Strategic Alliances
Contents
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
Goods Goods Services Services where their are combined to pursue mutual interests to
Partnerships between firms
Capabilities Capabilities Resources Resources Firm A Firm B Firm B Core Core Competencies Competencies
Types of Strategic Alliance
Types 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 … Contractual
Contractual EquityEquity
Strategic Alliance
Strategic Alliance
< < < < commitmentTypes of Strategic Alliance
Types 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
Contractual
Equity
Equity
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
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 Alliances
Business-Level Strategic Alliances
Vertical and horizontal alliances
Vertical and horizontal 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 Alliances
Corporate-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
Horizont
al
Alliance
Buyer Value Chain Buyer Value Chain
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 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 Alliance
PROS/CONS of Strategic Alliance
PROS
PROS
- 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
CONS
CONS
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
Strategic, not tactical
Focused on long-range goals and major economic benefits Features:
- tight linkages - vested interests - high level support
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
Alliance
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 Formation
Stages of Alliance Formation
Strategy Development Strategy Development Partner Assessment Partner Assessment Contract Negotiation Contract Negotiation Alliance Operation Alliance Operation Strategy Development Strategy 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 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)
Strategy Development Strategy Development Partner Assessment Partner Assessment Contract Negotiation Contract Negotiation Alliance Operation Alliance Operation Contract Negotiation Contract Negotiationaddressing 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 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 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 1985 1990 1995 1997 2002 2 3 7 15 21 35 0 5 10 15 20 25 30 35
Many Forms of Alliances are
Many Forms of Alliances are
Possible
Possible
Financial participation
Integration of business process
Strategic alliances
Forms of alliances
Forms of alliances
Increasing commitment from both partnersusually many forms
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 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 Alliance
Success factor of Strategic Alliance
Existing Networks,
Corporate Culture of Partner Existing Networks,
Corporate Culture of Partner
Compatibility
Compatibility
Capability
Capability
Commitment
Commitment
3C
3C
3C
3C
Resources and
Core Competence of Partner Resources and
Core Competence of Partner
Passion, Longing of Partner for the Alliance
Passion, Longing of Partner for the Alliance
Risks of Strategic Alliances
Risks of Strategic Alliances
Strategic alliances can lead to competition rather than
cooperation, to 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 Failure
Reasons for Failure
100 0
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
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
Joint Ventures
Joint 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 Ventures
Pros 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 Agreement
Components 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
Alliance
Alliance
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
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
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 Formation
Motives 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 Business
Strengthening the Existing Business
Other motives for International JVs
Other 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
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 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
Examples
Major strategic alliances of Samsung
Major strategic alliances of Samsung
electronics
electronics
LG Electronics
LG Electronics
alliance
alliance
portfolios
Sun Microsystems alliance portfolios
Sun Microsystems alliance portfolios
Sun Microsystems business and
Sun Microsystems business and
alliance strategy
alliance strategy
Dell computers alliance
Dell computers alliance
portfolios
portfolios
Dell computers business and alliance
Dell computers business and alliance
strategy
strategy
Business 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 component suppliers such as Intel
• Service alliances with Decision One, IBM, EDS, Andersen Consulting
• Generate revenue “outside the box” by aligning with Internet service
providers (e.g., AOL)
• Streamline logistics with suppliers by implementing valuechain.com
• Distribution alliances with valueadded
resellers and retailers to gain international presence
• Technology transfer agreements (e.g.,
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,
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
Philips Alliances
What is FlexRay? (Philips)
What is FlexRay? (Philips)
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
