Strategic AlliancesStrategic Alliances

ContentsContents

Strategic Alliance is a significant long/term partnership and collaborative agreement entered into by two or more companies to pursue a set of agreed upon critical goals while remaining (legally) independent organizations.

These collaborations can come in many shapes and sizes, including contractual and equity forms. It normally is a synergistic arrangement whereby the participating organizations each brings different strengths and capabilities to the alliance.

GoodsGoods

ServicesServices

where theirwhere their

are combined to pursue mutual interests to

are combined to pursue mutual interests to

Partnerships between firmsPartnerships between firms

CapabilitiesCapabilitiesResourcesResources

Firm A

Firm BFirm B

Core Core

CompetenciesCompetencies

Types of Strategic AllianceTypes of Strategic Alliance

Joint Venture

Purchase of Equity Share

Equity Swap

…

Joint Venture

Purchase of Equity Share

Equity Swap

…

Licensing

Franchising

Joint R&D

Turnkey Project

…

Licensing

Franchising

Joint R&D

Turnkey Project

…

ContractualContractual EquityEquity

Strategic AllianceStrategic Alliance

<<<<commitment

Types of Strategic AllianceTypes of Strategic Alliance

Licensing – the sale of a right to use certain proprietary knowledge in a defined way

Franchising –a method of doing business wherein a franchisor licenses trademarks and

tried and proven methods of doing business to a franchisee

Joint R&D –two or more organizations agree to combine their technological

knowledge to create new innovative products

Turnkey Project –a project in which a separate entity is responsible for setting up a plant or equipment and putting it into operations

Licensing – the sale of a right to use certain proprietary knowledge in a defined way

Franchising –a method of doing business wherein a franchisor licenses trademarks and

tried and proven methods of doing business to a franchisee

Joint R&D –two or more organizations agree to combine their technological

knowledge to create new innovative products

Turnkey Project –a project in which a separate entity is responsible for setting up a plant or equipment and putting it into operations

ContractualContractual

EquityEquity Joint Venture Joint Venture Independent firm is created by the joining assets from two Independent firm is created by the joining assets from two other firms where each contributes 50% of the totalother firms where each contributes 50% of the total

Equity Strategic AllianceEquity Strategic Alliance Partnership where the 2 partners don’t own equal sharesPartnership where the 2 partners don’t own equal shares

Non-Equity Strategic AllianceNon-Equity Strategic Alliance Contract is given to supply, produce or distribute a firm’s Contract is given to supply, produce or distribute a firm’s goods or services (without equity sharing)goods or services (without equity sharing)

Complementary Alliances

Diversification Alliances

Synergistic Alliances

Franchising

Competition Reduction Alliances

Competition Response Alliances

Uncertainty Reduction Alliances

Business-Level

Corporate-Level

Vertical Strategic Alliance◦ A cooperative partnership across the value chain.◦ Are most effective when partners trust each other.

Horizontal Strategic Alliance◦ A cooperative partnership in which firms at the same

stage of the value chain share resources and capabilities.◦ Intended to enhance the capabilities of the partners to

compete in their markets.◦ Developed to respond to competitors’ actions, share

risks, and/or to reduce the competition.

Business-Level Strategic AlliancesBusiness-Level Strategic Alliances

Vertical and horizontal alliancesVertical and horizontal alliances

Strategic alliances

Diversification by Alliance◦ Integrating unique knowledge stocks to create products

that serve new markets and customers.

◦ Valuable if the new products developed are related to current products in such that synergy can be created.

Synergy by Alliance◦ Partners share resources or integrate complementary

capabilities to build economies of scope.

◦ Franchising: the licensing of a good or service and business model to partners for specified fees (usually a signing fee and a percentage of the franchisee’s revenues or profits).

Corporate-Level Strategic AlliancesCorporate-Level Strategic Alliances

Partnerships that build on the complementarities among firms that make each more competitive

Supplier Value Chain

Buyer Value Chain

Include distribution, supplier or outsourcing alliances where firms rely on upstream partners or downstream partners to build competitive advantage

Japanese manufacturers rely on close relationships with and among suppliers to implement Just-In-Time inventory systems

Vertical Alliance

Used to increase the strategic competitiveness of the partners

Horizontal

Alliance

Buyer Value Chain Buyer Value Chain

Marketing agreements between Various Airlines

Cross-border strategic alliances are the most prominent means of entering foreign markets.◦ Countries require that firms form joint ventures with local

firms in order to enter their markets.

◦ Foreign firms need local knowledge and other resources to understand and compete effectively in the newly entered markets.

Challenges◦ Different cultures and a lack of trust hinders the transfer

of knowledge or sharing of other resources.

International Strategic AlliancesInternational Strategic Alliances

- Sharing costs/risks- Developing new technologies- Capturing economies of scale- Access to new markets/technologies- Organizational learning- Overcoming governmental barriers

- Sharing costs/risks- Developing new technologies- Capturing economies of scale- Access to new markets/technologies- Organizational learning- Overcoming governmental barriers

PROS/CONS of Strategic AlliancePROS/CONS of Strategic Alliance

PROSPROS

- Possible opportunistic behavior of partners- Searching costs- Coordination costs- Monitoring costs- Technology/information leakage

- Possible opportunistic behavior of partners- Searching costs- Coordination costs- Monitoring costs- Technology/information leakage

CONSCONS

Gain access to a new or restricted market Develop new goods or services Facilitate new market entry Share significant R&D investments Share risks and buffer against uncertainty Develop market power Gain access to complementary resources Build economies of scale Meet competitive challenges Learn new skills and capabilities Outsource for low costs and high quality output

Strategic, not tactical Focused on long-range goals and major economic benefits Features: - tight linkages - vested interests - high level support - cooperation and collaboration

Confidentiality agreement Mission, vision, values statements Long-term goals and objectives Plan for implementation of activities Plan for managing the process and measuring success Exit strategy

Components of a Strategic Components of a Strategic AllianceAlliance

studying the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people.

studying the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people.

Stages of Alliance FormationStages of Alliance Formation

StrategyDevelopment

StrategyDevelopment

PartnerAssessment

PartnerAssessment

ContractNegotiation

ContractNegotiation

AllianceOperation

AllianceOperation

Strategy DevelopmentStrategy Development

analyzing a potential partner’s strengths and weaknesses, creating strategies for accommodating all partners’ management styles, preparing appropriate partner selection criteria, understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner.

analyzing a potential partner’s strengths and weaknesses, creating strategies for accommodating all partners’ management styles, preparing appropriate partner selection criteria, understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner.

Partner AssessmentPartner Assessment

determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partner’s contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.

determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partner’s contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.

Stages of Alliance Formation Stages of Alliance Formation (cont’d)(cont’d)

StrategyDevelopment

StrategyDevelopment

PartnerAssessment

PartnerAssessment

ContractNegotiation

ContractNegotiation

AllianceOperation

AllianceOperation

Contract NegotiationContract Negotiation

addressing senior management’s commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, and measuring and rewarding alliance performance.

addressing senior management’s commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, and measuring and rewarding alliance performance.

Alliance OperationAlliance Operation

Hagedoorn (2002) • rapid growth in the number of new R&D

partnerships • particularly in IT industry and pharmaceuticals • over 50% of alliances are international

(globalization)

Growth in alliancing activitiesGrowth in alliancing activities

Alliances as a Percentage of Company Revenue

Top 1,000 U.S. Public Corporations

Source: Columbia University, European Trade Commission, et all, republished in “Stand and Deliver”,by Working Council for Chief Financial Officers Alliances

1980 19851990

19951997

2002

2 37

15

21

35

0

5

10

15

20

25

30

35

Many Forms of Alliances are Many Forms of Alliances are PossiblePossible

Financialparticipation

Integration of business process

Strategicalliances

Forms of alliancesForms of alliances

Increasingcommitment

from bothpartners

usually many forms

employed at the same time

Partnering to gain access to needed resources • knowledge and technologies, • foreign markets and customer segments, • brand name and reputation In order to partner effectively, the company needs to have own absorptive capacities Building skills to become independent and abandon the partner – “learning race” Example: Japan’s company in the 1980s • Learning core technologies from Western partners

and gradually substituting them

Strategic perspectiveStrategic perspective

Transaction costs (simplified) • cost of the components – directly related to resources • opportunity cost – if own manufacturing plant is built • search costs – finding suppliers, negotiating, etc. • communication and coordination costs – discussing specifications, technical training,

customer complaints handling, ...• measurement costs – necessary changes to

product designs, quality management, ... Not only cost of materials

Transaction costs – make or buy?Transaction costs – make or buy?

Asset specificity – investment useful only in a specific relationship • e.g. technology used only by one company, factory built close to a client’s site Two approaches: 1. Rotating suppliers • bargaining to always get the best price • problem: new technologies, future products • think about transaction costs – not only

component costs! 2. Long-term cooperation • economies of scale, experience effects, joint

R&D of new product generations

Transaction costs – make or buy or Transaction costs – make or buy or partner?partner?

Success factor of Strategic AllianceSuccess factor of Strategic Alliance

Existing Networks, Corporate Culture of Partner

Existing Networks, Corporate Culture of PartnerCompatibilityCompatibility

CapabilityCapability CommitmentCommitment

33CC33CC

Resources and Core Competence of Partner

Resources and Core Competence of Partner

Passion, Longing of Partnerfor the Alliance

Passion, Longing of Partnerfor the Alliance

Risks of Strategic Alliances Risks of Strategic Alliances Strategic alliances can lead to competition rather than cooperation, t

o loss of competitive knowledge, to conflicts resulting from incompatible cultures and objectives, and to reduced management control .

A study of almost 900 joint ventures found that less than half were mutually agreed to have been successful by all parties (Harrigan, 1986; Dacin et al , 1997 Spekman et al, 1996).

Reasons for FailureReasons for Failure

1000

Lack of partnership experience

Cultural mismatch

Misunderstood operating principles

Lack of financial commitment

Slow results or payback

Lack of shared benefits

Poor communications

Overly optimistic

50

20 Caution

28

31

32 Critical

42

49

54

73

Source: “Alliance Analyst” Survey of 455 CEO’s

60% of partnerships fail!

An alliance can fail for many reasons An alliance can fail for many reasons

failure to understand and adapt to a new style of management

failure to learn and understand cultural differences between the organizations

lack of commitment to succeed strategic goal divergence insufficient trust operational and geographical overlap unrealistic expectations

Joint VenturesJoint Ventures A “union” of two or more parties who contractually agree to

contribute to a specific venture which is usually limited to a specific task for a specific period of time

A joint venture is a separate legal entity generally governed under partnership law—which varies from state to state

The JV parties can be individuals, partnerships or corporations that continue to operate independently from the other except for activities related to the Joint Venture.

Pros and cons of Joint VenturesPros and cons of Joint Ventures

Advantages◦ Allows for sharing of

risk (both financial and political)

◦ Provides opportunity to learn new environment

◦ Provides opportunity to achieve synergy by combining strengths of partners

◦ May be the only way to enter market given barriers to entry

Disadvantages◦ Requires more

investment than a licensing agreement

◦ Must share rewards as well as risks

◦ Requires strong coordination

◦ Potential for conflict among partners

◦ Partner may become a competitor

The Union◦ The contract can be viewed as a pre-nuptial

agreement◦ The alliance is the union◦ The new legal entity can be viewed as the child.

The Separation◦ Separation is inevitable because JVs generally

have a limited life and purpose.

Components of a JV AgreementComponents of a JV Agreement

To operate under a JV, all parties have decided to keep core

business separate and limit interaction to joint operations.

JV vs. Strategic JV vs. Strategic AllianceAlliance

Contractual Separate legal entity Significant matters of

operating and financial policy are predetermined and “owned” by the JV

May or may not be contractual

Generally, not a separate legal entity

Significant matters of operating and financial policy may or may not be predetermined but are “owned” by the individual participants

Joint Venture Strategic Alliance

JV vs. Strategic Alliance (cont’d)JV vs. Strategic Alliance (cont’d)

Joint Venture Strategic Alliance

Exist for a specific time Exist for a specific project

or purpose Limited with respect to

future expectations

Indefinite life or a specific time

Fluid and allows for greater amounts of ambiguity

Companies remain

independent

Companies A and B combine to form a new company C

Joint Venture Strategic Alliance

A B

C

A B

A

B

Motives for IJV FormationMotives for IJV Formation

New Products

New Markets

Existing Markets

Existing Products

International joint ventures are used in a variety of ways by firms wishing to strengthen or protect their existing businesses through:

◦ Achieving Economies of Scale.◦ Raw Material and Component Supply.   ◦ Research and Development. ◦ Marketing and Distribution. ◦ Divisional Mergers.

Joint Ventures are also used for:◦ Acquiring technology in the core business◦ Reducing financial risk

Strengthening the Existing BusinessStrengthening the Existing Business

Other motives for International JVsOther motives for International JVs

Taking products to foreign markets◦ Following Customers to Foreign Markets◦ Investing in “markets of the future”

Bringing foreign products to local markets◦ Complementarily of interests

Diversification

Each party is responsible for the actions of the JV and one another

The best JV agreement cannot insulate the JV and parties from all risks

Problems Inherent in a JVProblems Inherent in a JV

Consortia are similar to joint ventures and could be classified as such except for two unique characteristics

They typically involve a large number of participants

They frequently operate in a country or market in which none of the participants is currently active

Consortia are developed to pool financial and managerial resources and to lessen risks

ExamplesExamples

Major strategic alliances of Samsung Major strategic alliances of Samsung electronicselectronics

Source : http://www.samsung.com/us/aboutsamsung/companyprofile/

LG ElectronicsLG Electronics alliance alliance portfoliosportfolios

Sun Microsystems alliance portfoliosSun Microsystems alliance portfolios

Sun Microsystems business and Sun Microsystems business and alliance strategyalliance strategy

Dell computers alliance Dell computers alliance portfoliosportfolios

Dell computers business and alliance Dell computers business and alliance strategystrategyBusiness Strategy Alliance Strategy

• Virtual integration: control flow of information from suppliers to customers• Assembler versus owner of technology• Direct model (with both suppliers and customers) offers competitive advantage (low cost, first-to-market with latest technology)• Desire to move into the enterprise computer market

• OEM alliances with key componentsuppliers such as Intel• Service alliances with Decision One,IBM, EDS, Andersen Consulting• Generate revenue “outside the box”by aligning with Internet serviceproviders (e.g., AOL)• Streamline logistics with suppliers byimplementing valuechain.com• Distribution alliances with valueaddedresellers and retailers to gaininternational presence• Technology transfer agreements (e.g.,IBM) to move into enterprise market

Asiana airlines alliances with competitiors Asiana airlines alliances with competitiors (Star alliances)(Star alliances) Codeshare agreements of airline industry First truly global airline alliance

NEC Rockets Past Its Competitors:NEC Rockets Past Its Competitors:

In the 1980s, NEC used more than 100 joint ventures to gain a leading position in three critical high-tech markets: computers, semiconductors, and telecommunications.

NEC Rockets Past Its Competitors: NEC Rockets Past Its Competitors: (cont’d)(cont’d) During a period of eight years NEC grew more

than five-fold, from $4 billion in sales to more than $20 billion. It shot past its competitors and emerged as one of the leading international companies with in-depth competence in all three key markets. NEC did this while spending a far smaller portion of its revenue on R&D than its competitors.

Nortel and Microsoft Nortel and Microsoft

Nortel and Microsoft Form Strategic Alliance to Accelerate Transformation of Business Communications

Microsoft CEO Steve Ballmer (R) and Nortel President and CEO Mike Zafirovski today announced a strategic alliance between the two companies at Microsoft headquarters in

Redmond, Wash.

Philips AlliancesPhilips Alliances

What is FlexRay? (Philips)What is FlexRay? (Philips)

FlexRay – Industry Standard Development

http://en.wikipedia.org/wiki/Strategic_alliance Thomson Canada limited Cross-Border Strategic Alliances and Foreign Market Entry

(Larry D. Qiu, Hong Kong University of Science and Technology)

Strategic alliances and their role in the management of technology (Dr. Krzysztof Klincewicz, Tokyo institute of technology)

Global Market Entry Strategies: Licensing, Investment, and Strategic Alliances (Kristopher Blanchard, North Central University)

Understanding business strategy (Hoskission, Hitt, 1st edition) 강태구 , 국제경영 ( 박영사 , 2007) Pearson education glossary site

ReferenceReference