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Cooperative StrategyCooperative StrategyThe Management of StrategicThe Management of Strategic

AlliancesAlliances

John NettingJohn Netting

Session 1 Context andSession 1 Context and Motivations forMotivations forStrategic AllianceStrategic Alliance

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AgendaAgenda

the nature of cooperative strategythe nature of cooperative strategy

forms of strategic allianceforms of strategic alliance

globalization as the context for ISAsglobalization as the context for ISAskey issues/problems in alliancekey issues/problems in allianceformation and managementformation and management

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There are a number of reasons for theThere are a number of reasons for thestrong trend towards costrong trend towards co--operativeoperative

strategy in the 1990sstrategy in the 1990s

Globalising markets

Rapidly changing technologies

Shortening product-life cycles

High investment requirementsCompanies limited core competencies and resources

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The

Nature of

Cooperation

Establishing

Cooperation

Managing

Cooperation

The Maturing

Relationship

& Global

Expansion

The Plan and Rationale of thisThe Plan and Rationale of this

Course: Matching the PhasesCourse: Matching the Phasesof Alliance Developmentof Alliance Development

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What is Cooperative Strategy?What is Cooperative Strategy?

The attempt by firms toThe attempt by firms torealize their objectivesrealize their objectivesthrough cooperation withthrough cooperation with

other firms, in alliances,other firms, in alliances,rather than throughrather than throughcompetition with them.competition with them.

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There are many intermediateThere are many intermediate

organisational forms between marketsorganisational forms between markets

and hierarchiesand hierarchiesHierarchy

Strategicalliance

Licensing agreement

Hub-subcontractors Keiretsu

Loose co-operative network

Established supplier and distributor network

Markets

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Federated enterprises areFederated enterprises are

developing from both directionsdeveloping from both directions

FEDERATED ENTERPRISE

COMPANY 1 COMPANY 2 COMPANY 3

MNC

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Historical perspective: INSEAD collectedHistorical perspective: INSEAD collected data on overdata on over

1800 collaborative agreements1800 collaborative agreements from 1976 to 1986from 1976 to 1986

discoveringdiscovering the following:the following:

5 major sectors accounted for the vast majority of

agreementsautomobiles

aerospace

telecommunications

computers,

electrical goods-

Morris andH

ergert (1987)

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All five industries are characterisedAll five industries are characterised

byby

High entry barriersHigh entry barriers

GlobalisationGlobalisation

Scale economiesScale economies

Rapidly changing technologiesRapidly changing technologies

RiskRisk

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ProfessorFaulkners researchProfessorFaulkners research has shownhas shown

the following breakdown of internationalthe following breakdown of international

alliances formed since November 1989alliances formed since November 1989Of 228 alliances:Of 228 alliances:

Defence, aerospace & aviationDefence, aerospace & aviation 15%15%

Oil, chemicals & plasticsOil, chemicals & plastics 15%15%

TelecommunicationsTelecommunications 12%12%

Financial servicesFinancial services 8%8%

Food, drink & hotelsFood, drink & hotels 6%6%

Energy & power generationEnergy & power generation 6%6%

Pharmaceuticals & biotechPharmaceuticals & biotech 5%5%

20 other industries20 other industries 31%31%

100%100%

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What is a strategic alliance?What is a strategic alliance?

A particular mode of inter-organisational relationship in which the

partners make substantial investmentsin developing a long term collaborationeffort and common orientation.

(Mattsson, 1988)

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Strategic Alliances are Agents ofStrategic Alliances are Agents of

Cooperative StrategyCooperative Strategy

Alliances are strategic when theyAlliances are strategic when theyare significant to the partnersare significant to the partners

High growth in all industry sinceHigh growth in all industry sincemidmid--eightieseighties

But not as fast as FDI or M&ABut not as fast as FDI or M&A

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Growing Significance of Alliances

Growing Significance of AlliancesEstimatedEstimated 1616 percentpercent toto 2525 percentpercent

ofof medianmedian companycompany valuevalue

4040 percentpercent ofof marketmarket valuevalue forfor 2525%%ofof firmsfirms

FarokFarok JJ.. ContractorContractor andand PeterPeter LorangeLorange.. TheThe growthgrowth ofof alliancesalliances inin thethe knowledgeknowledge--basedbasedeconomyeconomy.. InIn FarokFarok JJ.. ContractorContractor andand PeterPeter LorangeLorange (eds(eds..)).. CooperativeCooperative StrategiesStrategies andandAlliancesAlliances.. OxfordOxford:: PergamonPergamon 20022002,, pppp.. 33--2222.. QuotationQuotation isis fromfrom pp.. 44..

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A Definition of StrategicA Definition of Strategic

AlliancesAlliances

Agreements to jointly pursueAgreements to jointly pursuebusiness opportunities for mutualbusiness opportunities for mutual

benefit while leveraging each othersbenefit while leveraging each othersskill and resource baseskill and resource base

Partners join forces in pursuit ofPartners join forces in pursuit ofcommon goals without losing theircommon goals without losing theirstrategic autonomy or abandoning theirstrategic autonomy or abandoning theirown specific interestsown specific interests

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The external factors stimulatingThe external factors stimulating

alliance formationalliance formation

4

hortening ro uct life

c cle s

conomic uncertaint

Fast technological change

ar et tur ulence

egionalisation

lo alisation

conomies of scale/sco e

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Internal motivations for allianceInternal motivations for alliance

formationformation

0 20 0 60 80 100 120

Le

al req

irements

Ra materials

rea

financial risk

ana

ement sk ills

RD

Ke

la

o r skills RD

Bran

names

arketin

skills

RD

Local kno

le

e

RD

Least Cost

ol tion

C

Distri

tion c

annel

RD

ec

nolo

or kno

o RD

et to market fast

Re

tation

RD

RDP = Resource Dependency Perspective Factors

TCA = Transaction Cost Analysis Factors

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Strategic AlliancesStrategic Alliances

There are various types of strategicThere are various types of strategicalliance, representing differentalliance, representing differentoptionsoptions joint marketingjoint marketing

licensing and franchise agreementslicensing and franchise agreements

joint research contractsjoint research contractsconsortia (e.g. Airbus)consortia (e.g. Airbus)

equity joint ventures (majority, 50/50)equity joint ventures (majority, 50/50)

Project basedProject based cooperationscooperations

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Types of Strategic AllianceTypes of Strategic Alliance

1. Partnerships between non1. Partnerships between non--competing firmscompeting firms::

A International expansion joint venturesA International expansion joint ventures

B Vertical partnershipsB Vertical partnerships

C CrossC Cross--industry agreementsindustry agreements

Source:Source: DussaugeDussauge && GarretteGarrette 1999, chapter 4.1999, chapter 4.

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1A International Expansion Joint Ventures1A International Expansion Joint Ventures

to enter new markets with the support of a localto enter new markets with the support of a local

partnerpartner

To gain new competencesTo gain new competences

Better global reachBetter global reach

New knowledgeNew knowledge

Increased networksIncreased networks

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1B Vertical Partnerships1B Vertical Partnerships

Accompanies outsourcing manufacturing trendAccompanies outsourcing manufacturing trend

Relationship management of suppliersRelationship management of suppliers

E.g. Intel & HewlettE.g. Intel & Hewlett--PackardPackard

CCost motiveost motive

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1C Cross1C Cross--Industry AgreementsIndustry Agreements

Links between companies operating in differentLinks between companies operating in different

industries to combine competencies, often to developindustries to combine competencies, often to develop

a new businessa new business

To reduce costsTo reduce costs

To secure suppliesTo secure supplies

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2. Alliances between competitors:

A Shared supply alliances

B Quasi-concentration alliances

C Complementary alliances

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2A Shared Supply Alliances2A Shared Supply Alliances

Upstream activities (R&D, parts & components,Upstream activities (R&D, parts & components,

subsystems); partners remain competitors in endsubsystems); partners remain competitors in end

productsproducts

Objective to achieve economies of scale or to shareObjective to achieve economies of scale or to share

R&D costsR&D costs

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2B Quasi2B Quasi--Concentration AlliancesConcentration Alliances

Similar capabilities and assets in order to develop,Similar capabilities and assets in order to develop,

manufacture and market a joint productmanufacture and market a joint product

Replicate rivals advantagesReplicate rivals advantages

Sharing of development costs and risksSharing of development costs and risks

E.g. Airbus ;NUMMIE.g. Airbus ;NUMMI

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2C Complementary Alliances2C Complementary Alliances

Complementary assets and capabilitiesComplementary assets and capabilities

One partner:One partner:-- design;design;

The other :The other :-- local knowledgelocal knowledge

Often unstableOften unstable

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Key reasons for allianceKey reasons for allianceformationformation

Session 2Session 2

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Globalization as the Context for ISAsGlobalization as the Context for ISAs

The race to globalize has given alliance building freshThe race to globalize has given alliance building fresh

impetusimpetus

Steady increase in crossSteady increase in cross--border (international)border (international)

alliancesalliances

By now virtually all industries areBy now virtually all industries are alliancedallianced

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GlobalizationGlobalization

Need to distinguish between:Need to distinguish between:

internationalizationinternationalization of businessof business through tradethrough trade

globalizationglobalization of business:of business:

global spread of value chains (IT, decreasingglobal spread of value chains (IT, decreasingtransport costs)transport costs)

global integration of money & capital marketsglobal integration of money & capital markets

globalization of markets & tastes (in someglobalization of markets & tastes (in someareas)areas)

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Globalization as ISA IncentiveGlobalization as ISA Incentive

to secure rapid worldwide coverage of markets andto secure rapid worldwide coverage of markets and

sourcingsourcing

to spread sources of innovation & encourage learningto spread sources of innovation & encourage learning

to speed up innovation and new product developmentto speed up innovation and new product developmentto economize on costs of R&D, production, andto economize on costs of R&D, production, and

distributiondistribution

to reconcile need for globalization and localizationto reconcile need for globalization and localization

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Globalisation at industry levelGlobalisation at industry level

Globalisation is the exposure of a productivity followerindustry in one country to the productivity leader inanother country (Gersbach, 2002)

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The Global FactoryThe Global Factory Buckley &Buckley & GhauriGhauri (200 )(200 )

PartsSupplier

PartsSupplier

PartsSupplier

ContractAssembler

ContractAssembler

OutsourcedParts Supplier

PartsSupplier

PartsSupplier

DesignEngineering

BrandingMarketing

BRAND OWNER

R&DContractor

DesignContractor

EngineeringContractor

WarehousingDistributionAndAdaptation

CORE FUNCTIONSDISTRIBUTED MANUFACTURING LOCAL MARKET

ADAPTATION

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Hub and spoke strategies: an exampleHub and spoke strategies: an example

Wholly OwnedWholly OwnedProductionProduction

And WarehousingAnd WarehousingHubHub

WarehousingWarehousingAndAnd

AdaptationAdaptationIJVIJV

DistributionDistributionIJVIJV

WarehousingWarehousingAndAnd

DistributionDistributionIJVIJV

WarehousingWarehousingDistributionDistribution& adaptation& adaptation

IJVIJV

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Example (1) : AirlinesExample (1) : Airlines

All major carriers have formed global alliances: StarAll major carriers have formed global alliances: StarAlliance, One World, etc.Alliance, One World, etc.

Various forms of cooperation:Various forms of cooperation: shared ticketing and handlingshared ticketing and handling

coordinated marketing agreementscoordinated marketing agreements

code sharing for reservationscode sharing for reservations

shared maintenance facilitiesshared maintenance facilities

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Example (2): AutomobilesExample (2): Automobiles

US firms originally ac uire EU firms but nowUS firms originally ac uire EU firms but nowoften form ISAs with Japanese onesoften form ISAs with Japanese ones

GM with Suzuki, Isuzu, Toyota, SubaruGM with Suzuki, Isuzu, Toyota, Subaru

Ford with Mazda, Kia (Korea)Ford with Mazda, Kia (Korea)

Toyota with GM in the US (NUMMI)Toyota with GM in the US (NUMMI)

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Example (3): R&D Alliances in BioExample (3): R&D Alliances in Bio--

PharmaceuticalsPharmaceuticals

Forms of alliance in this sector:Forms of alliance in this sector:

Early stage :Early stage :--Small tech firms and rich bigSmall tech firms and rich big

pharmaceutical concernspharmaceutical concerns

ate stage :ate stage :--ISAs to get approvals clinical tests;ISAs to get approvals clinical tests;

bureaucracy skillsbureaucracy skills

virtual integration as an alternative to verticalvirtual integration as an alternative to vertical

integrationintegration

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The Challenge lies in Managing AlliancesThe Challenge lies in Managing Alliances

Find the right partner

Organising alliance management

Conflict resolution

Evolution over time

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Alliance Management: A Key CoreAlliance Management: A Key Core

CompetenceCompetence

More difficult than managing a companyMore difficult than managing a company

Politics more than economicsPolitics more than economics

-- Consensus rather than fiatConsensus rather than fiat

A key competency requirement in the modern worldA key competency requirement in the modern world