Intermediate entry modes

Transcription

1 11 Contents 11.1 Introduction 11.2 Contract manufacturing 11.3 Licensing 11.4 Franchising 11.5 Joint ventures/strategic aiances 11.6 Other intermediate entry modes 11.7 Summary Case studies 11.1 Ka-Boo-Ki 11.2 Bayer and GaxoSmithKine 11.3 Video case study: Mariott Learning objectives After studying this chapter you shoud be abe to do the foowing: Describe and understand the main intermediate entry modes: contract manufacturing; icensing; franchising; and joint venture/strategic aiances. Discuss the advantages and disadvantages of the main intermediate entry modes. Expain the different stages in joint-venture formation. Expore the reasons for the divorce of the two parents in a joint-venture consteation. Expore different ways of managing a joint venture/strategic aiance Introduction So far we have assumed that the firm entering foreign markets is suppying them from domestic pants. This is impicit in any form of exporting. However, sometimes the firm may find it either impossibe or undesirabe to suppy a foreign markets from domestic production. are distinguished from export modes because they are primariy vehices for the transfer of knowedge and skis, athough they may aso create export opportunities. They are distinguished from the hierarchica 329

2 Part III Market entry strategies entry modes in the way that there is no fu ownership (by the parent firm) invoved, but ownership and contro can be shared between the parent firm and a oca partner. This is the case with the (equity) joint venture. incude a variety of arrangements, such as icensing, franchising, management contracts, turnkey contracts, joint ventures and technica know-how or coproduction arrangements. In Figure 11.1 the most reevant intermediate modes are shown in the usua vaue chain perspective. Generay speaking, contractua arrangements take pace when firms possessing some sort of competitive advantage are unabe to expoit this advantage because of resource constraints, for instance, but are abe to transfer the advantage to another party. The arrangements often entai ong-term reationships between partner firms and are typicay designed to transfer intermediate goods such as knowedge and/or skis between firms in different countries Contract manufacturing Contract manufacturing Manufacturing is outsourced to an externa partner, speciaized in production and production technoogy. Severa factors may encourage the firm to produce in foreign markets: Desirabiity of being cose to foreign customers. Loca production aows better interaction with oca customer needs concerning product design, deivery and service. Foreign production costs (e.g. abour) are ow. Transportation costs may render heavy or buky products non-competitive. Tariffs or quotas can prevent entry of an exporter s products. In some countries there is government preference for nationa suppiers. Contract manufacturing enabes the firm to have foreign sourcing (production) without making a fina commitment. Management may ack resources or be unwiing to invest equity to estabish and compete manufacturing and seing operations. Yet contract manufacturing keeps the way open for impementing a ong-term foreign deveopment poicy when the time is right. These considerations are perhaps most important to the company with imited resources. Contract manufacturing enabes the firm to deveop and contro R&D, marketing, distribution, saes and servicing of its products in internationa markets, whie handing over responsibiity for production to a oca firm (see Figure 11.1). Payment by the contractor to the contracted party is generay on a per unit basis, and quaity and specification requirements are extremey important. The product can be sod by the contractor in the country of manufacture, its home country, or some other foreign market. This form of business organization is quite common in particuar industries. For exampe, Benetton and IKEA rey heaviy on a contractua network of sma overseas manufacturers. Contract manufacturing aso offers substantia fexibiity. Depending on the duration of the contract, if the firm is dissatisfied with product quaity or reiabiity of deivery it can shift to another manufacturer. In addition, if management decides to exit the market it does not have to sustain possibe osses from divesting production faciities. On the other hand, it is necessary to contro product quaity to meet company standards. The firm may encounter probems with deivery, product warranties or fufiing additiona orders. The manufacturer may aso not be as cost efficient as the contracting firm, or may reach production capacity, or may attempt to expoit the agreement. 330

3 Chapter 11 Figure 11.1 Intermediate modes 331

4 Part III Market entry strategies Thus, whie contract manufacturing offers a number of advantages, especiay to a firm whose strength ies in marketing and distribution, care needs to be exercised in negotiating the contract. Where the firm oses direct contro over the manufacturing function mechanisms need to be deveoped to ensure that the contract manufacturer meets the firm s quaity and deivery standards Licensing Licensing The icensor gives a right to the icensee against payment, e.g. a right to manufacture a certain product based on a patent against some agreed royaty. Licensing is another way in which the firm can estabish oca production in foreign markets without capita investment. It differs from contract manufacturing in that it is usuay for a onger term and invoves much greater responsibiities for the nationa firm, because more vaue chain functions have been transferred to the icensee by the icensor (see Figure 11.1). A icensing agreement A icensing agreement is an arrangement wherein the icensor gives something of vaue to the icensee in exchange for certain performance and payments from the icensee. The icensor may give the icensee the right to use one or more of the foowing things: a patent covering a product or process; manufacturing know-how not subject to a patent; technica advice and assistance, occasionay incuding the suppy of components, materias or pant essentia to the manufacturing process; marketing advice and assistance; the use of a trade mark/trade name. In the case of trade mark icensing the icensor shoud try not to undermine a product by overicensing it. For exampe, Pierre Cardin diuted the vaue of his name by aowing some 800 products to use the name under icense. Overicensing can increase income in the short run, but in the ong run it may mean kiing the goose that aid the goden egg. In some situations the icensor may continue to se essentia components or services to the icensee as part of the agreement. This may be extended so that the tota agreement may aso be one of cross-icensing, wherein there is a mutua exchange of knowedge and/or patents. In cross-icensing there might not be a cash payment invoved. Licensing can be considered a two-way street because a icense aso aows the origina icensor to gain access to the icensee s technoogy and product. This is important because the icensee may be abe to buid on the information suppied by the icensor. Some icensors are very interested in grantbacks and wi even ower the royaty rate in return for product improvements and potentiay profitabe new products. Where a product or service is invoved the icensee is responsibe for production and marketing in a defined market area. This responsibiity is foowed by a the profits and risks associated with the venture. In exchange the icensee pays the icensor royaties or fees, which are the icensor s main source of income from its icensing operations and that usuay invove some combination of the foowing eements: A ump sum not reated to output. This can incude a sum paid at the beginning of an agreement for the initia transfer of specia machinery, parts, bueprints, knowedge and so on. 332

5 Chapter 11 A minimum royaty a guarantee that at east some annua income wi be received by the icensor. A running royaty normay expressed as a percentage of norma seing price or as a fixed sum of money for units of output. Other methods of payment incude conversions of royaties into equity, management and technica fees, and compex systems of counter purchase, typicay found in icensing arrangements with eastern European countries. If the foreign market carries high poitica risk then it woud be wise for the icensor to seek high initia payments and perhaps compress the timescae of the agreement. Aternativey, if the market is reativey free of risk and the icensee is we paced to deveop a strong market share, then payment terms wi be somewhat reaxed and probaby infuenced by other icensors competing for the agreement. The icensing agreement or contract shoud aways be formaized in a written document. The detais of the contract wi probaby be the subject of detaied negotiation and hard bargaining between the parties, and there can be no such thing as a standard contract. In the foowing we see icensing from the viewpoint of a icensor (icensing out) and a icensee (icensing in). This section is written primariy from the icensor s viewpoint, but icensing in may be an important eement in smaer firms growth strategies, and therefore some consideration is given to this issue too. Licensing out Generay there is a wide range of strategic reasons for using icensing. The most important motives for icensing out are as foows: The icensor firm wi remain technoogicay superior in its product deveopment. It wants to concentrate on its core competences (product deveopment activities) and then outsource production and downstream activities to other firms. The icensor is too sma to have financia, manageria or marketing expertise for overseas investment (own subsidiaries). The product is at the end of its product ife cyce in the advanced countries because of obsoescent technoogy or mode change. A stretching of the tota product ife cyce is possibe through icensing agreements in ess deveoped countries. Even if direct royaty income is not high margins on key components to the icensee (produced by the icensor) can be quite handsome. If government reguations restrict foreign direct investment or if poitica risks are high icensing may be the ony reaistic entry mode. There may be constraints on imports into the icensee country (tariff or non-tariff barriers). When setting the price for the agreement the costs of icensing shoud not be underestimated. Tabe 11.1 presents a breakdown of costs of icensing out by Austraian firms. Licensing in Empirica evidence shows (Young et a., 1989, p. 143) that many icensing agreements actuay stem from approaches by icensees. This woud suggest that the icensee is at an immediate disadvantage in negotiations and genera reations with the icensor. In other cases icensing in is used as the easy option, with the icense being renewed reguary and the icensee becoming heaviy dependent on the technoogy suppier (the icensor). 333

6 Part III Market entry strategies Tabe 11.1 Reative costs of icensing overseas (%) Breakdown of tota costs of icensing overseas Protection of industria property 24.4 Estabishment of icensing agreement 46.6 Maintenance of icensing agreement Breakdown of estabishment costs Search for suitabe icensee 22.8 Communication between invoved parties 44.7 Adoption and testing of equipment for icensee 9.9 Training personne for icensee 19.9 Other (additiona marketing activity and ega expenses) Breakdown of maintenance costs Audit of icensee 9.7 Ongoing market research in market of icensee 7.2 Back-up services for icensee 65.0 Defence of industria property rights in icensee s territory 11.0 Other Sources: based on Carstairs and Wech (1981) and Young et a. (1989), p As Figure 11.2 shows, icensing in can improve the net cash fow position of the icensee, but mean ower profits in the onger term. Because technoogy icensing aows the firms to have products on the market sooner than otherwise, the firm benefits from an earier positive cash fow. In addition, icensing means ower deveopment costs. The immediate benefits of quick access to new technoogy, ower deveopment costs and a reativey eary cash fow are attractive benefits of icensing. Tabe 11.5 (see section 11.6) summarizes the advantages and disadvantages of icensing for the icensor. Figure 11.2 Life cyce benefits of icensing Sources: Lowe and Crawford, 1984; Bradey, 1995, p

7 Chapter Franchising Franchising The franchisor gives a right to the franchisee against payment, e.g. a right to use a tota business concept/system, incuding use of trade marks (brands), against some agreed royaty. The term franchising is derived from the French, meaning to be free from servitude. Franchise activity was amost unknown in Europe unti the beginning of the 1970s. The concept was popuarized in the United States, where over one-third of retai saes are derived from franchising, in comparison with about 11 per cent in Europe (Young et a., 1989, p. 111). A number of factors have contributed to the rapid growth rate of franchising. First, the genera wordwide decine of traditiona manufacturing industry and its repacement by service-sector activities has encouraged franchising. It is especiay we suited to service and peope-intensive economic activities, particuary where these require a arge number of geographicay dispersed outets serving oca markets. Second, the growth in popuarity of sef-empoyment is a contributory factor to the growth of franchising. Government poicies in many countries have improved the whoe cimate for sma businesses as a means of stimuating empoyment. A good exampe of the vaue of franchising is the Swedish furniture manufacturer IKEA, which franchises its ideas throughout the western word, especiay in Europe and North America. In terms of retai surface area and the number of visitors to retai stores, this company has experienced very significant growth through franchising in recent years. Franchising is a marketing-oriented method of seing a business service, often to sma independent investors who have working capita but itte or no prior business experience. However, it is something of an umbrea term that is used to mean anything from the right to use a name to the tota business concept. Thus there are two major types of franchising: 1 Product and trade name franchising. This is very simiar to trade mark icensing. Typicay it is a distribution system in which suppiers make contracts with deaers to buy or se products or product ines. Deaers use the trade name, trade mark and product ine. Exampes of this type of franchising are soft drink botters such as Coca-Coa and Pepsi. 2 Business format package franchising. The atter is the focus of this section. Internationa business format franchising is a market entry mode that invoves a reationship between the entrant (the franchisor) and a host country entity, in which the former transfers, under contract, a business package (or format) that it has deveoped and owns, to the atter. This host country entity can be either a franchisee or a subfranchisor. The package transferred by the franchisor contains most eements necessary for the oca entity to estabish a business and run it profitaby in the host country in a prescribed manner, reguated and controed by the franchisor. The package can contain the foowing items: trade marks/trade names; copyright; designs; patents; trade secrets; business know-how; geographic excusivity; design of the store; 335

8 Part III Market entry strategies market research for the area; ocation seection. The package may aso incude the right for the oca entity, a subfranchisor, to estabish and service its own subsystem of subfranchisees within its appointed territory. In addition to this package the franchisor aso typicay provides oca entities with manageria assistance in setting up and running oca operations. A ocay-owned franchisees, subfranchisees and subfranchisors can aso receive subsuppies from the franchisor and benefit from centray coordinated advertising. In return for this business package the franchisor receives from the franchisee or subfranchisor an initia fee up front and/or continuing franchise fees, based typicay on a percentage of annua turnover as a mark-up on goods suppied directy by the franchisor. There is sti a ivey debate about the differences between icensing and franchising, but if we define franchising in the broader business format (as here), we see the differences presented in Tabe Types of business format franchise incude business and persona services, convenience stores, car repairs and fast food. US fast-food franchises are some of the best-known goba franchise businesses, and incude McDonad s, Burger King and Pizza Hut. Tabe 11.2 How icensing and franchising differ Licensing The term royaties is normay used. Products, or even a singe product, are the common eement. Licences are usuay taken by we-estabished businesses. Terms of years are common, particuary where they reate to technica know-how, copyright and trade marks. The terms are simiar for patents. Licensees tend to be sef-seecting. They are often estabished businesses and can demonstrate that they are in a strong position to operate the icence in question. A icensee can often pass its icence on to an associate or sometimes unconnected company with itte or no reference back to the origina icensor. Usuay concerns specific existing products with very itte benefit from ongoing research being passed on by the icensor to its icensee. There is no goodwi attached to the icence as it is totay retained by the icensor. Licensees enjoy a substantia measure of free negotiation. As bargaining toos they can use their trade musce and their estabished position in the marketpace. Franchising Management fees is regarded as the appropriate term. Covers the tota business, incuding know-how, inteectua rights, goodwi, trade marks and business contacts. (Franchising is a-encompassing, whereas icensing concerns just one part of the business.) Tends to be a start-up situation, certainy as regards the franchisee. The franchise agreement is normay for 5 years, sometimes extending to 11 years. Franchises are frequenty renewabe. The franchisee is very definitey seected by the franchisor, and its eventua repacement is controed by the franchisor. The franchisor is expected to pass on to its franchisees the benefits of its ongoing research programme as part of the agreement. Athough the franchisor does retain the main goodwi, the franchisee picks up an eement of ocaized goodwi. There is a standard fee structure and any variation within an individua franchise system woud cause confusion and mayhem. Sources: based on Perkins (1987), pp. 22, 157 and Young et a. (1989), p

9 Chapter 11 The fast-food business is taken as an exampe of franchising in the vaue chain approach of Figure The production (e.g. assemby of burgers) and saes and service functions are transferred to the oca outets (e.g. McDonad s restaurants), whereas the centra R&D and marketing functions are sti controed by the franchisor (e.g. McDonad s head office in the United States). The franchisor wi deveop the genera marketing pan (with the genera advertising messages), which wi be adapted to oca conditions and cutures. As indicated earier, business format franchising is an ongoing reationship that incudes not ony a product or a service but aso a business concept. The business concept usuay incudes a strategic pan for growth and marketing, instruction on the operation of the business, eaboration of standards and quaity contro, continuing guidance for the franchisee, and some means of contro of the franchisee by the franchisor. Franchisors provide a wide variety of assistance for franchisees, but not a franchisors provide the same eve of support. Some exampes of assistance and support provided by franchisors are in the areas of finance, site seection, ease negotiation, cooperative advertising, training and assistance with store opening. The extent of ongoing support to franchisees aso varies among franchisors. Support areas incude centra data processing, centra purchasing, fied training, fied operation evauation, newsetters, regiona and nationa meetings, a hotine for advice and franchisor franchisee advisory councis. The avaiabiity of these services is often a critica factor in the decision to purchase a franchise, and may be crucia to the ong-term success of margina ocations or marginay prepared owners. Internationa expansion of franchising Franchisors, as other businesses, must consider the reevant success factors in making the decision to expand their franchising system gobay. The objective is to search for an environment that promotes cooperation and reduces confict. Given the ong-term nature of a franchise agreement country stabiity is an important factor. Where shoud the internationa expansion start? The franchising deveopment often begins as a response to a perceived oca opportunity, perhaps as an adaptation of a franchising concept aready operating in another foreign market. In this case the market focus is ceary oca to begin with. In addition, the oca market provides a better environment for testing and deveoping the franchising format. Feedback from the marketpace and franchisees can be obtained more readiy because of the ease of communication. Adjustments can be made more quicky because of the cose oca contact. A whoe variety of minor changes in the format may be necessary as a resut of eary experience in areas such as training, franchisee choice, site seection, organization of suppiers, promotion and outet decoration. The eary stages of franchise deveopment represent a critica earning process for the franchisor, not just about how to adapt the tota package to the market requirements but aso regarding the nature of the franchising method itsef. Utimatey, with a proven package and a better understanding of its operation, the franchisor is in a better position to attack foreign markets, and is more confident about doing so with a background of domestic success. Deveoping and managing franchisor franchisee reationships Franchising provides a unique organizationa reationship in which the franchisor and franchisee each bring important quaities to the business. The franchise system combines the advantages of economy of scae offered by the franchisor with the oca knowedge and entrepreneuria taents of the franchisee. Their joint contribution may resut in success. The franchisor depends on franchisees for fast growth, an infusion of 337

10 Part III Market entry strategies capita from the franchise purchase fee, and an income stream from the royaty fee paid by franchisees each year. Franchisors aso benefit from franchisee goodwi in the community and, increasingy, from franchisee suggestions for innovation. The most important factor, however, is the franchisee s motivation to operate a successfu independent business. The franchisee depends on the franchisor for the strength of the trade mark, technica advice, support services, marketing resources and nationa advertising that provides instant customer recognition. There are two additiona key success factors, which rest on the interdependence of the franchisee and the franchisor: 1 integrity of the whoe business system; 2 capacity for renewa of the business system. 1 Integrity of the business system The business wi be a success in a viabe market to the extent that the franchisor provides a we-deveoped, proven business concept to the franchisee and the franchisee is motivated to foow the system as it is designed, thereby preserving the integrity of the system. Standardization is the cornerstone of franchising: customers expect the same product or service at every ocation. Deviations from the franchising business concept by individua franchisees adversey affect the franchisor s reputation. The need for the integrity of the system requires that the franchisor exerts contro over key operations at the franchise sites. 2 Capacity for renewa of the business system Athough most franchisors conduct research and deveopment within the parent company, the highest proportion of innovation originates from franchisees in the fied. Franchisees are most famiiar with customers preferences. They sense new trends and the opportunity to introduce a new product and service. The issue is getting the franchisee to share new ideas with the parent company. Not a franchisees are wiing to share ideas with the franchisor, for a number of reasons. The most common is faiure of the franchisor to keep in cose contact with the franchisees; the most troubing is a ack of trust in the franchisor. The franchisor needs to promote a cimate of trust and cooperation for mutua benefit. Handing possibe conficts Confict is inherent in the franchisor franchisee reationship, since a aspects that are good for the franchisor may not be good for the franchisee. One of the most basic conficts is faiure of either the franchisor or the franchisee to ive up to the terms of the ega agreement. Disagreement over objectives may be the resut of poor communication on the part of the franchisor, or faiure on the part of the franchisee to understand the franchisor s objectives. Both franchisor and franchisee agree on the need for profits in the business, not ony to provide a iving but to stay competitive. However, the two parties may disagree on the means of achieving profits. The number of conficts between franchisors and franchisees may be reduced by estabishing extensive monitoring of the franchisee (e.g. computer-based accounting, purchasing and inventory systems). Another way of reducing the number of conficts is to view franchisors and franchisees as partners in running a business; both objectives and operating procedures have to be in harmony. This view requires a strong common cuture with shared vaues estabished by the use of intensive communication between franchisor and franchisees in different countries (e.g. cross-nationa/regiona meetings, cross-nationa/regiona advisory councis). 338

11 Chapter Joint ventures/strategic aiances Joint venture (JV) An equity partnership typicay between two partners. It invoves two parents creating the chid (the joint venture acting in the market). A joint venture (JV) or a strategic aiance is a partnership between two or more parties. In internationa joint ventures these parties wi be based in different countries, and this obviousy compicates the management of such an arrangement. A number of reasons are given for setting up joint ventures, incuding the foowing: Compementary technoogy or management skis provided by the partners can ead to new opportunities in existing sectors (e.g. mutimedia, in which information processing, communications and the media are merging). Many firms find that partners in the host country can increase the speed of market entry. Many ess deveoped countries, such as China and South Korea, try to restrict foreign ownership. Goba operations in R&D and production are prohibitivey expensive, but are necessary to achieve competitive advantage. The forma difference between a joint venture and a strategic aiance is that a strategic aiance is typicay a non-equity cooperation, meaning that the partners do not commit equity into or invest in the aiance. The joint venture can be either a contractua non-equity joint venture or an equity joint venture. In a contractua joint venture no joint enterprise with a separate personaity is formed. Two or more companies form a partnership to share the cost of investment, the risks and the ong-term profits. An equity joint venture invoves the creation of a new company in which foreign and oca investors share ownership and contro. Thus, according to these definitions, strategic aiances and non-equity joint ventures are more or ess the same (Figure 11.3). The question of whether to use an equity or a non-equity joint venture is a matter of how to formaize the cooperation. Much more interesting is to consider the roes that partners are supposed to pay in the coaboration. In Figure 11.4 two different types of coaition are shown in the vaue chain perspective. These are based on the possibe coaboration pattern aong the vaue chain. In Figure 11.4 we see two partners, A and B, each having its own vaue chain. Three different types of vaue chain partnership, appear: 1 Upstream-based coaboration. A and B coaborate on R&D and/or production. 2 Downstream-based coaboration. A and B coaborate on marketing, distribution, saes and/or service. Figure 11.3 Joint ventures and strategic aiances 339

12 Part III Market entry strategies Figure 11.4 Coaboration possibiities for partners A and B in the vaue chain Source: Adapted from Lorange and Roos, 1995, p. 16. Y-coaitions Each partner in the aiance/jv contributes with compementary product ines or services. Each partner takes care of a vaue chain activities within their product ine. X-coaitions The partners in the vaue chain divide the vaue chain activities between them, e.g. the manufacturer (exporter) speciaizes in up-stream activities, whereas the oca partner takes care of the down-stream activities. 3 Upstream/downstream-based coaboration. A and B have different but compementary competences at each end of the vaue chain. Types 1 and 2 represent the so-caed Y coaition and type 3 represents the so-caed X coaition (Porter and Fuer, 1986, pp ): Y coaitions. Partners share the actua performance of one or more vaue chain activities: for exampe, joint production of modes or components enabes the attainment of scae economies that can provide ower production costs per unit. Another exampe is a joint marketing agreement where compementary product ines of two firms are sod together through existing or new distribution channes, and thus broaden the market coverage of both firms. X coaitions. Partners divide the vaue chain activities between themseves: for exampe, one partner deveops and manufactures a product whie etting the other partner market it. Forming X coaitions invoves identifying the vaue chain activities where the firm is we positioned and has its core competences. Take the case where A has its core competences in upstream functions but is weak in downstream functions. A wants to enter a foreign market but acks oca market knowedge and does not know how to get access to foreign distribution channes for its products. Therefore A seeks and finds a partner, B, which has its core competences in the downstream functions but is weak in the upstream functions. In this way A and B can form a coaition where B can hep A with distribution and seing in a foreign market, and A can hep B with R&D or production. In summary, X coaitions impy that the partners have asymmetric competences in the vaue chain activities: where one is strong the other is weak and vice versa. In Y coaitions, on the other hand, partners tend to be more simiar in the strengths and weaknesses of their vaue chain activities. Stages in joint-venture formation The various stages in the formation of a joint venture are shown in Tabe Step 1: Joint-venture objectives Joint ventures are formed for a variety of reasons: entering new markets, reducing manufacturing costs, and deveoping and diffusing new technoogies rapidy. Joint ventures are aso used to acceerate product introduction and overcome ega and trade 340

13 Chapter 11 Tabe 11.3 Stages in joint-venture formation 1 Joint venture objectives Estabish strategic objectives of the joint venture and specify time period for achieving objectives. 2 Cost/benefit anaysis Evauate advantages and disadvantages of joint venture compared with aternative strategies for achieving objectives (e.g. icensing) in terms of: (a) financia commitment; (b) synergy; (c) management commitment; (d) risk reduction; (e) contro; (f ) ong-run market penetration; and (g) other advantages/disadvantages. 3 Seecting partner(s) (a) profie of desired features of candidates; (b) identifying joint-venture candidates and drawing up short ist; (c) screening and evauating possibe joint-venture partners; (d) initia contact/discussions; and (e) choice of partner. 4 Deveop business pan Achieve broad agreement on different issues. 5 Negotiation of joint-venture agreement Fina agreement on business pan. 6 Contract writing Incorporation of agreement in egay binding contract, aowing for subsequent modifications to the agreement. 7 Performance evauation Estabish contro systems for measuring venture performance. Source: Adapted from Young et a., 1989, p barriers expeditiousy. In this period of advanced technoogy and goba markets impementing strategies quicky is essentia. Forming aiances is often the fastest, most effective method of achieving objectives. Companies must be sure that the goa of the aiance is compatibe with their existing businesses, so their expertise is transferabe to the aiance. Firms often enter into aiances based on opportunity rather than inkage with their overa goas. This risk is greatest when a company has a surpus of cash. There are three principa objectives in forming a joint venture: 1 Entering new markets. Many companies recognize that they ack the necessary marketing expertise when they enter new markets. Rather than trying to deveop this expertise internay the company may identify another organization that possesses those desired marketing skis. Then, by capitaizing on the product deveopment skis of one company and the marketing skis of the other, the resuting aiance can serve the market quicky and effectivey. Aiances may be particuary hepfu when entering a foreign market for the first time because of the extensive cutura differences that may abound. They may aso be effective domesticay when entering regiona or ethnic markets. 2 Reducing manufacturing costs. Joint ventures may aow companies to poo capita or existing faciities to gain economies of scae or increase the use of faciities, thereby reducing manufacturing costs. 3 Deveoping and diffusing technoogy. Joint ventures may aso be used to buid jointy on the technica expertise of two or more companies in deveoping products that are technoogicay beyond the capabiity of the companies acting independenty. 341

14 Part III Market entry strategies Step 2: Cost/benefit anaysis A joint venture/strategic aiance may not be the best way of achieving objectives. Therefore this entry mode shoud be evauated against other entry modes. Such an anaysis coud be based on the factors infuencing the choice of entry mode (see section 9.3). Step 3: Seecting partner(s) If it is accepted that a joint venture is the best entry mode for achieving the firm s objectives, the next stage is the seection of the joint-venture partner. This normay invoves five stages. Estabishing a desired partner profie Companies frequenty search for one or more of the foowing resources in a partner: deveopment know-how; saes and service expertise; ow-cost production faciities; strategicay critica manufacturing capabiities; reputation and brand equity; market access and knowedge; cash. Identifying joint-venture candidates Often this part of partner seection is not performed thoroughy. The first candidate, generay discovered through contacts estabished by mai, arranged by a banker or a business coeague aready estabished in the country, is often the one with whom the company undertakes discussions. Litte or no screening is done, nor is there an indepth investigation of the motives and capabiities of the candidate. At other times the persona network that executives maintain with senior managers from other firms shapes the set of prospective joint-venture partners that companies wi generay consider. A too often, however, aiances are agreed upon informay by these top managers without carefu attention to how appropriate the partner match may be. Instead of taking this reactive approach the firm shoud proactivey search for jointventure candidates. Possibe candidates can be found among competitors, suppiers, customers, reated industries and trade association members. Screening and evauating possibe joint-venture partners Reationships get off to a good start if partners know each other. Tabe 11.4 gives some criteria that may be used to judge a prospective partner s effectiveness. These suggestions form ony an outine sketch of the type of information that can be used to grade partners. They cover areas where there is a reasonabe chance of forming a view by the appraisa of pubished information and by sensibe observation and questioning. Initia contacts/discussions Since reationships between companies are reationships between peope it is important that the top managers of the firm meet personay with top managers from the remaining two or three possibe partners. It is important to highight the persona side of a business reationship. This incudes discussion of persona and socia interests to see if there is a good chemistry between the prospective partners. Choice of partner The chosen partner shoud bring the desired compementary strength to the partnership. Ideay the strengths contributed by the partners wi be unique, for ony these 342

15 Chapter 11 Tabe 11.4 Anaysis of prospective partners: exampes of criteria that may be used to judge a prospective partner s effectiveness by assessing existing business ventures and commercia attitudes 1 Finance Financia history and overa financia standing (a the usua ratios). Possibe reasons for successfu business areas. Possibe reasons for unsuccessfu business areas. 2 Organization Structure of organization. Quaity and turnover of senior managers. Workforce conditions/abour reations. Information and reporting systems; evidence of panning. Effective owner s working reationship with business. 3 Market Reputation in marketpace and with competitors. Evidence of research/interest in service and quaity. Saes methods; quaity of saes force. Evidence of handing weakening market conditions. Resuts of new business started. 4 Production Condition of existing premises/works. Production efficiencies/ayouts. Capita investments and improvements. Quaity contro procedures. Evidence of research (interna/externa); introduction of new technoogy. Reationship with main suppiers. 5 Institutiona Government and business contacts (infuence). Successfu negotiations with banks, icensing authorities, etc. Main contacts with non-nationa organizations and companies. Geographica infuence. 6 Possibe negotiating attitudes Fexibe or hardine. Reasonaby open or cosed and secretive. Short-term or ong-term orientation. Wheeer-deaer or objective negotiator. Positive, quick decision making or tentative. Negotiating experience and strength of team support. Sources: Wamsey, 1982; Paiwoda, strengths can be sustained and defended over the ong term. The goa is to deveop synergies between the contributions of the partners, resuting in a win win situation for both. Moreover, the partners must be compatibe and wiing to trust one another. It is important that neither partner has the desire to acquire the other partner s strength, or the necessary mutua trust wi be destroyed. Dow Chemica Company, a frequent and successfu aiance practitioner, uses the negotiation process to judge other corporate cutures and, consequenty, their compatibiity and trustworthiness. Commitment to the joint venture is essentia. This commitment must be both financia and psychoogica. Uness there is senior management endorsement and enthusiasm at the operating eve an aiance wi strugge, particuary when tough issues arise. Step 4: Deveop business pan Issues that have to be negotiated and determined prior to the estabishment of the joint venture incude the foowing: ownership spit (majority, minority, 50 50); management (composition of board of directors, organization, etc.); production (instaation of machinery, training, etc.); marketing (the 4-Ps, organization). Step 5: Negotiation of joint-venture agreement As Figure 11.5 shows, the fina agreement is determined by the reative bargaining power of both prospective partners. 343

16 Part III Market entry strategies Figure 11.5 Partner-to-partner reationships creating a joint venture Source: Harrigan, 1985, p. 50. Step 6: Contract writing Once the joint-venture agreement has been negotiated it needs to be written into a egay binding contract. Of course, the contract shoud cover the marriage conditions of the partners, but it shoud aso cover the divorce situation, such as what happens with the chid (the joint venture). Step 7: Performance evauation Evauating joint-venture performance is a difficut issue. Managers often fa into the trap of assessing partnerships as if they were interna corporate divisions with unambiguous goas operating in ow-risk, stabe environments. Bottom-ine profits, cash fow, market share and other traditiona financiay oriented output measures become standard indicators of performance. These measures may be inappropriate for two reasons. First, they refect a short-term orientation, and maximization of initia output too soon can jeopardize the prospects for aiances positioned for the ong term. Second, the goas of many aiances may not be readiy quantifiabe. For instance, a partnership s objectives may invove obtaining access to a market or bocking a competitor. Many aiances need considerabe time before they are ready to be judged on conventiona output measures. Ony after partnerships mature (i.e. when the operations of the aiance are we estabished and we understood) can managers graduay shift to measure output, such as profits and cash fows. Thus expecting too much too soon in terms of profit and cash fows from an aiance working under risky conditions can endanger its future success. Managing the joint venture In recent years we have seen an increasing number of cross-border joint ventures. But it is dangerous to ignore the fact that the average ifespan for aiances is ony about seven years, and neary 80 per cent of joint ventures utimatey end in a sae by one of the partners. Harrigan s mode (Figure 11.6) can be used as a framework for expaining this high divorce rate. 344

17 Chapter 11 Figure 11.6 Mode of joint-venture activity Source: Harrigan, 1985, p. 52. Changes in bargaining power According to Beeke and Ernst (1994), the key to understanding the divorce of the two parents is changes in their respective bargaining power. Let us assume that we have estabished a joint venture with the task of penetrating markets with a new product. In the initia stages of the reationship the product and technoogy provider generay has the most power. But uness those products and technoogies are proprietary and unique power usuay shifts to the party that contros distribution channes and thus customers. The bargaining power is aso strongy affected by the baance of earning and teaching. A company that is good at earning can access and internaize its partner s capabiities more easiy, and is ikey to become ess dependent on its partner as the aiance evoves. Before entering a joint venture some companies see it as an intermediate stage before acquiring the other partner. By entering a joint venture the prospective buyer of the partner is in a better position to assess the true vaue of such intangibe assets as brands, distribution networks, peope and systems. This experience reduces the risk that the buyer wi make an uninformed decision and buy an expensive emon (Nanda and Wiiamson, 1995). 345

18 Part III Market entry strategies Other change stimui and potentia conficts Diverging goas As the joint venture progresses the goas of the two partners may diverge. For exampe, unacceptabe positions can deveop in the oca market when the sef-interest of one partner conficts with the interest of the joint venture as a whoe, as in the pricing of a singe-source input or raw materia. Diverging goas typicay arise in the oca market entry joint ventures. These joint ventures are created when mutinationa enterprises (MNEs) take oca partners to enter foreign markets. The MNE is usuay interested in maximizing its goba income, that is, the net income of a of its affiiates, and this means that it is quite wiing to run osses on some affiiates if this eads to higher net income for the whoe network. The oca partner, however, wants to maximize the profits of the specific affiiate of which it is part owner. Conficts then fare up whenever the two goas are incompatibe, as goba income maximization is not necessariy compatibe with the maximization of the separate profits of each affiiate. For exampe, conficts may arise concerning the roe given to the joint venture within the MNE network (and particuary on its aocation of export markets). This was the case when Genera Motors (GM) set up with Daewoo to manufacture subcompact cars for the Korean market and for export to the United States under GM s Pontiac badge. Since GM s Ope subsidiary was seing simiar subcompacts in Europe, GM imited the joint venture s export to its US Pontiac subsidiary. Dissatisfied with Pontiac s performance, Daewoo decided to export to Eastern Europe in competition with Ope, a move that contributed to the dissoution of the joint venture (Hennert and Zeng, 2005). Doube management A potentia probem is the matter of contro. By definition, a joint venture must dea with doube management. If a partner has ess than 50 per cent ownership that partner must in effect et the majority partner make decisions. If the board of directors has a spit it is difficut for the board to make a decision quicky if at a. Repatriation of profits Conficts can aso arise with regard to issues such as repatriation of profits, where the oca partner desires to reinvest them in the joint venture whie the other partner wishes to repatriate them or invest them in other operations. Mixing different cutures An organization s cuture is the set of vaues, beiefs and conventions that infuence the behaviour and goas of its empoyees. This is often quite different from the cuture of the host country and the partner organization. Thus, deveoping a shared cuture is centra to the success of the aiance. Partnering is inherenty very peope oriented. To the extent that the cutures of the partners are different, making the aiance work may prove difficut. Cutura differences often resut in an us versus them situation. Cutura norms shoud be consistent with management s vision of the aiance s idea cuture. This may entai creating norms as we as nurturing those that aready exist. The key to deveoping a cuture is to acknowedge its existence and to manage it carefuy. Bringing two organizations together and etting nature take its course is a recipe for faiure. Language differences are aso an obvious hurde for an internationa aiance. Ignoring the oca cuture wi amost certainy destroy the chances of it accepting the aiance s product or service. Carefu study of the cuture prior to embarking on the venture is vita. Again, extensive use of oca managers is usuay preferred. 346

19 Chapter 11 Shared equity Shared equity may aso invove an unequa sharing of the burden. Occasionay, internationa companies with joint ventures beieve that they are giving more than 50 per cent of the technoogy, management ski and other factors that contribute to the success of the operation, but are receiving ony haf the profits. Of course, the nationa partner contributes oca knowedge and other intangibes that may be underestimated. Nevertheess, some internationa companies beieve that the oca partner gets too much of a free ride. Deveoping trust in joint ventures Deveoping trust takes time. The first times that companies work together their chances of succeeding are very sight. But once they find ways to work together a sorts of opportunities appear. Working together on reativey sma projects initiay heps deveop trust and determine compatibiity whie minimizing economic risk. Each partner has a chance to gauge the skis and contributions of the other, and further investment can then be considered. Of course, winning together in the marketpace on a project of any scae is a great way to buid trust and overcome differences. It usuay serves as a precursor to more ambitious joint efforts. Providing an exit strategy As indicated earier, there is a significant probabiity that a newy formed joint venture wi fai, even if the previousy mentioned key principes are foowed. The anticipated market may not deveop, one of the partner s capabiities may have been overestimated, the corporate strategy of one of the partners may have changed, or the partners may simpy be incompatibe. Whatever the reason for the faiure, the parties shoud prepare for such an outcome by addressing the issue in the partnership contract. The contract shoud provide for the iquidation or distribution of partnership assets, incuding any technoogy deveoped by the aiance Other intermediate entry modes Management contracting emphasizes the growing importance of services and management know-how. The typica case of management contracting is where one firm (contractor) suppies management know-how to another company that provides the capita and takes care of the operating vaue chain functions in the foreign country. Normay the contracts undertaken are concerned with management operating/ contro systems and training oca staff to take over when the contracts are competed. It is usuay not the intention of the contractor to continue operating after the contract expires. Normay it is the phiosophy to operate, transfer know-how to the oca staff and then depart. This wi usuay give a strong competitive position to pick up other management contracts in the area. Management contracts typicay arise in situations where one company seeks the management know-how of another company with estabished experience in the fied. The ack of management capabiity is most evident for deveoping countries. Normay the financia compensation to the contractor for the management services provided is a management fee, which may be fixed irrespective of the financia performance or may be a percentage of the profit (Luostarinen and Wech, 1990). The advantages and disadvantages of management contracting are isted in Tabe

20 Part III Market entry strategies Tabe 11.5 Advantages and disadvantages of the different intermediate modes Intermediate entry mode Contract manufacturing (seen from the contractor s viewpoint) Licensing (seen from the icensor s viewpoint) Advantages Permits ow-risk market entry. No oca investment (cash, time and executive taent) with no risk of nationaization or expropriation. Retention of contro over R&D, marketing and saes/after-saes service. Avoids currency risks and financing probems. A ocay made image, which may assist in saes, especiay to government or officia bodies. Entry into markets otherwise protected by tariffs or other barriers. Possibe cost advantage if oca costs (primariy abour costs) are ower. Avoids intra-corporate transfer-pricing probems that can arise with a subsidiary. Increases the income on products aready deveoped as a resut of expensive research. Permits entry into markets that are otherwise cosed on account of high rates of duty, import quotas and so on. A viabe option where manufacture is near the customer s base. Requires itte capita investment and shoud provide a higher rate of return on capita empoyed. There may be vauabe spin-off if the icensor can se other products or components to the icensee. If these parts are for products being manufactured ocay or machinery, there may aso be some tariff concessions on their import. The icensor is not exposed to the danger of nationaization or expropriation of assets. Because of the imited capita requirements, new products can be rapidy expoited, on a wordwide basis, before competition deveops. The icensor can take immediate advantage of the icensee s oca marketing and distribution organization and of existing customer contacts. Protects patents, especiay in countries that give weak protection for products not produced ocay. Loca manufacture may aso be an advantage in securing government contracts. Disadvantages Transfer of production know-how is difficut. Contract manufacture is ony possibe when a satisfactory and reiabe manufacturer can be found not aways an easy task. Extensive technica training wi often have to be given to the oca manufacturer s staff. As a resut, at the end of the contract, the subcontractor coud become a formidabe competitor. Contro over manufacturing quaity is difficut to achieve despite the utimate sanction of refusa to accept substandard goods. Possibe suppy imitation if the production is taking pace in deveoping countries. The icensor is ceding certain saes territories to the icensee for the duration of the contract; shoud it fai to ive up to expectations, renegotiation may be expensive. When the icensing agreement finay expires, the icensor may find he or she has estabished a competitor in the former icensee. The icensee may prove ess competent than expected at marketing or other management activities. Costs may even grow faster than income. The icensee, even if it reaches an agreed minimum turnover, may not fuy expoit the market, eaving it open to the entry of competitors, so that the icensor oses contro of the marketing operation. Danger of the icensee running short of funds, especiay if considerabe pant expansion is invoved or an injection of capita is required to sustain the project. This danger can be turned to advantage if the icensor has funds avaiabe by a genera expansion of the business through a partnership. License fees are normay a sma percentage of turnover, about 5 per cent, and wi often compare unfavouraby with what might be obtained from a company s own manufacturing operation. Lack of contro over icensee operations. Quaity contro of the product is difficut and the product wi often be sod under the icensor s brand name. Negotiations with the icensee, and sometimes with oca government, are costy. Governments often impose conditions on transferra of royaties or on component suppy. 348

21 Chapter 11 Tabe 11.5 continued Intermediate entry mode Franchising (seen from franchisor s viewpoint) Joint venture (seen from parent s viewpoint) Management contracting (seen from contractor s viewpoint) Advantages Greater degree of contro compared to icensing. Low-risk, ow-cost entry mode (the franchisees are the ones investing in the necessary equipment and know-how). Using highy motivated business contacts with money, oca market knowedge and experience. Abiity to deveop new and distant internationa markets, reativey quicky and on a arger scae than otherwise possibe. Generating economies of scae in marketing to internationa customers. Precursor to possibe future direct investment in foreign market. Access to expertise and contacts in oca markets. Each partner agrees to a joint venture to gain access to the other partner s skis and resources. Typicay, the internationa partner contributes financia resources, technoogy or products. The oca partner provides the skis and knowedge required for managing a business in its country. Each partner can concentrate on that part of the vaue chain where the firm has its core competence. Reduced market and poitica risk. Shared knowedge and resources: compared to whoy owned subsidiary, ess capita and fewer management resources are required. Economies of scae by pooing skis and resources (resuting in e.g. ower marketing costs). Overcomes host government restrictions. May avoid oca tariffs and non-tariff barriers. Shared risk of faiure. Less costy than acquisitions. Possiby better reations with nationa governments through having a oca partner (meets host country pressure for oca participation). If direct investment or export is considered too risky for commercia or poitica reasons this aternative might be reevant. As with other intermediate entry modes, management contracts may be inked together with other forms of operation in foreign markets. Aows a company to maintain market invovement, so puts it in a better position to expoit any opportunity that may arise. Organizationa earning: if a company is in its eary deveopment stages of internationaization, a management contract may offer an efficient way of earning about foreign markets and internationa business. Disadvantages The search for competent franchisees can be expensive and time consuming. Lack of fu contro over franchisee s operations, resuting in probems with cooperation, communications, quaity contro, etc. Costs of creating and marketing a unique package of products and services recognized internationay. Costs of protecting goodwi and brand name. Probems with oca egisation, incuding transfers of money, payments of franchise fees and government-imposed restrictions on franchise agreements. Opening up interna business knowedge may create potentia future competitor. Risk to the company s internationa profie and reputation if some franchisees underperform ( free riding on vauabe brand names). Objectives of the respective partners may be incompatibe, resuting in conficts. Contributions to joint venture can become disproportionate. Loss of contro over foreign operations. Large investments of financia, technica or manageria resources favour greater contro than is possibe in a joint venture. Competion might overburden a company s staff. Partners may become ocked into ong-term investments from which it is difficut to withdraw. Transfer pricing probems as goods pass between partners. The importance of the venture to each partner might change over time. Cutura differences may resut in possibe differences in management cuture among participating firms. Loss of fexibiity and confidentiaity. Probems of management structures and dua parent staffing of joint ventures. Nepotism perhaps the estabished norm. Training future competitors: the management transfer package may in the end create a competitor for the contractor. Creates a great demand for key personne. Such staff are not aways avaiabe, especiay in SMEs. Considerabe effort needs to be put into buiding ines of communication at oca eve as we as back to contractor. Potentia confict between the contractor and the oca government as regards the poicy of the contract venture. Litte contro, which aso imits the abiity of a contractor to deveop the capacity of the venture. 349

22 Part III Market entry strategies Other management contracts may be part of a dea to se a processing pant as a project or a turnkey operation. This issue wi be deat with more intensivey in section Exhibit 11.1 McDonad s + Coca-Coa + Disney = a powerfu aiance Today business is being driven by two fashionabe ideas: gobaization and core competences. The first compes companies to ook for ways to se their product in as many different paces as possibe, which often requires other peope to hep them. The second, the fashion for a firm sticking to what it does best, means that they must often et outsiders hep them with everything ese. The ties binding Coca-Coa, McDonad s and Disney vary enormousy. McDonad s Disney In 1997 McDonad s and Disney began a forma ten-year aiance. The first specific outcome was a Disney fim, Fubber, whose box-office returns were heped by tie-ins at McDonad s. In Juy 1998 a promotion started of Armageddon, a $111 miion fim starring Bruce Wiis, with McDonad s seing tickets and specia Astromeas at each of its 23,500 restaurants wordwide. This time the target was not chidren but young aduts a market in which McDonad s is weaker. McDonad s Coca-Coa This aiance has no forma agreement no piece of paper to fa back on. Athough Coca-Coa ses drinks to other restaurants, its reationship with McDonad s goes far beyond that of a mere suppier. It has heped its partner to set up new operations around the word. Coca-Coa is sod in amost twice as many countries as McDonad s. Coca-Coa Disney Coca-Coa s ties to Disney are probaby the weakest of the three but they are sti considerabe. Coca-Coa has been the soe provider of soft drinks at Disney parks since 1955, and it has had a marketing aiance in pace since Coca-Coa has aso heped Disney overseas. Questions 1 What is it that makes the Coca-Coa Disney McDonad s triumvirate so powerfu in the gobaization process? 2 Which factors coud make the aiance of Coca-Coa Disney McDonad s break up? Figure 11.7 McDonad s + Coca-Coa + Disney = a powerfu aiance 11.7 Summary The advantages and disadvantages of the different intermediate entry modes are summarized in Tabe

23 Chapter 11 CASE STUDY 11.1 Ka-Boo-Ki: Licensing in the LEGO brand The Danish toy manufacturer LEGO is known wordwide for its LEGO bricks. LEGO is a strong and we-known brand. At the end of 1991 LEGO management received the resut of three consumer surveys: 1 Landour Associates competed a survey at the end of 1991 of the best brands image power among 11,000 representativey chosen aduts aged between 18 and 65 in the United States, Japan and Europe (Begium, France, the Netherands, Itay, Spain, the United Kingdom and Sweden). Image power is a measure of brands impact, where consumers awareness of the word s eading brands is combined with their judgement of the brands quaity. In the United States and Japan LEGO was not paced among the top ten, but the resuts from Europe were impressive. Here LEGO was paced at number 5 after four car brands: Mercedes-Benz, Ros-Royce, Porsche and BMW. LEGO was in front of brands such as Nesté, Roex, Jaguar and Ferrari. 2 A US survey, conducted in Europe, the United States and Japan, showed that LEGO is number 13 in the ist of most appreciated brands. 3 A survey by a German market anaysis institute showed that LEGO is one of the most we-known brands in toys in the new German Federa Repubic, with an awareness share of 67 per cent. Matchbox is number 2 with 41 per cent. The LEGO management has decided to expoit this strong brand image. A managing director for the new business area LEGO Licensing A/S has been appointed. The company s objective is to generate income from icensing suitabe partners, which wi use the LEGO brand in marketing their own products. The LEGO management has noticed that Coca- Coa has an income of DKr3 biion from icensing aone. Coca-Coa s strategy can be characterized as brand miking, where a brand is sod to the highest bidder in each product area. Ideas become viabe In 1993 the idea of icensing the LEGO brand became viabe for the Danish textie firm Ka-Boo-Ki, as it was given the rights to use the LEGO brand in Chidren in Ka-Boo-Ki cothes (Lego icence) connection with the production and sae of chidren s cothes. For Ka-Boo-Ki s Managing Director, Torben Kausen, the idea of producing chidren s cothes is not new. He was earier empoyed in LEGO s internationa marketing department, where he was in charge of coordinating the European marketing of LEGO bricks. From this position he was abe to foow the deveopment of the icensing concept. Since 1993 things have been deveoping very fast. In mid-1997 Ka-Boo-Ki, which has invested a considerabe amount of money in the R&D of LEGO chidren s cothes, was seing to approximatey 900 shops, primariy in Scandinavia and Engand. Torben Kausen says: We received a strong internationa brand from the first day. But in seing LEGO chidren s comes an obigation to ive up to the LEGO company s unique quaity demands. LEGO must approve a new modes that are put on the market, and that is between 350 and 400 a year. Ë 351

24 Part III Market entry strategies LEGO chidren s cothes distinguish themseves from other brands by being functiona and having strong coours and an uncompromising quaity. This means a reativey high price for the cothes, and that the products are not sod in discount shops. The cothes are sod on the basis of a shop-in-shop concept, where merchandising and dispay faciities are very important. Questions You have just been empoyed by LEGO Licensing A/S in connection with the deveopment of the icensing data. You are given the foowing assignments. 1 What are the most important factors determining future market demand for LEGO chidren s cothes from Ka-Boo-Ki? 2 Which other products coud be considered for icensing out the LEGO brand? 3 List some criteria for choosing suitabe icensees and future products for the LEGO brand (icensing out). 4 What vaues/benefits can LEGO transfer to the icensee (e.g. Ka-Boo-Ki) apart from the use of the LEGO brand? 5 What vaues/benefits can the icensee transfer to the icensor? CASE STUDY 11.2 Bayer and GaxoSmithKine: Can the X-coaition and the product Levitra chaenge Viagra s market eader position? In November 2001 Bayer and GaxoSmithKine (GSK) signed a wordwide co-promotion and codeveopment agreement ( to aunch a new treatment for men seeking to improve their erectie function, Levitra. Since then both companies were working together on the deveopment and future marketing of the product. Under the terms of a joint promotion agreement Bayer woud mainy take care of up-stream activities (manufacturing the product and being responsibe for a reguatory work required to obtain product approva), whereas GSK woud take care of down-stream activities by promoting Levitra wordwide. Seing and future deveopment expenses, aong with a the profits, wi be shared by the two companies. If Bayer was seeking saes force (down-stream) strength in the aiance, it seemed to be a wise decision. GSK s US saes force is the argest of a the pharmaceutica companies, with 8,000 representatives. But on 10 January 2005 something happened. Both GSK and Bayer announced that Bayer had taken back contro of the ex-us rights for Levitra. Bayer said it had paid $272 miion to buy out GSK as joint promoter of the treatment in Europe, Asia, the Pacific, Latin America and Canada. GSK wi continue jointy to promote Levitra in the United States with Bayer through its distributor, Schering-Pough, and has retained the rights in a few other markets incuding Itay. It seems that the main driver of this dea was the poor saes of Levitra in the context of the rest of the ED (erectie dysfunction) market. The batte for dominance in a condition that affects about one in five men is fierce. Ciais, a drug 352