Page 106 - DMGT545_INTERNATIONAL_BUSINESS

Unit 6: Modes of Entering International Business

1. The parties intend a long-term alliance; notes
2. The alliance will require a significant commitment of resources by each party;

3. The alliance will require significant interaction between the parties;
4. The alliance will require a separate management structure;
5. If the business of the alliance may be subject to unique regulatory issues;
6. In addition, a joint venture will be appropriate if the parties expect that the alliance
ultimately may be able to function as a separate business that could be sold or taken
public.
Historically, information technology and life sciences companies have sought minority equity
investments from strategic commercial partners. This form of strategic alliance has gained
increased popularity in the current economic climate. In many cases, the equity investment
will also be accompanied by a contractual arrangement between the parties such as a license
agreement or a distribution agreement. From the company’s perspective, an equity investment
from a strategic commercial partner may be structured on more favorable terms than those
obtained from venture capitalists, and it may increase the company’s valuation and enhance
the company’s ability to secure future rounds of funding. Venture capitalists and underwriters
generally view these types of strategic alliances as validating an early stage company’s technology
and business model. In some cases, they have even become a condition to an underwriter taking
a life science company public. The strategic commercial partner may desire this form of alliance
to gain a competitive advantage through access to new technologies and to share in the upside of
the other party’s business through equity ownership.
Early stage companies may gain significant operational advantages as a result of forming strategic
alliances. Moreover, the growth of early stage companies may be significantly accelerated
through strategic alliances, and the companies may be more successful in obtaining future equity
investments. In addition, early stage companies may find that strategic alliances are the first
step to the acquisition of the company by the strategic partner, and they give the parties the
opportunity to evaluate whether or not an acquisition is desirable.
Strategic alliances also have their risks, particularly if the parties are not financial equals. These
risks include the loss of operational control and confidentiality of proprietary information and
technology. Some alliances can involve a clash of corporate cultures or the perceived diminution
of independence. In addition, the parties may deprive themselves of future business opportunities
with competitors of their strategic partner.
The parties must carefully consider a number of factors in the decision of whether to enter
into a strategic alliance, and how best to govern the relationship once the alliance is formed. In
addition to the parties’ business objectives, the parties should consider a variety of accounting,
tax, antitrust, and intellectual property issues when structuring a strategic alliance. A properly
structured strategic alliance can bring many new opportunities and enhance the parties’ growth
potential. In addition, it can provide an alternative source of capital during difficult economic
times.

6.3.1 stages of alliance formation

A typical strategic alliance formation process involves these steps:
Alliance Operation: Alliance operations involves addressing senior management’s commitment,
finding the calibre of resources devoted to the alliance, linking of budgets and resources
with strategic priorities, measuring and rewarding alliance performance, and assessing the
performance and results of the alliance.

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