Q.1.GLOBALISATION OF INDIAN BUSINESS:
Globalization, liberalization and privatization were the three cornerstones of India’s New Economic Policy of 1991. The year 1991 marks the beginning of a new era in the Indian economy. The new objective to be pursued by the policy makers, strategists and executives was to make India the largest free market economy of the 21st century. In pursuit of this objective, the Indian economy was to be integrated with the world economy through a programme of structural adjustment and stabilization. While the stabilization programme included inflation control, fiscal adjustment and BOP adjustment, the structural reforms included trade and capital flows reforms, industrial deregulation, disinvestment and public enterprise reforms and financial sector reforms. The programme of economic reforms has not been entirely successful and as a result, the globalization process of the Indian economy has not gathered momentum. Indian business continues to face a number of difficulties and obstacles in their effort to globalize their business. These obstacles are as follows:
GOVERNMENT POLICY AND PROCEDURES:
Government policy and procedures in India are extremely complex and confusing. Swift and efficient action is a pre-requisite for globalization- which sadly missing. The procedures and practice continue to be bureaucratic and hence a speed breaker in the globalization effort.
HIGH COST OF INPUTS AND INFRASRUCTURAL FACILITIES:
The cost of raw materials, intermediate goods, power, finance, infrastructural facilities etc. in India is high which reduces the global competitiveness of Indian business. The quality and adequacy of infrastructural facilities in India is far from satisfactory. Further the technology employed by Indian industries and the style of operation is generally out dated.
RESISTANCE TO CHANGE:
The pre-reform era (1951- 1991) breeded lethargy, created rigid structures, systems, practices and procedures and generally instilled a laid back attitude. These factors are a hindrance to the processes of modernization, rationalization and efficiency improvement. Technological change is generally perceived to be employment reducing and hence resisted to the extent possible. For instance, information technology was introduced in India in the early eighties. However, computerization process of nationalized banks began only in the mid nineties. Excess labour is particularly employed in the public sectors in areas such as banking, insurance, and the railways and Indian industry in general. As a result, labour productivity is low and cheap labour in many a cases turns out to be dear.
SMALL SIZE AND POOR IMAGE:
Grant Indian firms are known to be global pygmies. A look at the fortune 500 list would reveal all to you. On a global scale, Indian firms are found to be small in size with low availability of resources. Indian firms there for cannot compete successfully in the international market. Indian products suffer from a poor image in the international market for both reasons valid and otherwise. Indian firms continue to miss consumer focus both domestically and internationally. The value-money equilibrium is missing in Indian products. Further, Indian firms are do not have the where- withal to keep up to the delivery schedule, accepts large orders and match up to international specifications.
GROWING COMPETITION AND POOR SPEND:
Indian firms are not only up and against competition from developed countries but also emerging Asian powerhouses such as South Korea and China. Continuous improvement in quality and usefulness and competitive costs with competitive pricing can only keep you afloat and in order to remain afloat, one has to spend quite a lot on R & D. both public and private sector outlays on research in India is deliberately low when compared to the developed countries.
NON – TARIFF BARRIERS (NTBs)
Member nations of the World Trade Organizations are bound to progressively reduce tariff rates across the board over a definite period of time so that level playing field is created in global trade. Tariff barriers are therefore not of much concern. What concerns developing nations in particular, are non- tariff barriers imposed by the developed countries. Issues such as child labor content in some of the products exported by India to the developed nations had cropped up and remain unresolved.
Q.2. ADVANTAGES OF GLOBALISATION:
For successful globalization, countries need to chalk out strategies and policies to open up the doors for the inflows of foreign direct investment (FDI). The FDI by the MNCs brings with it flow of foreign exchange/ foreign capital, inflow of technology, real capital goods, managerial and technical skills and know- how.
Globalization can easily promote exports of the country by exploiting its export potentials in a right way. Globalization can be the engine of growth by facilitating export- led growth strategy of developing country. ASEAN countries such as Indonesia, Malaysia and Thailand have demonstrated their success of export- led growth strategy supported by the FDI under globalization approach.
Globalization can provide sophisticated job opportunities to the qualified people and check ‘brain drain’ in a country. Globalization would provide varieties of products to consumers at a cheaper rate when they are domestically produced rather than imported. This would help in improving the economic welfare of the consumer class.
Under globalization, the rising inflow of capital would bring foreign exchange into the country. Consequently, the exchange reserve and balance of payments position of the country can improve. This also helps in stabilizing the external value of the country’s currency.
Under global finance, companies can meet their financial requirements easily. Global banking sector would facilitate e banking and e-business. This would integrate countries economy globally and its prosperity would be enhanced.
DISADVANTAGES OF GLOBALIZATION
Globalization is never accepted as unmixed blending. Critics have pessimistic views about its ill- consequences.
When a country is opened up and its market economy and financial sectors are well liberalized, its domestic economy may suffer owing to foreign economic invasion.
A developing economy hen lacks sufficient maturity; globalization may have adverse effect on its growth.
Globalization may kill domestic industries when they fail to improve and compete with foreign well-managed, well-established firms.
Globalization may result into economic imperialism.
Unguarded openness may become a playground for speculators. Currency speculation and speculators attacks, as happened in case of Indonesia, Malaysia, Philippines, Thailand, etc. recently, may lead to economic crisis. It may lead to unemployment, poverty and growing economic inequalities.
Q.3. STRATEGIES FOR GLOBALISATION:
Ans. When a company makes the commitment to go international, it must choose an entry strategy. This decision should reflect an analysis of market potential, company capabilities and the degree of marketing involvement and commitment management is prepared to make. The approach to foreign marketing can range from minimal investment with infrequent and indirect exporting with little thought given to market development, to large investments of capital and management in an effort to capture and maintain a permanent, specific share of world markets. Depending on the firm’s objectives and market characteristics, either approach can be profitable. In fact, a company in various country markets may employ a variety of entry modes since each country market poses a different set of conditions. Having more than one strategy allows the company to match its expertise with the specific needs of each country market.
The various strategies available to Indian firms to enter the international environment are discussed as follows:
1. EXPORTING
Exporting is perhaps the first step for a company to go global. It is the first of the attempts to understand the international environment develop markets abroad.
Exporting can be direct or indirect. With direct exporting the company sells to a customer in another country. This is the most common approach employed by companies taking their first international step because the risks of financial loss can be minimized. In contrast, indirect exporting usually means that the company sells to a buyer in the home country who in turn exports the product. Customers include large retailers like Wal-Mart or Sears, Wholesale supply houses, trading companies, and others that buy to supply customers abroad.
In a global environment, the sourcing of finance, materials, managerial inputs etc. will also be global. However, with 0.5 percent share in the world trade, India is an insignificant player. There are a number of products with large export potential but these have not been tapped properly. With a more pragmatic and realistic export policy, procedural reforms and institutional support, with technological development, modernization and expansion of production facilities, India can definitely improve its share in the world trade from its present poor status. There are three strategies to increase export revenue. These are:
1. increase the average unit value realization,
2. increase the quantity of exports and
3. Export new products.
Value added exports assume significance in the context of increasing the average unit value realization. The bulk of India’s manufactured exports constitute the low price segment of international markets. Quality improvement and aggressive marketing is required to enter the high price segments of the markets. This can be achieved by technology imports and or foreign collaborations.
The size of India’s export basket needs to be expanded by adding new products. In order to identify new products for exports, export opportunities needs to be explored and products with high foreign demand also need to be identified.
There are also market segments, and industries which are abandoned by the developed countries on account of factors such as environmental consideration, lack of competitiveness etc. For instance, developed countries are progressively vacating production of a range of chemicals due to higher expenditure on overheads and wages. Yet another strategy available to Indian Companies is Niche Marketing.
2. FOREIGN INVESTMENT
It refers to investment in foreign country. Foreign investment by Indian Companies have been negligible because of factors such as assured domestic market, want of global orientation, protective government regulation etc. However, this inward orientation has undergone substantial change after the adoption of the new economic policy 1991. With the economic liberalization and growing global orientation, many Indian firms are setting up manufacturing, assembling and trading bases overseas. These facilities are either wholly owned or foreign partnership firms.
Further, through acquisition route, Indian companies have made substantial investments abroad. The Aditya Birla Group has been pioneer in making foreign investments much before the adoption of the new economic credo. Indian companies are also setting up production bases in foreign countries to get an easy entry into the regional trade blocks. For instance, a production facility in Mexico opens the doors to the NAFTA area for Arvind Mills. Yet another example is that of Cheminoor Drugs by Dr. Reddy’s Labs in New Jersey which is set up as a subsidiary.
3. MERGERS AND ACQUISITIONS
In merger, two companies come together but only one survives and the other goes out of existence as it is merged in the other company. While in acquisition, one company (acquirer) gets control over the other company (acquired) at the willingness of each of the companies.
Mergers and acquisitions is an important entry strategy in international business. Mergers and acquisitions can be used to acquire new technology, reduce the level of competition and provides quick access to markets and distribution network. Many Indian firms have resorted to the acquisition route to gain a foothold in the foreign market. For instance, Indian companies had spent $ 711.4 million in acquisitions abroad in 2000 in industries such as InfoTech, drugs and pharmaceuticals, paints, tele-communication, petroleum and broadcasting. Some of the major acquisitions include investments by Zee Telefilms, Leading Edge System BPL Software and Tata Tea. Dataline Transcription, Teamasia semiconductors, Goa Carbons, Wockhordt and Acro lab are few other firms to name from a long list.
A very important acquisition has been the $ 271 billion leveraged buy out of Tetley by Tata Tea. With the acquisition of Tetley, Tata Tea, having been the largest integrated tea producer in the world, also got possession of the second largest global tea marketer.
Indian companies have also acquired foreign brands. Nicholas Piramal India has acquired the Indian rights for three anti-infective brands from the US firm Eli Lilly.
Ranbaxy interred the German pharma market by acquiring the generics business of Bager Ali.
The Indian Rayon acquired Madura Garments; a subsidiary of the UK based coats Viyella and also acquired global rights for Coats Viyella brands such as Louis Phillipe, Allen Solly and Peter England.
4. JOINT VENTURES
Joint Ventures as a means of foreign market entry have accelerated sharply since the 970s. Joint ventures refer to joining with foreign companies to produce or market the products or services. Besides serving as a means of lessening political and economical risks by the amount of the partner’s contribution to the venture, JVs provide a less risky way to enter markets that pose legal and cultural barriers than would be the case in an acquisition of an existing company.
There are two types of JVs, namely:
1. Contractual JVs and
2. Equity based JVs.
A contractual JV consists of a contractual arrangement between two or more companies in which certain assets and liabilities are shared for a specific purpose and time. Contractual JVs are common in the construction, extractive and consultancy services.
An equity JV is a capital sharing arrangement between an MNC and a local company or another MNC or even a foreign government. Each partner holds share in the subsidiary and shares the profits in proportion to its ownership share.
The advantage of a JV for MNC is that it can spread its investment across locations, and thereby minimize its risks.
The liberalization of policy towards the foreign investment by Indian firms along with the new economic environment seems to have given joint venture a boost. At the beginning of 1995 although there were 177 JVs in operation, there were 347 under implementation. Not only the number of JVs is increasing but also the number of countries and industries in the map of Indian JVs is expanding. Companies like Ranbaxy, Dr. Reddy’s Lab, Lupin etc. have taken the JV route to mark their presence in the overseas market.
5. STRATEGIC ALLIANCE:
A Strategic International Alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective.
It is an agreement between companies that is of strategic importance to one or both companies’ competitive viability. Strategy refers to the means to fulfill company’s objectives. In every day business, the term ‘strategic alliance’ is generally used to describe a wide variety of collaborations, irrespective of strategic importance. In a strategic alliance, a firm could establish relationships with organization that have the potential to add values. Bench marking, re-engineering, outsourcing, merger and acquisition are examples of strategic alliance.
On the basis of structure, strategic alliances can be classified into equity based and non- equity based.
Non-equity based alliances such as licensing agreements, marketing agreements, technology transfer agreements etc. are found to be more dynamic, constructive and strategic. The scope of strategic alliance ranges from Research and Development to distribution.
6. LICENSING AND FRANCHISING:
A means of establishing a foothold in foreign markets without large capital outlays is licensing. It is a favorite strategy for small and medium sized companies. International licensing helps a firm from one country (licensor) to permit another firm in a foreign country (licensee) to use its intellectual property such as patents, trademarks, copyrights, technology, technical know-how, marketing skill etc. in return for royal payments. Royal payments or license fee is regulated in most of the countries.
The advantages of licensing are most apparent when: capital is scarce, import restrictions forbid other means of entry, a country is sensitive to foreign ownership, or it is necessary to protect trademarks and patents against cancellation of nonuse.
An important risk of licensing is that the licensor may give birth to his own competitor i.e. the licensee can become a competitor after the expiry of the licensing agreement. The only anti-dote that is available to the licensor to pre-empt any potential or actual competition is continuous innovation. Only innovation will provide sustainable competitive advantage.
Franchising is a form of licensing in which a parent company (franchiser) grants another company (franchisee) the right to do business in a specific manner. Franchising can assume various forms such as selling the franchiser’s products, using the name of the franchiser, production and marketing techniques etc. Important forms of franchising are:
1. Manufacturer- retailer systems e.g. automobile dealership
2. Manufacturer- wholesaler system e.g. soft drink companies
3. Service firm- retailer systems e.g. lodging and fast food outlets.
Potentially, the franchise system provides an effective blending of skill centralization and operational decentralization, and has become increasingly important form of international marketing.
Globalization, liberalization and privatization were the three cornerstones of India’s New Economic Policy of 1991. The year 1991 marks the beginning of a new era in the Indian economy. The new objective to be pursued by the policy makers, strategists and executives was to make India the largest free market economy of the 21st century. In pursuit of this objective, the Indian economy was to be integrated with the world economy through a programme of structural adjustment and stabilization. While the stabilization programme included inflation control, fiscal adjustment and BOP adjustment, the structural reforms included trade and capital flows reforms, industrial deregulation, disinvestment and public enterprise reforms and financial sector reforms. The programme of economic reforms has not been entirely successful and as a result, the globalization process of the Indian economy has not gathered momentum. Indian business continues to face a number of difficulties and obstacles in their effort to globalize their business. These obstacles are as follows:
GOVERNMENT POLICY AND PROCEDURES:
Government policy and procedures in India are extremely complex and confusing. Swift and efficient action is a pre-requisite for globalization- which sadly missing. The procedures and practice continue to be bureaucratic and hence a speed breaker in the globalization effort.
HIGH COST OF INPUTS AND INFRASRUCTURAL FACILITIES:
The cost of raw materials, intermediate goods, power, finance, infrastructural facilities etc. in India is high which reduces the global competitiveness of Indian business. The quality and adequacy of infrastructural facilities in India is far from satisfactory. Further the technology employed by Indian industries and the style of operation is generally out dated.
RESISTANCE TO CHANGE:
The pre-reform era (1951- 1991) breeded lethargy, created rigid structures, systems, practices and procedures and generally instilled a laid back attitude. These factors are a hindrance to the processes of modernization, rationalization and efficiency improvement. Technological change is generally perceived to be employment reducing and hence resisted to the extent possible. For instance, information technology was introduced in India in the early eighties. However, computerization process of nationalized banks began only in the mid nineties. Excess labour is particularly employed in the public sectors in areas such as banking, insurance, and the railways and Indian industry in general. As a result, labour productivity is low and cheap labour in many a cases turns out to be dear.
SMALL SIZE AND POOR IMAGE:
Grant Indian firms are known to be global pygmies. A look at the fortune 500 list would reveal all to you. On a global scale, Indian firms are found to be small in size with low availability of resources. Indian firms there for cannot compete successfully in the international market. Indian products suffer from a poor image in the international market for both reasons valid and otherwise. Indian firms continue to miss consumer focus both domestically and internationally. The value-money equilibrium is missing in Indian products. Further, Indian firms are do not have the where- withal to keep up to the delivery schedule, accepts large orders and match up to international specifications.
GROWING COMPETITION AND POOR SPEND:
Indian firms are not only up and against competition from developed countries but also emerging Asian powerhouses such as South Korea and China. Continuous improvement in quality and usefulness and competitive costs with competitive pricing can only keep you afloat and in order to remain afloat, one has to spend quite a lot on R & D. both public and private sector outlays on research in India is deliberately low when compared to the developed countries.
NON – TARIFF BARRIERS (NTBs)
Member nations of the World Trade Organizations are bound to progressively reduce tariff rates across the board over a definite period of time so that level playing field is created in global trade. Tariff barriers are therefore not of much concern. What concerns developing nations in particular, are non- tariff barriers imposed by the developed countries. Issues such as child labor content in some of the products exported by India to the developed nations had cropped up and remain unresolved.
Q.2. ADVANTAGES OF GLOBALISATION:
For successful globalization, countries need to chalk out strategies and policies to open up the doors for the inflows of foreign direct investment (FDI). The FDI by the MNCs brings with it flow of foreign exchange/ foreign capital, inflow of technology, real capital goods, managerial and technical skills and know- how.
Globalization can easily promote exports of the country by exploiting its export potentials in a right way. Globalization can be the engine of growth by facilitating export- led growth strategy of developing country. ASEAN countries such as Indonesia, Malaysia and Thailand have demonstrated their success of export- led growth strategy supported by the FDI under globalization approach.
Globalization can provide sophisticated job opportunities to the qualified people and check ‘brain drain’ in a country. Globalization would provide varieties of products to consumers at a cheaper rate when they are domestically produced rather than imported. This would help in improving the economic welfare of the consumer class.
Under globalization, the rising inflow of capital would bring foreign exchange into the country. Consequently, the exchange reserve and balance of payments position of the country can improve. This also helps in stabilizing the external value of the country’s currency.
Under global finance, companies can meet their financial requirements easily. Global banking sector would facilitate e banking and e-business. This would integrate countries economy globally and its prosperity would be enhanced.
DISADVANTAGES OF GLOBALIZATION
Globalization is never accepted as unmixed blending. Critics have pessimistic views about its ill- consequences.
When a country is opened up and its market economy and financial sectors are well liberalized, its domestic economy may suffer owing to foreign economic invasion.
A developing economy hen lacks sufficient maturity; globalization may have adverse effect on its growth.
Globalization may kill domestic industries when they fail to improve and compete with foreign well-managed, well-established firms.
Globalization may result into economic imperialism.
Unguarded openness may become a playground for speculators. Currency speculation and speculators attacks, as happened in case of Indonesia, Malaysia, Philippines, Thailand, etc. recently, may lead to economic crisis. It may lead to unemployment, poverty and growing economic inequalities.
Q.3. STRATEGIES FOR GLOBALISATION:
Ans. When a company makes the commitment to go international, it must choose an entry strategy. This decision should reflect an analysis of market potential, company capabilities and the degree of marketing involvement and commitment management is prepared to make. The approach to foreign marketing can range from minimal investment with infrequent and indirect exporting with little thought given to market development, to large investments of capital and management in an effort to capture and maintain a permanent, specific share of world markets. Depending on the firm’s objectives and market characteristics, either approach can be profitable. In fact, a company in various country markets may employ a variety of entry modes since each country market poses a different set of conditions. Having more than one strategy allows the company to match its expertise with the specific needs of each country market.
The various strategies available to Indian firms to enter the international environment are discussed as follows:
1. EXPORTING
Exporting is perhaps the first step for a company to go global. It is the first of the attempts to understand the international environment develop markets abroad.
Exporting can be direct or indirect. With direct exporting the company sells to a customer in another country. This is the most common approach employed by companies taking their first international step because the risks of financial loss can be minimized. In contrast, indirect exporting usually means that the company sells to a buyer in the home country who in turn exports the product. Customers include large retailers like Wal-Mart or Sears, Wholesale supply houses, trading companies, and others that buy to supply customers abroad.
In a global environment, the sourcing of finance, materials, managerial inputs etc. will also be global. However, with 0.5 percent share in the world trade, India is an insignificant player. There are a number of products with large export potential but these have not been tapped properly. With a more pragmatic and realistic export policy, procedural reforms and institutional support, with technological development, modernization and expansion of production facilities, India can definitely improve its share in the world trade from its present poor status. There are three strategies to increase export revenue. These are:
1. increase the average unit value realization,
2. increase the quantity of exports and
3. Export new products.
Value added exports assume significance in the context of increasing the average unit value realization. The bulk of India’s manufactured exports constitute the low price segment of international markets. Quality improvement and aggressive marketing is required to enter the high price segments of the markets. This can be achieved by technology imports and or foreign collaborations.
The size of India’s export basket needs to be expanded by adding new products. In order to identify new products for exports, export opportunities needs to be explored and products with high foreign demand also need to be identified.
There are also market segments, and industries which are abandoned by the developed countries on account of factors such as environmental consideration, lack of competitiveness etc. For instance, developed countries are progressively vacating production of a range of chemicals due to higher expenditure on overheads and wages. Yet another strategy available to Indian Companies is Niche Marketing.
2. FOREIGN INVESTMENT
It refers to investment in foreign country. Foreign investment by Indian Companies have been negligible because of factors such as assured domestic market, want of global orientation, protective government regulation etc. However, this inward orientation has undergone substantial change after the adoption of the new economic policy 1991. With the economic liberalization and growing global orientation, many Indian firms are setting up manufacturing, assembling and trading bases overseas. These facilities are either wholly owned or foreign partnership firms.
Further, through acquisition route, Indian companies have made substantial investments abroad. The Aditya Birla Group has been pioneer in making foreign investments much before the adoption of the new economic credo. Indian companies are also setting up production bases in foreign countries to get an easy entry into the regional trade blocks. For instance, a production facility in Mexico opens the doors to the NAFTA area for Arvind Mills. Yet another example is that of Cheminoor Drugs by Dr. Reddy’s Labs in New Jersey which is set up as a subsidiary.
3. MERGERS AND ACQUISITIONS
In merger, two companies come together but only one survives and the other goes out of existence as it is merged in the other company. While in acquisition, one company (acquirer) gets control over the other company (acquired) at the willingness of each of the companies.
Mergers and acquisitions is an important entry strategy in international business. Mergers and acquisitions can be used to acquire new technology, reduce the level of competition and provides quick access to markets and distribution network. Many Indian firms have resorted to the acquisition route to gain a foothold in the foreign market. For instance, Indian companies had spent $ 711.4 million in acquisitions abroad in 2000 in industries such as InfoTech, drugs and pharmaceuticals, paints, tele-communication, petroleum and broadcasting. Some of the major acquisitions include investments by Zee Telefilms, Leading Edge System BPL Software and Tata Tea. Dataline Transcription, Teamasia semiconductors, Goa Carbons, Wockhordt and Acro lab are few other firms to name from a long list.
A very important acquisition has been the $ 271 billion leveraged buy out of Tetley by Tata Tea. With the acquisition of Tetley, Tata Tea, having been the largest integrated tea producer in the world, also got possession of the second largest global tea marketer.
Indian companies have also acquired foreign brands. Nicholas Piramal India has acquired the Indian rights for three anti-infective brands from the US firm Eli Lilly.
Ranbaxy interred the German pharma market by acquiring the generics business of Bager Ali.
The Indian Rayon acquired Madura Garments; a subsidiary of the UK based coats Viyella and also acquired global rights for Coats Viyella brands such as Louis Phillipe, Allen Solly and Peter England.
4. JOINT VENTURES
Joint Ventures as a means of foreign market entry have accelerated sharply since the 970s. Joint ventures refer to joining with foreign companies to produce or market the products or services. Besides serving as a means of lessening political and economical risks by the amount of the partner’s contribution to the venture, JVs provide a less risky way to enter markets that pose legal and cultural barriers than would be the case in an acquisition of an existing company.
There are two types of JVs, namely:
1. Contractual JVs and
2. Equity based JVs.
A contractual JV consists of a contractual arrangement between two or more companies in which certain assets and liabilities are shared for a specific purpose and time. Contractual JVs are common in the construction, extractive and consultancy services.
An equity JV is a capital sharing arrangement between an MNC and a local company or another MNC or even a foreign government. Each partner holds share in the subsidiary and shares the profits in proportion to its ownership share.
The advantage of a JV for MNC is that it can spread its investment across locations, and thereby minimize its risks.
The liberalization of policy towards the foreign investment by Indian firms along with the new economic environment seems to have given joint venture a boost. At the beginning of 1995 although there were 177 JVs in operation, there were 347 under implementation. Not only the number of JVs is increasing but also the number of countries and industries in the map of Indian JVs is expanding. Companies like Ranbaxy, Dr. Reddy’s Lab, Lupin etc. have taken the JV route to mark their presence in the overseas market.
5. STRATEGIC ALLIANCE:
A Strategic International Alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective.
It is an agreement between companies that is of strategic importance to one or both companies’ competitive viability. Strategy refers to the means to fulfill company’s objectives. In every day business, the term ‘strategic alliance’ is generally used to describe a wide variety of collaborations, irrespective of strategic importance. In a strategic alliance, a firm could establish relationships with organization that have the potential to add values. Bench marking, re-engineering, outsourcing, merger and acquisition are examples of strategic alliance.
On the basis of structure, strategic alliances can be classified into equity based and non- equity based.
Non-equity based alliances such as licensing agreements, marketing agreements, technology transfer agreements etc. are found to be more dynamic, constructive and strategic. The scope of strategic alliance ranges from Research and Development to distribution.
6. LICENSING AND FRANCHISING:
A means of establishing a foothold in foreign markets without large capital outlays is licensing. It is a favorite strategy for small and medium sized companies. International licensing helps a firm from one country (licensor) to permit another firm in a foreign country (licensee) to use its intellectual property such as patents, trademarks, copyrights, technology, technical know-how, marketing skill etc. in return for royal payments. Royal payments or license fee is regulated in most of the countries.
The advantages of licensing are most apparent when: capital is scarce, import restrictions forbid other means of entry, a country is sensitive to foreign ownership, or it is necessary to protect trademarks and patents against cancellation of nonuse.
An important risk of licensing is that the licensor may give birth to his own competitor i.e. the licensee can become a competitor after the expiry of the licensing agreement. The only anti-dote that is available to the licensor to pre-empt any potential or actual competition is continuous innovation. Only innovation will provide sustainable competitive advantage.
Franchising is a form of licensing in which a parent company (franchiser) grants another company (franchisee) the right to do business in a specific manner. Franchising can assume various forms such as selling the franchiser’s products, using the name of the franchiser, production and marketing techniques etc. Important forms of franchising are:
1. Manufacturer- retailer systems e.g. automobile dealership
2. Manufacturer- wholesaler system e.g. soft drink companies
3. Service firm- retailer systems e.g. lodging and fast food outlets.
Potentially, the franchise system provides an effective blending of skill centralization and operational decentralization, and has become increasingly important form of international marketing.
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