International Strategic Alliances

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International Strategic Alliances After studying this chapter, students should be able to: >

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Compare joint ventures and other forms of strategic alliances. Characterize the benefits of strategic alliances. > Describe the scope of strategic alliances. Discuss the forms of management for strategic alliances. Identify the limitations of strategic alliances.

LECTURE OUTLINE OPENING CASE: The European Cereal Wars

The opening case examines the cereal market in Europe and the role of the key players, Cereal Partners Worldwide and Kellogg, within the market. Key Points Kellogg initially began to introduce its cereal to the European market in the 1920s 1920s when when it entered entered the United Kingdom. Kingdom. Since Since then, then, Kellogg has virtual virtually ly created the market for for breakfast cereals cereals in Europe. However, However, the process was not an easy one because Europeans traditionally preferred other foods. •

Today, Today, however, however, the market market is booming. booming. The turnarou turnaround nd is the result of a number of factors: factors: health-conscious health-conscious Europeans are looking for alternatives alternatives to eggs and meat; demand has increased increased for prepackaged foods to ease demands on dualcareer families; families; supermarkets supermarkets with large amounts of shelf space have opened; and the growth of commercial TV has allowed for an increase in advertising. •

General Mills, one of Kellogg’s biggest competitors, noted the opportunities in Europe and made the decision to enter the market. However, However, General Mills knew knew it could not compete head-to-head with powerful Kellogg, and began to look for an ally. •

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General Mills identified Nestlé as a potential partner because Nestlé is the world’s largest food-processing firm. It is a household name in Europe, has a wellestablished distribution system, and owns manufacturing plants worldwide, but it does not have a strong cereal line. In fact, Nestle had been considering approaching General Mills for that very reason. •

Nestlé believed that General Mills would be a good partner because it had a strong knowledge of cereal technology, an array of proven cereal products, and expertise in marketing cereals to consumers. •

A new firm called Cereal Parents Worldwide was formed by the two companies. Under their agreement, General Mills installed its proprietary manufacturing systems in existing Nestle factories, oversaw the production process, and assisted in the development of advertising campaigns. Nestlé agreed to lend its corporate name to the venture’s products and handle sales and distribution. •

At this point in time, CPW is successful and has established itself as a major player in the European cereal markets. CPW has also begun to expand into Latin America and Asia. •

CHAPTER SUMMARY

Chapter Thirteen explores international strategic alliances in detail. The chapter begins with a discussion of the various types of strategic alliances and then goes on to explore the benefits of alliances. The scope of strategic alliances is the subject of the next section, followed by a discussion of how strategic alliances should be managed. Finally, the pitfalls of strategic alliances are considered. I.

INTERNATIONAL CORPORATE COOPERATION •

Strategic alliances , business arrangements whereby two or more firms

cooperate for their mutual benefit, can take many forms including cross-licensing of proprietary information, production sharing, joint research and development, and marketing of each other’s products using existing distribution channels. A joint venture is a special type of strategic alliance in which two or more firms • join together to create a new business entity that is legally separate and distinct from its parents. Strategic alliances are one means of expanding internationally. Other modes of expansion include exporting, licensing, franchising, and FDI (see Chapter 12). However, a strategic alliance differs from these other modes in that it involves cooperation among firms. A joint venture can be managed in any of three ways: parent companies can • jointly manage the venture, one parent can manage the venture alone, or an independent team of managers can be hired to run it. Other types of strategic alliances may involve a more informal management arrangement, such as a coordinating committee. Joint ventures are typically broader in scope and have a longer duration than other types of strategic alliances. In fact, non-joint venture alliances are frequently formed for a specific purpose that has a natural ending. Non-joint venture alliances are generally less stable than joint ventures because they lack a formal organizational structure and have a narrow mission. The text •

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provides an example of a non-joint venture alliance involving United Airlines and British Airways. The number of alliances has skyrocketed because they represent an effective means of competing in international markets. The growth rate in 1980 was about 6 percent per year, but had risen to 22 percent per year by the end of the decade. •

Teaching Note:

Instructors may wish to emphasize how important strategic alliances have become to companies by developing a record of the strategic alliances that have been formed over a period of one year. Students can be divided into twelve small groups, each of which is then assigned to examine the Wall Street Journal (or another business publication) for announcements of strategic alliances in a particular month. Students can classify the alliances according to why they formed, who was involved, etc. This information can then be compiled into a “master list” that demonstrates the growth of strategic alliances. II.

BENEFITS OF STRATEGIC ALLIANCES

The four potential benefits a firm may realize from a strategic alliance are: ease of market entry, shared risk, shared knowledge and expertise, and synergy and competitive advantage. Discuss Figure 13.1 here . Ease of Market Entry

Strategic alliances may represent a means of overcoming the obstacles to entry that can hinder a firm’s international expansion. (See Chapter 11 for a discussion of the basic factors to consider when assessing a foreign market.) Strategic alliances may be a way to achieve the benefits of rapid entry while • keeping costs down, or to overcome regulations imposed by the host government regarding entry modes. Moreover, strategic alliances may be a means of obtaining information about local customers, distribution networks, and suppliers. The text provides several examples of how various companies have employed strategic alliances to facilitate their global expansion. The text also discusses how joint ventures with local firms are sometimes required by host governments. Show Map •

13.1 here . Shared Risk

Strategic alliances can help a firm minimize or control risk because by definition, strategic alliances imply that two or more firms work together, and therefore, risk is shared. The text provides several examples of firms that have controlled risk via strategic alliances. •

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The Ups and Downs of Market Entry

This Venturing Abroad box examines the entry strategy used by Otis Elevator in emerging markets. Otis attempts to capitalize on first mover advantages by quickly linking up with local partners and moving into emerging markets as they open up. in this discussion. The box fits in well with the discussion of shared risk, Review Question 3, and Discussion Question 10. Use Map 13.2

Shared Knowledge and Expertise

A firm may be able to gain knowledge and expertise that it lacks via a strategic alliance. For example, the text points out that one of the main objectives behind the collaboration of Toyota and GM was cross learning. •

Synergy and Competitive Advantage

Synergy and competitive advantage are benefits of strategic alliances that are results of the combination of the other advantages mentioned above. The text provides an example of this concept through a description of the strategic alliance between PepsiCo and a division of Unilever. •

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SCOPE OF STRATEGIC ALLIANCES

The scope of cooperation among firms can vary significantly, depending on the basic objectives of each partner. Figure 13.2 should be used here . Sea Launch: A Match Made in the Heavens

This e-World box describes a joint venture between firms in four countries. The goal of the venture is to capture the lion’s share of the $6.6 billion-a-year market launching satellites into space. Each firm brings unique capabilities to the venture and the venture, Sea Launch, is off to a promising start. Comprehensive Alliances

Comprehensive alliances involve an agreement by participants to perform multiple stages of the process by which goods and services are brought to market. Because this type of alliance requires that firms mesh functional areas such as finance, production, and marketing, most comprehensive alliances are structured as joint ventures. Comprehensive alliances may be the most rapidly growing form of strategic alliances between MNCs. However, they can be complex to arrange. The text provides an example of how General Mills and Nestle were able to gain synergy by combining resources. •

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Functional Alliances

Strategic alliances that have a narrow scope involving only a single functional area of the business are less complex than comprehensive alliances and therefore may not take the form of joint venture. Typical functional strategic alliances include production alliances, marketing alliances, financial alliances, and R&D alliances. A production alliance is a functional alliance in which two or more firms each manufacture products or provide services in a shared or common facility. The text provides several examples of production alliances in the auto and computer industries. A marketing alliance is a functional alliance in which two or more firms share • marketing expertise or services. Typically, this type of agreement involves one partner introducing its products or services into a market in which the other partner already has a presence. The established firm provides the newcomer with assistance in this process in exchange for a fee. •

Culture Clash at GM and Toyota

This Going Global Box emphasizes that strategic alliances that “look good on paper” don’t always turn out as planned. The box discusses GM and Toyota’s alliance to sell cars in Japan. Although the match seemed like a marriage made in heaven, it has proved to be a disappointment for both partners. The box fits in well with a discussion of the scope of strategic alliances and with Review Question 3. A financial alliance is a functional alliance of firms that want to reduce the financial risks associated with a project. Financial risk may be reduced when financial contributions toward the project are shared or when one partner provides the bulk of the financing while the other partner provides special expertise or makes other kinds of contributions. The text provides several examples of financial alliances. An R&D alliance involves an agreement whereby the partner agrees to • undertake joint research to develop new products or services. This type of arrangement has evolved as a result of short technology life cycles and skyrocketing R&D costs. In most cases, R&D alliances do not take the form of joint ventures, but rather cross-licensing. The text provides an example of the R&D alliance between Siemens, Motorola, IBM, and Toshiba. An R&D consortium is a confederation of organizations that band together to • research and develop new products or processes for world markets. Governments play a role in both the formulation and continued operation of R&D consortia. Until recently, U.S. firms were prohibited from entering R&D consortia because of concerns about antitrust. Japanese firms, on the other hand, have been involved in R&D consortia for years. •

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IMPLEMENTATION OF STRATEGIC ALLIANCES

Firms, after concluding a SWOT analysis (see Chapter 11), may conclude that strategic alliances are the best means of expanding internationally. Several issues that then must be considered include selecting a partner, deciding on ownership form, and evaluating joint management concerns.

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Selection of Partners

At least four factors (compatibility, nature of the potential partner’s products or services, the relative safeness of the alliance, and the learning potential of the alliance) should be considered when selecting a partner for collaboration. Compatibility and mutual trust are essential to the success of a strategic • alliance. Alliances that lack these elements will probably fail to succeed. For example, the text notes that incompatibilities between General Electric Corporation and Siemens caused their alliance to fail. The nature of a potential partner’s products or services may impact the • success of a proposed strategic alliance. Most experts recommend that because it is difficult to cooperate with a firm in one market but battle it in a second market, a firm should align itself with a partner whose products and services are complementary to, rather than directly competitive with, its own. The text provides an example of a strategic alliance in which the partners’ products are complementary and an example of a strategic alliance in which the partners’ products are directly competitive. The Relative Safeness of the Alliance . Strategic alliances should be • undertaken cautiously and deliberately as part of the firm’s strategic plan. The process of forming a strategic alliance should include a careful assessment of the potential partner, its previously formed alliances, and its goals and objectives. The text provides a detailed example of how Corning, Inc. and Asahi Video Products developed their joint venture. The Learning Potential of the Alliance . The potential to learn from a partner • should be assessed prior to forming a strategic alliance. In addition, a firm should be careful not to give away information that would put it at a competitive disadvantage if a strategic alliance failed. •

Forms of Ownership

Firms considering forming strategic alliances must determine what form of ownership will be involved. The most common form of strategic alliance is the joint venture; however, in some cases joint ventures may not be possible or desirable and limited partnerships may be employed instead. A public-private venture , a special form of joint venture, involves a partnership • between a privately owned firm and a government. This type of arrangement may be a result of several factors. First, governments may form an alliance with a firm to obtain information related to the development of a particular resource. Second, a firm may be pulled into a joint venture with a government if the country in question does not permit wholly owned foreign operations. Third, firms entering centrally planned economies may have little choice but to establish government involvement. In Central and Eastern Europe, for example, joint ventures were the primary means by which a firm could invest. A joint venture with an existing state-owned firm can benefit a company because it gains access to the firm’s existing consumers. The text illustrates this concept with an example of the alliance between Glaverbel and Skklo Union. •


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Joint Management Considerations

There are three obvious means that may be used to jointly manage a strategic alliance: a shared management agreement, an assigned arrangement, or a •

delegated arrangement. Discuss Figure 13.3 here . Under a shared management agreement, each partner fully and actively • participates in managing the alliance. This type of arrangement is difficult to implement because it requires a high level of coordination and near-perfect agreement between participants. The text illustrates this concept with an example of an agreement between Coca-Cola and France’s Groupe Danone. In contrast, under an assigned arrangement , one partner assumes primary • responsibility for the operations of the strategic alliance. This type of arrangement avoids the conflict and slowdowns that may be associated with a shared management agreement. Finally, under a delegated arrangement , which is reserved for joint ventures, • the partners agree not to get involved in ongoing operations and so delegate management control to the joint venture itself. Executives to run the alliance may be hired from outside the operations, or may be transferred from the parent company, but in either case have real power and autonomy in decision-making. V.

PITFALLS OF STRATEGIC ALLIANCES

The five fundamental sources of problems that threaten the viability of strategic alliances are conflict among partners, access to information, distribution of earnings, potential loss of autonomy, and changing circumstances. These problems are summarized in Figure 13.4. Teaching Note:

The text provides several examples of strategic alliances that have faced problems. Instructors may wish to raise the issue of just when these alliances should be considered failures – how failure should be defined. Instructors may wish to supplement the examples in the text by asking students to find an announcement in the Wall Street Journal (or other business publication) of a strategic alliance that has failed. Incompatibility of Partners

A primary cause of failure in strategic alliances is incompatibility among partners. Firms may be able to anticipate incompatibility problems if the partners carefully discuss and analyze why the alliance is being formed in the first place. If there is no agreement among partners regarding issues such as what the alliance’s strategy should be, how it is to be organized, or how it is to be staffed, the alliance probably will not succeed. •

Access to Information

Collaboration implies that one firm (or both) may have to share proprietary information with the other firm. This access to information issue may be a real concern if a firm enters an agreement not anticipating having to share certain information and then compromises the agreement when the reality of the situation •

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becomes apparent. The text illustrates this concept with an example of an alliance between Unisys and Hitachi and an example of an alliance between Ford and Mazda. Conflicts over Distributing Earnings

Firms involved in strategic alliances not only share costs and risks, they also share profits. The basic distribution of earnings between partners is usually negotiated as part of the original agreement; however, issues relating to the proportion of earnings that will be reinvested, accounting procedures, and transfer pricing may cause problems that could jeopardize the success of an alliance. The text provides an example of the problems related to the distribution of earnings facing the alliance between Rubbermaid and its Dutch partner DSM Group NV. •

Loss of Autonomy

A strategic alliance implies shared risks and profits and also shared control. This shared control may limit the strategy of each participant. In some cases, a strategic alliance may be the initial step in a takeover. The text provides an example of this type of situation that involved Fujitsu and International Computers, Ltd. •

Changing Circumstances

Changing circumstances may affect the viability of a strategic alliance. For example, technological advances may make an agreement obsolete or economic changes may alter the circumstances that originally motivated the agreement. The text illustrates this concept by exploring the situation faced by Ford and Volkswagen's South American joint venture. •

CHAPTER REVIEW 1. What are the basic differences between joint ventures and other types of strategic alliances?

A strategic alliance is a business arrangement in which two or more firms agree to cooperate for their mutual benefit. A joint venture, a special type of strategic alliance, involves the creation of a new business entity that is independent of the parent companies. This separate entity can then be broader in purpose, scope, and duration than other types of strategic alliances. Joint ventures typically have formal management systems, while other types of strategic alliances may be more informally managed. Strategic alliances are usually considered less stable than joint ventures because they lack formal organizational structures and have narrow missions.


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2. Why have strategic alliances grown in popularity in recent years?

Strategic alliances have grown in popularity in recent years because they are an effective means of competing in the global marketplace. In fact, in just a decade, the growth rate of alliances quadrupled from 6 percent a year in 1980, to 22 percent a year in 1990. 3. What are the basic benefits partners are likely to gain from their strategic alliance? Briefly explain each.

The basic benefits partners are likely to gain from their strategic alliances are ease of market entry, shared risk, shared knowledge and expertise, and synergy and competitive advantage. Strategic alliances can ease market entry because they allow firms to overcome barriers such as entrenched competition and hostile government regulations and/or reduce the cost of entry. Strategic alliances can also enable firms to reduce or control exposure to risk. Firms can gain knowledge and expertise via strategic alliances, as well as synergy and competitive advantage. In theory, strategic alliances should help firms to achieve more and compete more effectively than if they acted independently. 4. What are the basic characteristics of a comprehensive alliance? What form is it likely to take?

Comprehensive alliances involve collaboration at multiple stages of the process by which goods and services are brought to the market. Most comprehensive alliances take the form of a joint venture because it is difficult to effectively integrate the differing operating procedures of the parent over a broad range of activities without a formal organizational structure. Typically, comprehensive alliances involve only two firms and may evolve over time. Firms involved in such alliances hope to achieve greater synergy through sheer size and total resources. 5. What are the four common types of functional alliances? Briefly explain each.

The four common types of functional alliances are production alliances, marketing alliances, financial alliances, and R&D alliances. Production alliances involve collaboration in product manufacturing and may involve a shared or common facility. Marketing alliances typically involve a situation whereby one firm with a presence in a particular market assists a new firm in entering that market. Financial alliances are used by firms to reduce the financial risks associated with a project. Finally, R&D alliances involve collaboration to develop new products or services and help participants stay abreast of the rapid technological change that is currently affecting high-technology industries. 6. What is an R&D consortium?

An R&D consortium is a confederation of organizations that bands together to research and develop new products and processes for world markets. Some examples include ESPRIT, BRITE, and RACE.

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7. What factors should be considered in selecting a strategic alliance partner?

At least four factors should be considered in selecting a strategic alliance partner including compatibility, the nature of the potential partner’s products or services, the relative safeness of the alliance, and the learning potential of the alliance. 8. What are the three basic ways of managing a strategic alliance?

There are three basic ways of jointly managing a strategic alliance: through a shared management agreement in which each partner fully and actively participates in managing the alliance, through an assigned arrangement in which one partner assumes the primary responsibility of managing the alliance, and through a delegated arrangement whereby management of the operation is delegated to the joint venture itself. 9. Under what circumstances might a strategic alliance be undertaken by public and private partners?

There are several circumstances that might warrant a public-private venture. First, governments may form partnerships with a private firm to obtain assistance in the development of a particular resource. Second, firms may seek an alliance with a government if the particular country does not permit wholly owned subsidiaries. Finally, firms operating in centrally planned economies may be forced to seek government partners if they are to have freedom to operate. 10. What are the potential pitfalls of strategic alliances?

The potential pitfalls of strategic alliances include conflict among partners (one of the primary causes of failure), access to information (firms may prefer to keep certain information secret), distribution of earnings (profits must be shared among partners), potential loss of autonomy (control must be shared among partners), and changing circumstances (as circumstances change, the rationale behind the formation of an alliance may no longer exist).

QUESTIONS FOR DISCUSSION 1. What are the relative advantages and disadvantages of joint ventures compared to other types of strategic alliances?

A joint venture is a special type of strategic alliance in that a new business entity is created that is legally separate and distinct from its parents. A primary advantage of a joint venture is that the venture can have a broader purpose, scope, and duration compared to other types of strategic alliances. Moreover, joint ventures tend to be more stable than non-joint venture strategic alliances. Joint ventures in which there is shared management or that are managed by one parent may have difficulties because there may be a tendency to try to please management from the founding companies rather than focusing on what is best for the joint venture. In contrast, non-joint venture strategic alliances are useful because they allow participants to focus on a particular project, yet do so without creating a new entity. Furthermore, non-joint venture strategic alliances can help firms overcome short-term hurdles.


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2. Assume you are a manager for a large international firm, which has decided to enlist a foreign partner in a strategic alliance and has asked you to be involved in the collaboration. What effects, if any, might the decision to structure the collaboration as a joint venture have on you personally and on your career?

Students will probably approach this question in different ways. Some students will take the perspective that if they are assigned to work for the joint venture, they will have more exposure to different issues and situations than if they were to continue to work within the large international firm or for a less structured strategic alliance. Students taking this perspective are likely to argue that being a big fish in a small pond is better for their careers than working as a little fish in a big pond. Other students are likely to point out that they may be “left out of the loop” if the alliance is structured as a joint venture because they will not be working directly with the parent company on a day-to-day basis as they would if the venture were structured more informally. Finally, other students will point out that having experience working within the environment of a strategic alliance is good experience regardless of whether it is a joint venture or some other type of strategic alliance. 3. What factors could conceivably cause a sharp decline in the number of new strategic alliances formed?

The number of strategic alliances being formed has been skyrocketing. Firms are turning to strategic alliances because they are an effective way to compete in international markets. There are several factors that could cause a sharp decline in the number of new strategic alliances, however. For example, war typically alters trade and investment patterns, and therefore one could surmise that it might also affect the number of alliances being formed. Similarly, a sudden increase in protectionism might cause a decline in the number of new cross-border alliances being formed. In addition, antitrust regulation has the potential to affect the number of new strategic alliances being formed. 4. Could a firm conceivably undertake too many strategic alliances at one time? Why or why not?

A number of companies today operate within a web of strategic alliances. The text points out, for example, that IBM has over 40 active strategic alliances. However, it is important to recognize that strategic alliances require strong commitment on the part of a firm if they are to succeed. Therefore, it is conceivable that a firm could spread itself too thin by forming too many alliances. However, the real issue is commitment to alliances rather than sheer numbers. 5. Can you think of any foreign products you use that may have been marketed in this country as a result of a strategic alliance? What are they?

Students will probably identify a number of products that have been marketed in the United States as a result of a strategic alliance. Two of the more common products that might be identified are automobiles and computers.

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What are some of the issues involved in a firm’s trying to learn from a strategic alliance partner without giving out too much valuable information of its own?

One of the primary benefits of a strategic alliance is the opportunity it provides for cross learning. However, with this benefit comes one of the primary disadvantages of strategic alliances, the risk of giving away proprietary information. A firm should assess the value of its own information and avoid giving away information that could result in a competitive disadvantage if the strategic alliance is dissolved. In addition, care should be taken to create a “learning objective” so that the opportunity to learn from a partner is not wasted. 7. Why would a firm decide to enter a new market on its own rather than using a strategic alliance?

There are numerous reasons why a firm might decide to enter a new market on its own rather than using a strategic alliance. Some of the more common reasons are protection of proprietary information, distribution of earnings, and strategic autonomy. A firm may want to protect proprietary information and consequently might internalize its expansion effort rather than use a strategic alliance. A firm might want to capitalize on the full potential of a market rather than share profits with a strategic alliance partner. A firm may want to maintain its strategic autonomy and would therefore enter a new market on its own rather than in conjunction with a partner. 8. What are some of the similarities and differences between forming a strategic alliance with a firm from the same country and forming one with a firm from a foreign country?

Many of the issues involved with forming strategic alliances apply to both within-border and cross-border agreements. For example, regardless of whether an alliance is formed within borders or across borders, care should be taken in selecting partners and decisions must be made regarding the form of venture and how it is to be managed. However, crossborder alliances may be more complex than within-border alliances because of physical and physic distance. Firms involved in cross-border alliances may have to adapt to new cultures, political systems, and economic systems, and may have fewer face-to-face work opportunities. 9.

The joint venture between General Mills and Nestlé was worked out in only 23 days. Most experts, however, argue that a firm should spend a long time getting t o know a prospective partner before proceeding with an alliance. What factors might account for CPW being an exception to this general rule?

The relatively short negotiation period between Nestlé and General Mills may be a result of the fact that both companies had already identified each other as potential partners. The strong fit between the two companies may have also been a factor in the short negotiation process. Nestlé lacked a strong line of cereal, while General Mills, interested in the European market, needed a partner that could facilitate its entry there.


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10. Otis Elevator has sought to obtain first-mover advantages by quickly entering emerging markets with the help of local partners. This strategy has proved very successful for Otis. Should all firms adopt this strategy? Under what conditions is this strategy likely to be successful?

Most students will probably agree that there is no “one-size-fits-all” strategy, and that therefore, all firms should not hasten to adopt Otis Elevator’s strategy of being a first mover without carefully assessing their situations. This strategy is likely to be most successful when local partners are strong competitors in the host market. By linking operations with a company that already enjoys brand recognition, has strong ties with local suppliers and distributors, and possesses a firm grasp of the local business landscape, a firm can quickly capitalize on the opportunities in new markets. However, as Otis has found out, finding partners with these credentials is not always easy. In addition, many students may suggest that firms approach new alliances with a degree of caution so that they do not “spread themselves too thin.”

BUILDING GLOBAL SKILLS Essence of the exercise

This exercise is designed to explore a firm’s decision making process in selecting a strategic alliance partner. Students are asked to assume the role of the executive committee of a company, evaluate three possible strategic alliance partners, and identify which partner would be most appropriate. Answers to the follow-up questions: 1. How straightforward or ambiguous was the task of evaluating and ranking the three alternatives?

In answering this question, most students will probably create a list of criteria against which each alternative can be compared. Most students will probably conclude that the task of evaluating and ranking the three was fairly ambiguous in some areas, but straightforward in others. 2. Determine and discuss the degree of agreement or disagreement among the various groups in the class.

Instructors may wish to create a “master list” of decision criteria on the board and then list each group’s analysis of each issue accordingly. In most cases, there will be a fair amount of agreement on certain issues, such as the need for knowledge of the market, but disagreement about other issues, such as the need for a financially strong partner. Other Applications

This exercise asks students to identify an appropriate strategic alliance partner for Resteaze, a mattress company that wants to expand into Europe. Instructors may wish to extend this exercise and discuss what other options (in addition to a strategic alliance) are open to Resteaze. Instructors can ask students to continue working with their groups to identify and rank other modes of expansion available to Resteaze or raise the same issues in a debate format.

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CLOSING CASE Slimline: Marching to a Different Drummer

The closing case describes the operation of Slimline Ltd., a clothing manufacturer located in Sri Lanka. Slimline supplies Victoria's Secret and Marks & Spencer. Slimline is a Sri Lankan-U.S.-British joint venture. Key Points The management at Slimline is considerably higher educated than average for a Sri Lankan garment factory. •

Working conditions are better than average, with greater investments in protective gear for workers, as well as air-conditioned factories and ergonomically advanced work stations. Even a gym is open to all employees. •

Each month Slimline produces 500,000 pieces of sportswear and baby clothes, as well as 1.5 million panties. •

Workers receive significant productivity bonuses as part of their compensation packages. Salaries at Slimline start at 7% above minimum wage. •

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Slimline emphasizes teamwork as well as an egalitarian work environment.


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Case Questions 1.

Slimline Ltd. is a joint venture among three companies – a local Sri Lankan firm, a British firm, and a U.S. firm. What are the benefits of this joint venture to each of these companies? Why did each choose to form a joint venture, rather than operate its own wholly-owned subsidiary?

The joint venture format allows the British firm (Courtaulds Textiles PLC) and the U.S. firm (Mast Industries Inc.) to capitalize on the local expertise of MAS, the Sri Lankan partner. MAS is able to handle hiring and firing and other functions that require an in-depth understanding of local culture and Sri Lankan law. MAS benefits by having a guaranteed market for its products with Courtaulds and Mast, who supply Marks & Spencer and Victoria's Secret, respectively. MAS also benefits from the capital invested by the foreign firms, which allows Slimline to automate its accounting and production systems and improve productivity.

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2. From the perspective of each of the partners, are there any potential pitfalls to joining this joint venture?

All partners must split the profits and split control over the operations. Consequently, each partner is unable to make unilateral decisions. For MAS, the security of built-in buyers limits its flexibility to sell garments produced by Slimline to other potential customers. There is always a danger that MAS could produce comparable garments at other factories and sell them to other British and U.S. distributors. If this were done, the products sold at Marks & Spencer and Victoria's Secret would be less unique. 3. Although many human rights advocates are critical of the working conditions found in many textile factories, Slimline appears to have gone out of its way to provide its workers with first-rate working conditions. Why do you think Slimline has done this? Do you agree with this approach?

The garments produced by Slimline are intended for an upscale market (Marks & Spencer and Victoria's Secret customers). Quality is very important and the goods command a premium price. The good working conditions reduce turnover, which helps maintain high quality production. Also, good working conditions reduce fatigue, which also promotes higher quality work. Slimline’s approach seems to make sense and appears to be working well. 4. Why haven’t other apparel manufacturers adopted Slimline’s approach to doing business?

Much of the world’s apparel industry competes based on price. In such instances, there are huge pressures to keep costs down. Also, it has to do with management philosophy and values. Some manufacturers seek to maximize profit at all costs.

CHINA: HOW TO TELL A WOOFIE FROM A JV

Chapter 13: International Strategic Alliances

Suggestions on incorporating the Multimedia exploration into the lesson plan

The key objectives of Chapter 13 are: • • • •

Comparing joint ventures and other forms of strategic alliances Understanding the scope and benefits of strategic alliances Analyzing the forms of management of strategic alliances Identifying the limitations of strategic alliances


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The following are some suggestions on how best to utilize the CultureQuest materials to achieve these objectives. 1.

The chapter includes three active media hangers, called CultureQuest Insight Into , on the three key topic areas: culture, business, geography & history. In this chapter all three focus on China. For each Active Media lesson, assign your students to review the online materials that include additional video and discussion of the respective topic. They will need to review this online material in order to answer the test questions as well as participate in suggested activities and discussion noted later in this section.

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Review the case in the text at the end of the chapter and use it as an example to initiate additional discussion and activities.

Additional Exercises 1. Student Activity and Discussion:

After the students have read the chapter end case and reviewed the online materials, discuss the following questions and statements. •

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Discuss the cultural nuances of doing business in China and how that has impacted strategic alliances. Research the role of Hong Kong for global companies establishing strategic alliances with mainland China? Has this been a successful or challenging approach for global firms? What challenges or pitfalls might global firms encounter when establishing a strategic alliance with China?

2. Team Activity and Discussion:

Group students into teams of 2-3. Have students select a global company that has operations in China. •

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What factors do you think the company considered when they selected to have a strategic alliance in China? What options and forms of strategic alliances might the company have considered when analyzing China Assess the current stage of the strategic alliance. Has it been successful, yes or no and why?

Additional test questions on this information can be found in the Test Item File.

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Chapter 13

Chapter 13: Test Questions

1. List two options and forms of strategic alliances a company have considered when entering a new market? • • • •

exporting licensing, including franchising Equity joint ventures Wholly owned foreign subsidiaries

2. True or False. Guanxi is an important part of Chinese business culture. True. One of the most important cultural factors in China is guanxi , which is loosely defined as

a connection based on reciprocity. 3. Why might a company choose a WOFE (Woofie) versus a joint venture when entering China? Wholly owned foreign enterprises (WOFEs — sometimes referred to as “woofies”) were started in the mid-1990s as a way to solve some of the problems associated with joint ventures. It was thought that by going it alone in China, companies would be free from the constraints of having to work in partnership with a Chinese company. The reality, though, is that WOFEs haven’t been the ideal structure some thought they would be. For one, WOFEs must still cooperate with Chinese businesses and with the government and its various agencies. For another, entering a complex market like China, with its significant cultural and regulatory differences, can be a real challenge to an uninitiated company without the guiding hand of a Chinese partner. Still, some companies are making it alone and have established China-based operations with a high degree of autonomy from their head offices. 4. True or False. The Chinese government prohibits foreign consumer products from entering the country. False. As China’s economy becomes more integrated, a huge internal market is developing as

well. From Kodak to Proctor & Gamble to Coca-Cola, foreign consumer brands are now enjoying substantial success in the Chinese marketplace.


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Resources for additional information

http://www.tdctrade.com/chinaguide/index_e.htm – Hong Kong TDC is the global marketing arm and service hub for Hong Kong-based manufacturers, traders and service exporters. http://www.usatrade.gov/website/ForOffices.nsf/(CountryList)/China?OpenDocument – U.S. government information on doing business with China. www.worldinformation.com – overview per continent/region; current events; trade, etc. www.nationsonline.org – general information on countries/regions/continents; history, business and finance information www.executiveplanet.com – information on business etiquettes/protocols per country www.nationbynation.com – information on geography, history and people of each country www.culture-quest.com – business and cultural information on countries and regions around the world www.businesstravelogue.com – information on business etiquettes for each country www.economist.com – search for global ethics to see most recent articles http://www.countrybriefings.com/?showPage&PAGE=atmaGlobal.tml&RID=4196 – current economic information on major economies around the world

International Strategic Alliances

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