Strategic Alliances

Some blatant facts Only 15% of the strategic alliances are successful. Rules of SAs a) Both firms must remain independent entities with their own objectives. b) Each individual parties preserve their own identity and come together for their own objective

 Need for Strategic Alliances:

Need to access superior ideas continously, with access to knowhow and information to be sustainable in the marketplace (Barley and Chakraborty1996)

No firm can access all the information individually in marketplace making collaborations essential in the form of alliances with firms,government research laboratories and universities(Arora and Gambardella 1990;Powel et al1996;Ahuja 2000)

Primary purpose of an Alliance :

Co option In this process potential competitors are converted into allies and providers of complementary goals and services that allow new businesses to develop. Co specialization- Synergistic value creation in which partners in an alliance contribute unique and differentiated sources like skills, brands, relationships, and create value through bundling of resources Learning and Internalization : Alliances are learning sources for skills which are tacit, embedded and collective which can be internalized and exploited to yield more value.

Synergies Generated in Alliance: Modular Synergies: Companies manage resources independently and pool results for greater profits e.g HP and Microsoft non equity alliance that pools systems integration and enterprise software skills to create technology solutions for small and big customers e.g Airline companies. Sequential Synergies: This happens when one company completes its task and passes on the partner to do its bit. As for e.g the Biotech firm that specializes in discovering new drugs like Albgenix wishes to work with a pharmaceutical giant that is more familiar with the FDA process like Astra Zeneca as both companies are pursuing sequential synergies.

Synergies Generated in Alliance: Modular Synergies: Companies manage resources independently and pool results for greater profits e.g HP and Microsoft non equity alliance that pools systems integration and enterprise software skills to create technology solutions for small and big customers e.g Airline companies. Sequential Synergies: This happens when one company completes its task and passes on the partner to do its bit. As for eg the Biotech firm that specializes in discovering new drugs like Albgenix wishes to work with a pharmaceutical giant that is more familiar with the FDA process like Astra Zeneca as both companies are pursuing sequential synergies.

Diversification
Concentric Conglomerate

Some examples:Godrej and Procter Gamble Alliance. Birla AT &T and Tata Sony Ericsson Reckitt and Colman and Nicholas Piramal. Some examples in SAs: a)Two firms in Related but non competing Industries:(Telemetric Guidance Systems)Hitachi + GM =GPS (Sat Navigation Sys) (O.E.M of electronic supplier to G.M.)

 Mercedes Aromatic Suspension + Johnson Controls. SGL + Porsche = Carbon Brakes(life 3,00,000 miles) B) Relation between two firms in same industry but not in direct competition: G.M + Isuzu = Trucks ($16000 mid sized trucks) (Diesel Tech/$10000). Porsche + BMW = SUVs(XYZ series designed by Porsche)

C)Relationship of a Firm to a Direct Competitor G.M.+ Toyota= NUMMI(National United Motor Mfg Incorp) D) Alliance between totally unrelated folks:Du Pont + Sony = Optic Fibre. Ericsson + Nokia + Motorola = Symbian System

Diversification A Case Study of ITC Ltd.

Motives for Diversification

Growth
Managers interest

Risk Reduction
Threat from one product line

Profitability
Through forward & backward linkage

MODEL OF DIVERSIFICATION
INDUSTRY Existing New

C O M P E T E N C E

New

Premier Plus 10

Mega Opportunities

Existing

Fill in the Blanks

White Spaces

Source: Gary Hamel & C K Prahlad

Ways to increase profitability in diversified company

By transferring competencies among existing business. By leveraging competencies to create new business. By sharing resources to realize economics of scope By using diversification as a means of managing risk/ rivalry By forward & backward linkage

Transferring competencies
Philip Morris distinct competency in Product Development, Consumer Marketing & Brand Positioning. Acquired Miller Brewing. Both are mass market product & advertising, brand positioning & product development skills are important If Brand Positioning improvesdiversification successful

Competitive Advantage for Diversification

Market Power Economics of Scope (Cost Savings from using a resource in multiple activities carried out in combination e.g. Boeing ) Organizational Capabilities Economies from Internalizing Transactions Information Advantage of Diversified Corporation

ITC Corporate

FMCG

PSPD

Agribusiness

Hotels

Subsidiaries

ITD Packaged Foods Lifestyle GGSB Safety Matches & Incense Sticks Soaps & Shampoos IBD ILTD

Info tech BFIL Fin. Surya Nepal Land base Inc. Russel Credit

Leaf Tobacco
Spices Organic Input

Core Competency & Diversification

ITD Distribution, Branding
Synergy with FMCG

ILTD Procurement, Relation with farmers

Synergy with ITC Foods, new product line

IBD Procurement, Trading, Relation with farmers.

Synergy with ITC Foods

Limitations of Diversifications
High bureaucratic cost Difficulty in coordination among business
When the companys core competency are applicable to a wide variety of industrial & commercial situation

The bureaucratic costs of implementation dont exceed the value that can be created through resource sharing & transferring competency