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
different strengths and capabilities to the alliance.
 Firm A
Partnerships between firms
Firm B
where their
Resources
Capabilities
Core
Competencies
are combined to
pursue mutual
interests to
Goods

Services
Types of Strategic Alliance
Strategic Alliance

Contractual Equity

Licensing commitment
<< Joint Venture
Franchising
Purchase of Equity Share
Joint R&D
Equity Swap
Turnkey Project
…
…
 Types of Strategic Alliance
Contractual
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
 Joint Venture Equity
Independent firm is created by the joining assets from two
other firms where each contributes 50% of the total

 Equity Strategic Alliance

Partnership where the 2 partners don’t own equal shares

 Non-Equity Strategic Alliance

Contract is given to supply, produce or distribute a firm’s
goods or services (without equity sharing)
 Complementary Alliances

Competition Reduction Alliances

Business-
Level Competition Response Alliances

Uncertainty Reduction Alliances

Diversification Alliances
Corporate- Synergistic Alliances
Level
Franchising
Business-Level Strategic Alliances
 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.
Vertical and horizontal alliances

Strategic alliances
Corporate-Level 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).
Supplier Value
Chain Partnerships that build on the
complementarities among firms that
make each more competitive

Include distribution, supplier

or outsourcing alliances
Vertical where firms rely on upstream
Buyer Value Alliance partners or downstream
Chain partners to build competitive
advantage

Japanese manufacturers rely on close

relationships with and among suppliers to
implement Just-In-Time inventory systems
 Used to increase the strategic
competitiveness of the partners

Buyer Value Chain Horizont Buyer Value Chain

al
Alliance

Marketing agreements between Various Airlines

International Strategic Alliances
 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.
PROS/CONS of Strategic Alliance
PROS
- Sharing costs/risks
- Developing new technologies
- Capturing economies of scale
- Access to new markets/technologies
- Organizational learning
- Overcoming governmental barriers

CONS
- Possible opportunistic behavior of partners
- Searching costs
- Coordination costs
- Monitoring costs
- Technology/information leakage
 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
Components of a Strategic
Alliance
 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
 Stages of Alliance Formation

Strategy Partner Contract Alliance

Development Assessment Negotiation Operation

Strategy Development

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.

Partner Assessment

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.
Stages of Alliance Formation
(cont’d)
Strategy Partner Contract Alliance
Development Assessment Negotiation Operation

Contract Negotiation

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.

Alliance Operation

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.
Growth in alliancing activities
 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)
 Alliances as a Percentage of Company
Revenue
Top 1,000 U.S. Public Corporations
35

30

25

20

15 35

10
21
15
5

7
2 3
0
1980
1985
1990
1995
1997
2002

Source: Columbia University, European Trade Commission, et all, republished in

“Stand and Deliver”,by Working Council for Chief Financial Officers Alliances
 Many Forms of Alliances are
Possible

Financial
participation

Strategic
alliances

Integration of business process

Forms of alliances

Increasing
commitment
from both
partners

usually many forms

employed at the same time
Strategic perspective
 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
Transaction costs – make or buy?
 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 or
partner?
 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
Success factor of Strategic Alliance
Existing Networks,
Compatibility Corporate Culture of Partner

3C

Capability Commitment

Resources and Passion, Longing of Partner

Core Competence of Partner for the Alliance
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
60% of partnerships fail!
Lack of partnership experience 20 Caution

Cultural mismatch 28

Misunderstood operating principles 31

Lack of financial commitment 32 Critical

Slow results or payback 42

Lack of shared benefits 49

Poor communications 54

Overly optimistic 73

0 50 100
Source: “Alliance Analyst” Survey of 455 CEO’s
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 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
 Advantages  Disadvantages
◦ 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
◦ 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
Components of a JV Agreement
 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.

To operate under a JV, all parties have decided to

keep core
business separate and limit interaction to joint
operations.
 JV vs. Strategic
Alliance
Joint Venture Strategic Alliance
 Contractual  May or may not be
 Separate legal entity contractual
 Significant matters of  Generally, not a separate
operating and financial legal entity
policy are predetermined  Significant matters of
and “owned” by the JV operating and financial
policy may or may not be
predetermined but are
“owned” by the individual
participants
JV vs. Strategic Alliance (cont’d)
Joint Venture Strategic Alliance
 Exist for a specific time  Indefinite life or a specific
 Exist for a specific project time
or purpose  Fluid and allows for greater
 Limited with respect to amounts of ambiguity
future expectations
Joint Venture Strategic Alliance

C A
A B
A B B

Companies A and
B combine to form Companies
a new company C remain
independent
Motives for IJV Formation

New
Markets

Existing
Markets

Existing Products New Products

Strengthening the Existing Business
 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
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

 Diversification
Problems Inherent in a JV
 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
 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
electronics

Source : http://www.samsung.com/us/aboutsamsung/companyprofile/
LG Electronics alliance
portfolios
Sun Microsystems alliance portfolios
Sun Microsystems business and
alliance strategy
Dell computers alliance
portfolios
 Dell computers business and alliance
strategyStrategy
Business Alliance Strategy
• Virtual integration: control flow • OEM alliances with key component
of information from suppliers to suppliers such as Intel
customers • Service alliances with Decision One,
• Assembler versus owner of IBM, EDS, Andersen Consulting
technology • Generate revenue “outside the box”
• Direct model (with both by aligning with Internet service
suppliers and customers) offers providers (e.g., AOL)
competitive advantage (low • Streamline logistics with suppliers by
cost, first-to-market with latest implementing valuechain.com
technology) • Distribution alliances with
• Desire to move into the valueadded
enterprise computer market resellers and retailers to gain
international presence
• Technology transfer agreements
(e.g.,
IBM) to move into enterprise market
Asiana airlines alliances with competitiors
(Star alliances)
 Codeshare agreements of airline industry
 First truly global airline alliance
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:
(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 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 Alliances
What is FlexRay? (Philips)

FlexRay – Industry Standard Development

Reference
 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