alliances

Strategic alliances, which belong to the category of cooperative market entry strategies, are formal mecha­nisms that are established to strengthen the participating firms’ competitive positions in the markets. Interna­tional strategic alliances are working partnerships between firms across national boundaries in the same or different industries. Strategic alliances are agreements between two or more participating organizations that target business objectives that are rather long term (Deresky 2014). The firm members usually have access to strategically relevant resources, such as client data and distribution channels that are shared between the alliance partners. While vertical strategic alliances display cooperation between suppliers and buyers, horizontal strategic alliances are characterized by cooperation at the same stage of value-added activities. Lateral alliances entail the firms’ cooperative sharing of products and services originating in different lines of business (Welge & Holtbrugge 2015).

Firms agree on cooperative strategies with other industry stakeholders – such as competitors, suppliers, and customers – for various strategic purposes. Firstly, an international strategic alliance may facilitate entry into a foreign market because of the regional expertise and market goodwill of the local firm. The local firm may help secure government and public approval to establish the business. Market entry activities tend to be more efficient because the foreign firm supports entry with its regional marketing expertise and better information access to behavioral aspects, such as purchase attitudes, service expectations, and design tastes of the customers. An alliance, supposing it runs well, is a way to bring together complementary knowledge, such as regional client data, that neither company could easily develop on its own.

Firms seek to establish strategic alliances in order to implement different product branding strategies in in­ternational markets. These strategies include direct extension of an existing brand to the new product, intro­ducing a new brand for a new product, and collaborating with a local brand (of the partner firm) to establish a brand alliance for a new product (Li & He 2013).

In various markets, particularly at the beginning of a new technology life-cycle, firms have to decide on com­mon technological or industry standards. At this stage, the firm’s management often agrees on strategic al­liances in order to implement their favored technological standards for the future. An alliance of companies can look forward to promising earnings due to the fact that the defeated alliances of firms, in terms of another competing technological standard, usually have to license the superior technology.

The formal difference, compared to a joint venture, is that a strategic alliance does not come along with a legally independent entity. All firms participating in a strategic alliance remain legally fully responsible for their business. In most cases, a strategic alliance is established as non-equity cooperation, meaning that the partners do not commit mutual financial investments (Hollensen 2014). However, there are also cases where firms decide to establish a strategic alliance in which one partner acquires a stake in the other partner or where both partners mutually hold equity participations. If the alliance partner is located in a target foreign market, the equity participating firm undertakes a foreign direct investment. Figure 3.8 illustrates the de­cisional alternatives of cooperative strategies, distinguishing between strategic alliances and joint ventures and corresponding relevant facets.

Potential disadvantages from alliance agreements derive from the risk of resource transfer, such as client data, marketing, and technological and managerial knowledge, to the partner firm, which is often, but not necessarily, a competitor. The right partner selection is of vital importance to the success of the alliance. A suitable partner should not exploit the alliance for its own needs. For example, it should not expropriate human resources, such as recruiting highly qualified alliance partner staff through attractive job offers in order to employ them in its own firm. The partner selection process plays a crucial role and includes the collection and analysis of publicly available information regarding potential partners as well as opinions, if available, from other industry stakeholders, such as logistic firms, suppliers, and customers (Hill 2012)

Against the background of liberalized market structures and the strategic importance of efficient resource allocation and global product launch speed, firms increasingly tend to agree on alliances (Inkpen & Ra- maswamy 2006). For sure, the building of a successful alliance partnership belongs to the most complex of management tasks. Synergy effects of the partner firms often are not performing as expected – as many firms involved in international alliances have experienced to their regret.

2. Joint Ventures

A joint venture is formed when two or more legally distinct firms decide to own and control a common busi­ness – for example, manufacturing and sales of a particular product or service. A joint venture indicates a legally independent entity. The controlling parties, also named joint venture parents, contribute assets and, depending on each party’s equity share, the revenue and risks (Rugman & Collinson 2012). An equal joint ven­ture describes the constellation when each party contributes half of the amount of equity, thus sharing the managerial control, risk, and earnings. Majority joint ventures describe the constellation when a firm owns more than fifty percent share of the joint venture and, thus, secures control of strategic-managerial decisions and corresponding resource allocations (Hill 2012).

A joint venture can be formed between firms that run businesses in the same industry, indicating similar value-added activities (horizontal joint venture). Alternatively, a joint venture can be established between firms that are located at different stages of the industry value-added chain (vertical joint venture), such as a supplier-buyer cooperation. Conglomerate joint ventures describe a constellation when the cooperating firms join different lines of businesses (Kutschker & Schmid 2006).

An international joint venture (IJV) describes an arrangement where at least one parent organization is head­quartered outside the venture’s country of operation or if the venture has a significant level of operations in more than just one country. Driven by the fundamental changes that have occurred during recent decades toward internationalization of markets and competition and the increasing costs and complexity of techno­logical developments, IJVs have become an important mode for international market entry (Frayne & Geringer 2000: 406). The donation and share of resources – such as technological and managerial knowledge, oper­ational capacities, management expertise, and the mutual access of the supplier and customer networks – serve as important advantages for the partner firms.

An IJV can be formed in order to organize research and development and/or manufacturing facilities for the involved partners. This arrangement belongs to the category of an upstream-based partnership. When companies join their marketing, distribution, sales, and after-sales service network, this belongs to down­stream-based collaborations. In the case where the joint venture partners have complementary competencies in the value chain (for instance, company A, technology, and company B, brand name), this is an upstream/ downstream-based collaboration (Lorange & Roos 1995).

IJVs are often established under time pressure and fast-changing market environments. Consequently, the qualification development of the venture staff is usually done too quickly or does not take place at all. How­ever, the proper preparation of the venture staff through adequate training programs is of vital importance for the venture lifetime. Cooperative market entry strategies through IJVs are not static constructs. The factor of time plays an important role for the partner firms, which unavoidably change their industry network po­sition as the worldwide market circumstances continuously develop. The network repositioning process (in a positive or negative direction) often develops unnoticed or underestimated by the firms but, in turn, has a decisive influence on the IJV business success.

When a multinational firm’s strategic business unit performs less profitably than expected or accumulates losses, the top management has to decide whether to restructure or even shut down this poorly operating division. Instead of factory closures, there is the alternative of finding another partner with whom the firm can establish a joint venture, hoping that both parties can better manage operations and, thus, improve the business. The transfer of deficiently operating functions to a legally independent joint venture company is perceived less negatively by the public than factory shutdowns, which usually come along with the release of employees. In the course of transferring the business, both parties’ top management often emphasize the term ‘synergy effects’ as a result of the mutual resource commitment. However, synergy effects are often overesti­mated because both parties, before the joint venture is established, rather hide their individual weaknesses in order to secure a higher interest stake (‘Who wants to join with a poor performing partner?’).

There are several other reasons that firms decide to establish an IJV, such as entry into geographically new markets (Hollensen 2014). For example, firms notice that they lack the necessary market knowledge and brand recognition in the target foreign market. Rather than trying to develop these capabilities internally, the firm may identify another organization that possesses those desired marketing skills. Joint ventures may be helpful when entering a foreign market, particularly where socio-cultural or political/legal differences rel­ative to the home country exist. Cooperation with a firm in the host country can increase the speed of market entry. The bundle of distribution channels increases sales capacity and allows access to geographically di­verse markets. The costs of after-sales service may be reduced, and the service reaction time may be improved. Furthermore, some countries (e.g., India) try to restrict foreign ownership. Governments may create pressure on multinationals to establish international joint ventures with local firms.

Global operations in research and development and operations are expensive, but often necessary to achieve competitive advantages. Joint ventures allow participating firms to pool financial capital, human resources, research and development, and operational capacities to gain economies of scale because of joint use of their facilities, thereby reducing the costs per output unit. Pooling the procurement increases the bargaining power of the joint venture partners and better provides prerequisites for standardized platform manufacture. Joint ventures may also be used to build jointly on the technological expertise of two or more firms in develop­ing products that are technologically beyond the capability and resources of the firms acting independently. Complementary technologies provided by the partners can lead to new product or manufacturing process developments. Joint research and development helps to accelerate product innovations (Hollensen 2014).

Trust is most crucial to the success of an IJV. But how can it be developed? Choose a partner with compatible strategic goals and objectives, and work out with the partner how and to what extent proprietary technol­ogy and sensitive information is to be shared. Recognize that most IJVs usually last a couple of years and probably break up once a partner feels it has incorporated the skills and information it needs to go it alone (Deresky 2014).

When two firms first initiate a relationship and start to interact with each other, trust on both sides might only be present to a limited extent because trustworthy behavior first has to be proved to one another. When the first series of IJV resource transactions are successful and carried out to partners’ satisfaction, firms may be willing to increase the size of the resource and accept higher risks, which naturally correlate with greater benefits. This implies that firms gradually gain trust in the relationship when a series of resource exchange episodes within the IJV have been performed successfully. Likewise, it posits that an increase in trust en­hances the partners’ willingness to increasingly commit to the exchange relationship. Shared values and mutual interests and IJV business objectives entail that both parties have a congruent vision of the direction in which they want to develop their relationship (Lambe, Wittmann, & Spekman 2001).

Joint ventures between Japanese firms follow a certain pattern that is characterized by the mutual wish over time to create a ‘win-win situation.’ The long-term time horizon allows partner firms to build up mutual trust and helps to overcome the short-term venture difficulties that come up during the partnership. Experiences collected in one previous joint venture project improve organizational issues and the corresponding business performance of the next venture operation. Moreover, Japanese firms make sure the joint venture manage­ment does not operate separately and too independently. The management is integrated into the parent firm’s structure and long-term strategic plans. The long-term oriented business relations between Japanese firms mean that the partner firm relations are not interrupted when the venture project comes to an end. Instead, Japanese firms often cooperate on a number of common joint venture projects with one selected partner firm. If a joint venture is ended – because, for example, the market for the corresponding products is no longer there – the cooperation is continued in another project. Panasonic, for example agreed to a joint venture with Hitachi in 2004 concerning shared research activities, manufacture, and distribution of LCD modules. The cooperation between Panasonic and Hitachi was ‘renewed’ and continued in 2008 in terms of research, manufacture, and distribution of LCD modules in the Czech Republic (DisplaySearch 2008).

Considering the complexities associated with operating an IJV, flexibility of the IJV parents is required to adapt to continuously changing conditions in the global markets (Zeira & Newburry 1999). Learning to man­age IJVs is multifaceted, and the success of an IJV participating firm assumes a certain ability to absorb knowl­edge about work ethics, communication behaviors, and business attitudes from the other IJV partner (Glais- ter, Husan, & Buckley 2003; Meschi 2005). Inter-organizational learning is a process where flexibility and adaptability are consistently important in assimilating the knowledge of the partner firm. Applying external knowledge from the partner organization involves the ability to diffuse knowledge, integrate it into the orga­nization, and generate new knowledge from it (Lane, Salk, & Lyles 2001). Commitment to the joint venture from one IJV parent is dependent on the position taken by the other IJV parent. In light of this discussion, there are various reasons for IJV instability that the involved parties should keep in mind and work on when they arise.

  • First, one joint venture partner may show opportunistic behavior and attempt to hide proprietary knowl­edge, such as technological expertise, from the other joint venture participant. This behavior finally causes an IJV failure due to the lack of mutual trust and partners’ willingness to learn (Li 1995; Schuler 2001).
  • Second, tensions are created when either the IJV management or one of the IJV parents redirects its strate­gic focus, changes key objectives, attempts to reposition in the markets, or undertakes major growth or downsizing without prior appropriate communication to the partner.
  • Third, instability occurs when the partners renegotiate contracts (e.g., on technology transfer).
  • Fourth, the reconfiguration of the venture’s ownership and control structures represents a major source of instability because such amendments cause new bargaining dynamics and/or alter the strategic stakes of the partners (Yan & Zeng 1999). Lack of appropriate organizational structures, uncertain managerial roles, and indefinite decision authority negatively influence IJV performance (Schuler 2001). Diverse cul­tural backgrounds of the IJV partners hinder communication and may cause misunderstanding and re­duced motivation of the IJV management (Frayne & Geringer 2000; Muller & Gelbrich 2004).
  • A fifth facet of instability concerns the IJV’s relationship with each parent company. The IJV threatens to become unstable when changes take place that affect the decisional autonomy of the IJV management, such as limitation of their authority (Frayne & Geringer 2000; Yan & Zeng 1999).
  • Sixth, IJVs are often established in markets where the product is positioned at the declining stage of the technology life-cycle. Instead of realizing the business reality, the partners hope that business perfor­mance will improve because they have bundled their mutual resources, which is often a fundamental mistake – as many firms experienced to their regret.
  • Seventh, IJVs are often founded in order to bring complementary resource assets together. For example, one partner contributes technological and engineering knowhow, and the other partner brings market­ing expertise to the venture operations. At first glance, such an approach makes sense. However, engi­neers and marketers often speak a ‘different language’ and have different objectives (e.g., technological state-of-the-art versus costs and prices). This communication challenge is increased when engineers and controlling people and marketers have a different language and cultural background due to the different backgrounds of the joint venture parents.
  • Finally, major technological product developments on the market, unnoticed by one or both IJV partners, may damage the business performance and provoke disputes, which can lead to the termination of the IJV (Contractor & Lorange 1988).

To sum up, IJVs represent ‘mixed-motive games’ in which competitive and cooperative dynamics of the in­volved partners may occur simultaneously. The significant association of operational control with a partner’s achievement of its strategic objectives contributes to competition over resource allocation and pursuit of the unilateral goals of the partner firms (Yan & Gray 2001). Das and Teng (2000) similarly claim potential different motives, such as cooperation versus competition, rigidity versus flexibility, and short-term versus long-term orientation. These differences create a framework of multiple tensions, which can cause partnership insta­bility and finally the termination of the IJV.

Source: Glowik Mario (2020), Market entry strategies: Internationalization theories, concepts and cases, De Gruyter Oldenbourg; 3rd edition.

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