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Table of Contents
Chapter 06: Licensing, Strategic Alliances,FDI

Licensing........................................................................................................................................................ 3
Franchising .................................................................................................................................................... 3
Original Equipment manufacturing (OEM) ................................................................................................... 3
Strategic Alliances ......................................................................................................................................... 4
The Rationale for Non-equity Alliance .......................................................................................................... 4
Distribution Alliance...................................................................................................................................... 4
Manufacturing Alliance ................................................................................................................................. 4
R&D Alliance ................................................................................................................................................. 4
Joint Venture ................................................................................................................................................. 5
Manufacturing subsidiaries: ......................................................................................................................... 5
Outsourcing:.................................................................................................................................................. 6
Acquisitions: .................................................................................................................................................. 6
Entry Modes and Marketing control:............................................................................................................ 7
The “Cultural Distance” Effect ...................................................................................................................... 9
Waterfall versus Sprinkler Strategies:........................................................................................................... 9
Colgate-Palmolive: Cleopatra in Quebec?

Company Background ................................................................................................................................. 11

Case Summary............................................................................................................................................. 12
Solution to Case .......................................................................................................................................... 14
Conclusion ................................................................................................................................................... 18
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Chapter 06
Licensing, Strategic
Alliances, FDI
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Licensing
Licensing refers to offering a firm’s knowledge and other intangible assets to another foreign
company rather than using a distributor in foreign market for a fee, royalty or any other type of
payment. It gives advantage exporting in its avoidance over tariffs and other levies that might be
assed against an important product. The new exporter also gets the advantage of market research
and knowledge that was needed while using a distributor. Because of licensing the firm in host
country gets specific know-how from the licensing firm and is able to develop new skills.
Licensing is also the greatest weakness of the licensor because it might leak certain important
knowledge of the company which gives it competitive advantages to its competitors.

Franchising
In franchising the entering firm offers to help a local entrepreneur to establish a local business that
is allowed to sell the firms well known branded product in the new market. In return the franchisee
will raise the necessary capital and agree to pay the franchisor a royalty on sales and usually an
upfront fee. The franchisor will maintain the brand through advertising and promotion. The
franchisor will also provide market support to the franchisee, for which the franchisee will usually
pay a portion.

Original Equipment manufacturing (OEM)

In OEM a company enters a foreign market by selling its unbranded product or component to
another company in the market country. The buyer then sells the final product under its own brand
image. For the supplier firm, there is little or no expense in the marketing and the buyer gets a
product ready to use in the market.
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Strategic Alliances
Through a strategic alliance, two companies will decide to share resources to accomplish a specific,
mutually beneficial project. This type of agreement is less involved and less binding than a joint
venture, where the two businesses pool resources in the creation of a separate business entity. Each
of the two companies will maintain their autonomy in a strategic alliance while gaining a new
opportunity.

The Rationale for Non-equity Alliance

A non-equity strategic alliance is created when two or more companies sign a contractual
relationship to pool their resources and capabilities together. Due to nonequity alliance a company
do things that it could not do before in the foreign market. It allows two companies to undertake
missions impossible for a single firm to undertake.

Distribution Alliance
There are three types of non-equity alliance: distribution, manufacture and research &
development. In a strategic alliance, two or more organizations have connections that cause them
to function according to a perception of a single interest shared by all parties. Here two companies
have joint ventures in distributing their product in a market.

Manufacturing Alliance
Manufacturing alliance involve the brands of both manufacturers with existing capabilities in the
manufacturing of the parts. The arrangement is convenient and saves money and time of the
partners by not having to invest in a new plant or equipment.

R&D Alliance
R&D is used to solve critical questions of the firm. Its tie ups with competitors are a means of keeping
peace while making sure competitors work towards the same technological standards.
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Joint Venture
A joint venture is a business arrangement in which two or more parties agree to pool their resources
for the purpose of accomplishing a specific task. This task can be a new project or any other
business activity. In a joint venture, each of the participants is responsible for profits, losses, and
costs associated with it. However, the venture is its own entity, separate from the participants' other
business interests.

Manufacturing subsidiaries:
Manufacturing Subsidiary means any Subsidiary (A) substantially all the property of which is
located within the continental United States of America, (B) which owns a Principal Domestic
Manufacturing Property and (C) in which the Company's investment, direct or indirect and whether
in the form of equity, debt.

The aims could be to acquire raw materials, to operate at lower manufacturing costs, to avoid tariff
barriers and satisfy local content requirements, and/or to penetrate local markets

Manufacturing FDI has several advantages in Market penetration:

1. First, local production means price escalation caused by transport costs, customs duties
fees, local turnover taxes, and so on can be nullified or drastically reduced.
2. Availability of goods can usually be guaranteed to resellers, minimizing potential channel
conflicts over allocation decisions and eliminating delays for ultimate buyers.
3. Location of production in the market country may lead to more uniform quality, although
in some cases the basis of initial reluctance to go to manufacturing abroad may well have
been the risk of lowered quality.
4. With the global spread of manufacturing skills, the risk of lower quality is reduced, and
companies can count on local suppliers to provide quality and service.
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Outsourcing:
The outsourcing practice where a company shuts down production in one country, fires the
workers, and starts production in a lower-wage country, has come under strong criticism in many
developed countries.

Outsourcing is a business practice in which a company hires another company or an individual to

perform tasks, handle operations or provide services that are either usually executed or had
previously been done by the company's own employees.

Acquisitions:
An acquisition is when one company purchases most or all of another company's shares to gain control of
that company. Purchasing more than 50% of a target firm's stock and other assets allows the acquirer to
make decisions about the newly acquired assets without the approval of the company's shareholders.

Few disadvantages are, In a narrow sense, the existing product line and the new products to be introduced
might not be compatible, and pruning and adjustments that have to be made require reeducating the sales
force and distribution channels. In general, it is not so easy to find a company to acquire that fits the
purposes of entry very well.
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Entry Modes and Marketing control:

The effect of entry mode on the degree to which the firm can exercise control over its local
marketing effort is not simple and direct.

Three alternative ways of organizing the local marketing effort:

(1) Independent agents and distributors

(2) Alliance with a local marketing partner

(3) A wholly owned sales subsidiary

Modes of Entry:

1. Exporting
2. Licensing
3. Franchising
4. Joint Venture
5. Wholly Owned Subsidiary
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Matrix:

An optimal entry mode matrix:

Optimal Modes:
For preferred choices among the alternative modes:

1. Incremental: The resource-poor entrant that wants to stay flexible for the future will most
likely be best off with exporting using a gradual “waterfall” strategy.
2. Protected: The firm with strong and protected know-how but without very keen interest or
skills in foreign markets might also be best off with indirect exporting in high-growth
markets (if speed is of the essence).
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3. Control: The larger firm interested in global expansion and control over production and
marketing in various countries would usually do best with some type of FDI in
manufacturing and local sales subsidiaries.

Real world cases:

The suggested entry modes can be illustrated with reference to some real-world examples

The “Cultural Distance” Effect

The CAGE framework:

1. Cultural Distance
2. Administrative and Political Distance
3. Geographic Distance
4. Economic Distance

Waterfall versus Sprinkler Strategies:

Waterfall:

Waterfall market entry strategy is sequential business expansion to foreign markets. In this case,
each stage is represented by a single foreign market.

Sprinkler:

The sprinkler strategy is a market entry strategy based on the principle of diversification in which
a company attempts to enter as many markets as possible in a relatively short time.
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Colgate-Palmolive:
Cleopatra in Quebec?
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Company Background
Colgate-Palmolive Company, is an American diversified company that manufactures and
distributes household and commercial cleaning products, dental and other personal-care products,
and pet foods in the United States and in more than 200 other countries and territories worldwide.
Headquarters are in New York City.
Colgate-Palmolive’s history traces back to the early 19th century when William Colgate,
a soap and candle maker, began selling his wares in New York City under the name William
Colgate & Company. After his death in 1857, the company was run by his son, Samuel Colgate,
under the new name Colgate & Company. The current corporate name was adopted in 1953.
The Canadian subsidiary opened its door in 1912 and grew into a $250-million-a-year corporation.
Colgate-Palmolive Canada manufactured and marketed a wide range of personal care and
household products inside Canada and also supplied brands to the United States and Puerto Rico.
Cleopatra soap was first introduced in France in November 1984 with 23% price premium
compared to other rivals. At the end of 1985 market share of Cleopatra shot up to 15%. Success in
France made them go global. They thought, if Cleopatra worked in France, it should do likewise
elsewhere in the world. They chose Canada, especially Quebec, a French speaking state as its
target.
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Case Summary
In 1986 Colgate-Palmolive attempted to introduce a premium soap product to the Canadian market
in Quebec. The soap, Cleopatra, was such a huge hit in France that they had difficulty keeping up
with demand. With such a success on their hands, Colgate-Palmolive decided to replicate the
accomplishment in another market. They chose Quebec, because 80% of the population spoke
French.

After 14 months, the soap failed to sell and Cleopatra had lost a significant amount of money. The
idea to take a popular product and try to sell it elsewhere seems quite logical on the surface. After
all, many multi-national companies do this all the time. For example, there is hardly a place on the
planet where you can’t get a Coca-Cola. However, just because a product is popular in one place
doesn’t mean that it will be equally sought after in another location.

In introducing Cleopatra to Quebec, Colgate-Palmolive made several errors. The first, and most
obvious, was assuming that a common language and ancestry means similar tastes and
attitudes. Failing to realize that people who live on different continents and in different
environments may have a different perception about the products they choose was a mistake of
vast proportion. It turns out Canadians have a dissimilar view of perfumed soaps than the
French. It may not have been invented in there, but France has been the center of European
perfume since the 14th century. Canadians, on the other hand, view the level of perfume to vary
directly with the harshness of the product. Abrasive chemicals and cleansing strength, whether
accurate or not, isn’t the image you want to portray when going after the higher margin skin care
segment.

The Canadian market was highly competitive with 15 main brands and 20-25 minor brands of
soap. Perhaps Cleopatra wasn’t the highest priced soap in France as it was in Quebec. Colgate-
Palmolive chose Quebec to sell Cleopatra because of its supposed similarity to France.
Inexplicably, what little market research they did was conducted in Toronto. Additionally, the
market research that was done seemed to be poorly thought out and executed sloppily. For
example, simply asking someone if they would buy your product without bothering to mention it
will be the highest cost soap on the market won’t lead to a very good data point.
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The second biggest mistake Colgate-Palmolive made was in pricing. Their goal was to compete
against Dove, the most popular soap, in the skin care and high end soap market. While it is true
that having a higher priced product can signal higher quality, for an unknown brand selling a
mostly elastic commodity type product a higher price can also signal that it is merely
expensive. By trying to out-Dove Dove, Cleopatra priced themselves out of the market. In the
market research, people liked Cleopatra and agreed they would buy the product; but they didn’t
agree to buy it any price.

The third error made by Colgate-Palmolive was in the product launch method. Their goal was to
build such customer demand that retailers would be forced to offer the product. Part of this plan
involved heavy television advertising using the same commercial that ran in France. While
the commercial was entertaining, it didn’t have the same effect on sales that was experienced in
France. Again, poor market research. More importantly, Colgate-Palmolive attempted to
circumvent the normal method of offering allowances and discounts to retailers in an effort to
maintain high margins. Without the support of the retailers, they were putting all their eggs in the
customer demand basket without truly understanding if the demand would actually materialize.

There were several other issues that Colgate-Palmolive ran into or failed to consider. Their
promotional campaign involving coupons for free soap failed. Only 21% of the coupons were ever
redeemed. By only selling Cleopatra one bar at a time, they didn’t take advantage of the new
trend, used by Dove and most others, of bundling several bars together. Also, liquid soap was new
to the market at that time and created even more competition in an already competitive
market. Finally, the organizational manner, in which some of the product managers didn’t fully
buy into the soap for the Canadian market, didn’t facilitate a successful product launch.
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Solution to Case
Question 01

What are the similarities that suggest acceptance for Cleopatra after the French success? Critically
evaluate the market research prior to the launch. Any significant differences which would alert
you to potential problems ahead of the launch?

Answer:

Besides the fact that French is spoken in both France and Quebec and most of the population of
France ended up in Quebec, there are not very much similarities between the two markets. Colgate
Palmolive Canada made the mistake of presuming that the product will be successful in other
regions around the world. Just because a product is successful in one place does not mean it would
necessarily be successful in another part unless the two markets are completely identical. Another
issue was that the product was just launched into the market with in-depth research of competition
and such. In this example, by launching a high priced soap into a competitive soap market where
the only differentiation was price, would affect Colgate Palmolive drastically. Especially because
the entered the market already at a high price. Because of the success in France, the company did
not see the mistakes they were making and just how their decision would play.

The pre-launch international business research for Cleopatra missed to address many of the inherent
issues that could have affected the buying behavior of customers in Quebec, Canada. The pre-launch
business research had a few notable deficiencies. Asking a “super group” of articulate professional
women their likes and dislikes about the product was not a very bright move, because this so called
“super group” did not have all the characteristics of the population ( target customers ) and hence we
can be right to say that the sample picked for the research was faulty. The “super group” disposable
income would have been higher than the average of the target customers, hence price might not have
been a driving force behind their decisions. The “super group” was also never given a chance to
physically use the product. A response after the so called “super group” had used the product would
have made more sense. The research that was conducted on typical consumers also had deficiencies.
The research was conducted by showing the consumers only the advertisements, and then the
consumers were asked about their buying decision. The research missed the key point of ascertaining
the income elasticity and the demand elasticity of the product.
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Question 02
How would you evaluate the positioning of Cleopatra in Canada? Any alternative options?

Answer

Cleopatra placed itself as the premium priced, premium quality soap differentiated from all others.
However, this was not a very good move. Because:

• The pricing in Canada within the soap industry is very competitive. In a market where the
competition is so high, setting premium price for a new product might not be a very good
idea. Because there are always other brands to choose from that have familiarized
themselves with the consumer base.
• In Canada the soap market was already taken by existing brands that were in the market
for years. Brands like Dove, Carnay, Zest, Coast, Woodbury, Ivory etc. had already
occupied a significant number of the customer base. So the problem was that the target
customers of Cleopatra had other acceptable brands to choose from. If the customers
wanted a brand image they could easily choose from existing brands.
• At the time when Cleopatra was launched, Dove was the leading soap in the Canadian
market. Dove was the market leader and was priced the highest. Cleopatra was launched
with a price that was higher than Dove. As a new product, pricing Cleopatra higher than
the market leader was also a reason for failure. Though Cleopatra was meant to give a
premium product feeling to the customers, pricing it higher than the market leaders was a
bad move.

Alternative options for Cleopatra in terms of positioning would be

• To bring some changes to their promotional activities. Their promotional activities failed
to attract to customers. As they avoided relying on retailers, their main source to attract
customers is promotion. They need to adopt promotional activities that would attract
customers in Canada. Tailor activities according to the customer base of Canada.
• The prelaunch research was conducted in Toronto while the results were implemented in
Quebec. Customer perception in Toronto and Quebec are not the same. They need to
conduct proper research for their desired target location.
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Question 03

Evaluate the promotional launch and the advertising campaign. Were mistakes made that could
have been anticipated?

Answer

The promotional launch and the advertising campaign of Cleopatra in Quebec are completely
different from the other companies in the same industries, they expect direct demands from
customers by arousing their interest and bypassing retailers who have a significant effect on
selling.

Therefore they would lose supporting from retailers and get some unreliable information. And
obviously, the promotional launch and the advertising campaign are costly and high-level which
frighten most ordinary consumers thereby losing a large market. So a misunderstanding for the
product did exist.

• They decided to place Cleopatra as premium priced, premium quality beauty soap. Thus
giving no discounts.
• They gave away free bar coupons for one bar in order to capture the market by proving
their quality.
• They launched their campaign through strong media and consumer promotion. They used
television advertising to create impact.

They made some silly mistakes that could have been easily avoided if they considered the fact that
Franc and Canada are different countries where the population has different perceptions. They did
not research responses to their television advertising campaigns. They just assumed that the
commercial that was successful in France would also be a success in Quebec.
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Question 04

On the basis of the consumer research data collected after the launch, what is your diagnosis of
what went wrong?

Answer

Based on consumer research data collected after the launch, it seems that Colgate-Palmolive made
the right choice by entering the Quebec market but the process of doing so was completely wrong.
Not only did they price the soap much higher than what other brands were priced at but they also
did not do their research for advertisement and they completely ignored the customers’ preferences
and the cultural norm of buying soap in a bundled set. What Colgate-Palmolive was literally doing
was trying to sell a quantity amount of soap for a much higher price. The company could have
avoided all this by further researching customer preferences, their buying habits, advertising
through television, and the comparisons with other major competitive brands like Dove.

Question 05

If you were Steve Boyd, which of the three options you pursue? Justify your choice.

Answer

Of the 3 options to choose from:

• Admit defeat and discontinue the brand

• Continue the strategy with minor modifications if necessary and try to get a 4.5% market
share by giving it more time and support
• Alter the strategy or even the product itself

I would choose the 2nd option of continuing the strategy with minor modifications. What I would
do is put more effort into getting the proper exposure it deserves through shelf space. Another
thing I could do is to reduce the price of the bar of soap or offer discounts that would allow
customers to buy 5 bars and get one free. By starting off with a lower price, one can gain customers
and receive high brand loyalty before increasing prices because by then, loyal customers will
continue to pay and purchase the product even with a price increase.
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Conclusion
When a company such as Cleopatra wants to expand their business overseas, it is most useful to
do market research beforehand so that the local buyer behavior can be understood. Only then the
company can start to evaluate the problem that may occur and find the solutions and pick the best
marketing strategy that fits the local needs and wants to eventually create customer preferences
and loyalty to the company, in this case Cleopatra, brand and products.
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