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Strategic Alliances

Strategic Alliances

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STRATEGIC ALLIANCES

8-1

Four Basic Ways to Ensure Tasks Are Completed

Internal activities

Activities that are core strengths may be the best way to perform the activity. Gives the acquiring firm full control over the way the particular business function is performed Can be difficult and expensive. (Culture/Competitors) Most business transactions are of this type. Short-term arrangement that fulfills a particular business need but doesn‟t lead to long-term strategic advantages. Multifaceted, goal-oriented, long-term partnerships between two companies Both risks and rewards are shared. Typically lead to long-term strategic benefits for both partners.
8-2

Acquisitions
 

Arm’s-length transactions
 

Strategic alliances
  

Framework for Strategic Alliances: When to Go for a Strategic Alliance?
Adding value to products  Improving market access  Strengthening operations  Adding technological strength  Enhancing strategic growth  Enhancing organizational skills  Building financial strength

8-3

Downsides
Core competencies should not be compromised  Competitive advantages should not be compromised

8-4

Benefits of Strategic Alliances

Potential Benefits of Strategic Alliances

Ease of Market Entry

Shared Risk

Shared Knowledge and Expertise

Synergy and Competitive Advantage

8-5

Types of Alliances Comprehensive  Functional  Production  Marketing  Financial  Research and Development  8-6 .

Comprehensive Alliances Participating firms agree to perform together multiple stages of the process by which goods or services are brought to the market  Functional areas are intertwined between firms  Organized as joint ventures  Achieves greater synergy through sheer size and total resources  8-7 .

Functional Alliances Involve only a single functional area of the business  Integration is less complex  Does not typically take the form of a joint venture  8-8 .

The Scope of Strategic Alliances 8-9 .

Implementation of Strategic Alliances Selection of partners  Compatibility  Nature of potential partner‟s products or services  Relative safeness of the alliance  Learning potential of the alliance 8-10 .

Asahi Video Products Company: A Joint Venture between Corning and Asahi Glass Asahi Glass‟s expertise in large television bulb technology complemented Corning‟s strength in other bulb sizes  Joint venture would benefit from Asahi Glass‟s ongoing business connections  Combined strength of the two firms would help both stay abreast of technological innovations  8-11 .

Asahi Video Products Company: A Joint Venture between Corning and Asahi Glass Asahi Glass would benefit from Corning‟s technology and marketing clout in U.  Corning had successfully operated another joint venture with Asahi Glass  8-12 .S.

Form of Ownership Corporation  Limited partnership  Public-private venture  8-13 .

Joint Management Considerations Shared management agreements  Assigned arrangements  Delegated arrangements  8-14 .

Shared Management Agreement Partner 1 Both partners participate actively Partner 2 Alliance 8-15 .

Assigned Arrangement Partner 1 One partner takes primary responsibility Partner 2 Alliance 8-16 .

Delegated Arrangement Partner 1 Both partners delegate management to the joint venture‟s executives Partner 2 Joint Venture 13-17 ©2004 Prentice Hall 8-17 .

Pitfalls of Strategic Alliances Pitfalls of Strategic Alliances Incompatibility of partners Access to Information Distribution of Earnings Loss of Autonomy Changing Circumstances 13-18 ©2004 Prentice Hall 8-18 .

Three Types of Strategic Alliances Third Party Logistics (3PL)  Retailer–Supplier Partnerships (RSP)  Distributor Integration (DI)  8-19 .

Third Party Logistics (3PL) Use of 3PL providers to take over a company‟s logistics functions  Almost a $85billion industry by 2004  8% of all logistics costs attributed to 3PL  8-20 .

warehouses  Prevalent usage with larger companies 8-21 .What Is 3PL? Strategic partnership  Long term commitment  Multi-function arrangement  Process integration  Large range of 3PL companies   Non-asset owning 3PL companies called 4PL  Provide services but not trucks.

3PL Advantages  Focus on Core Strengths Allows a company to focus on its core competencies  Logistics expertise left to the logistics experts  8-22 .

3PL Advantages  Provides Technological Flexibility Technology advances adopted by better 3PL providers  Adoption possible by 3PLs in a quicker. more cost-effective way  3PLs may have the capability to meet the needs of a firm‟s potential customers  8-23 .

3PL Advantages  Provides Other Flexibilities Flexibility in geographic locations.  Flexibility in service offerings  Flexibility in resource and workforce size  8-24 .

 Logistics is one of the core competencies of a firm  Makes no sense to outsource these activities to a supplier who may not be as capable as the firm‟s inhouse expertise  Wal-Mart.3PL Disadvantages  Loss of control inherent in outsourcing a particular function. dressing 3PL employees in the uniforms of the hiring company. Many third-party logistics firms work very hard to address these concerns.   Outbound logistics 3PLs interact with a firm‟s customers. pharmaceutical companies 8-25 .  Painting company logos on the sides of trucks. and providing extensive reporting on each customer interaction.

3PL Issues Costs and Customer Orientation  Know your own costs   Compare with the cost of using an outsourcing firm. Use activity-based costing techniques Ability of provider to understand the needs of the hiring firm and to adapt its services to the special requirements of that firm. Flexibility of the provider  Customer orientation of the 3PL    8-26 . Reliability.

 Firms may have even more specialized requirements  Firms can use one of its trusted core carriers as its third-party logistics provider.  8-27 .3PL Issues Specialization of the 3PL Consider firms whose roots lie in the particular area of logistics that is most relevant to the logistics requirements in question.

May have low overhead costs and specialized industry expertise at the same time 8-28  Non-asset-owning companies     . economies of scope and scale. May have limited resources and bargaining power May be more flexible Able to tailor services and have the freedom to mix and match providers. human resources. customer base. and systems May be bureaucratic with a long decision-making cycle.3PL Issues Asset-Owning vs Non-Asset-Owning 3PL  Asset-owning companies   Significant size.

3PL Implementation Issues  Buying company Should devote enough time to start-up considerations (First 6-12 months most critical)  Must identify exactly what it needs for the relationship to be successful  Be able to provide specific performance measures and requirements to the 3PL firm.  8-29 .

3PL Implementation Issues  3PL company:  Must consider and discuss requirements honestly and completely. including their realism and relevance  Both parties: Must dedicate time and effort for the relationship  Treat as a mutually beneficial alliance  No “transaction pricing” mentality  8-30 .

Specific criteria regarding subcontractors should be discussed. Specific performance measures must be agreed upon. Escape clauses should be negotiated into the contract. Methods of ensuring that performance goals are being met should be discussed 8-31 . Arbitration issues should be considered before entering into a contract.Other Issues       The third party and its service providers must respect the confidentiality of the data.

Retailer-Supplier Relationships Cooperative relationship between suppliers and retailers to use one another‟s knowledge  Suppliers have better knowledge of lead times and production capacities  Retailers have better knowledge of demands  8-32 .

Types of RSP Quick Response Strategy Suppliers receive POS data from retailers  Suppliers use this information to synchronize their production and inventory activities with actual sales at the retailer.  Retailers still prepare individual orders  POS data are used by suppliers to improve forecasting and scheduling and to reduce lead time  8-33 .

Advanced form of continuous replenishment  Suppliers may gradually decrease inventory levels at the retail store or distribution center as long as service levels are met.Types of RSP Continuous Replenishment Strategy     Also called rapid replenishment Suppliers receive POS data Suppliers use these data to prepare shipments at previously agreed-upon intervals to maintain specific levels of inventory. 8-34 .

Types of RSP Vendor Managed System (VMI)      Also called vendor-managed replenishment (VMR) system Supplier decides on the appropriate inventory levels and the appropriate inventory policies to maintain these levels. Supplier suggestions initially approved by retailer Goal of many VMI programs is to eliminate retailer oversight on specific orders. begun in 1985 Has improved P&G‟s on-time deliveries to Wal-Mart while increasing inventory turns 8-35 . Wal-Mart and Procter & Gamble VMI   Partnership.

RSP Requirements Presence of advanced information systems  Top management commitment   Especially because information will be shared across companies  A level of trust among partners Supplier manages retailer‟s inventory  Retailer provides sales information to supplier  Reduced inventory leads to space savings   Should not be given to competitors 8-36 .

RSP Inventory Ownership   Who makes the replenishment decisions? Who owns the inventory until it is sold?  Consignment relationship in VMI programs  Supplier owns the inventory until it is sold  Issues with consignment relationship:      Retailer lowers inventory cost Supplier can manage inventory more effectively Supplier can move as much inventory as contract allows Higher costs to supplier because of longer inventory holding Power relationship between supplier and retailer may move the supply contract to consider higher system savings rather than savings from one party only (Global v. Local) 8-37 .

Manufacturing technology or capacity at supplier may need to be modified/enhanced to respond to specifics in the contract:   Fast response to emergencies Situational changes at the retailer 8-38 .   Initial problems can be worked out through communication and cooperation.RSP Implementation  Performance measurement criteria must also be agreed to.  Non-financial measures as well as the traditional financial measures.

when appropriate. the contractual terms of the agreement must be negotiated on the following:     Inventory ownership Credit terms Ordering responsibilities Performance measures such as service or inventory levels.Steps in RSP Implementation  Initially.  The following three additional steps need to be executed:    Development of integrated information systems Development of effective forecasting techniques Establishment of a tactical decision support tool to assist in coordinating inventory management and transportation policies 8-39 .

Advantages of RSP  Better knowledge the supplier has about order quantities  an ability to control the bullwhip effect provides a good opportunity for the reengineering of the retailer–supplier relationship.  eliminate  A variety of side benefits  redundant order entries  automate manual tasks can be automated  reassign tasks for better efficiency  Eliminate unnecessary control steps 8-40 .

Consignment arrangement may increase inventory costs for the supplier.  Disadvantages of RSP May force the supplier to add personnel to meet this responsibility.    Expenses at the supplier often increase as managerial responsibilities increase. which is often expensive.   Necessary to employ advanced technology. Float  Retailers accustomed to waiting 30 to 90 days to pay for goods may now have to pay upon delivery 8-41 . Essential to develop trust in what once may have been an adversarial supplier– retailer relationship. Supplier often has much more responsibility than formerly.

Distributor Integration (DI) Distributors an important partner in the supply chain  Distributors have a wealth of information about customer needs and wants   Successful manufacturers use this information when developing new products and product lines.  Distributors typically rely on manufacturers to supply the necessary parts and expertise 8-42 .

8-43 .Changing View Regarding Distributors  Strong and effective distribution network cannot always meet challenges   Rush order might be impossible to meet from inventory Customer might require some specialized technical expertise that the distributor does not have.   In the past. issues were addressed by adding inventory and personnel Modern information technology leads to a third solution  Distributor Integration  Expertise and inventory located at one distributor is available to the others.

a large Dutch holding company  70 electrical wholesale subsidiaries  some designated as centers of excellence  Other subsidiaries.  Can meet a customer‟s specialized technical service requests   Steer special requests to the distributors best suited to address them Centers of Excellence for Otra. Dealers are contractually bound to exchange the part under certain conditions and for agreed-upon remuneration. are directed to these centers of excellence to meet particular requests 8-44 . as well as customers.Types of DI  Addresses both inventory-related and service-related issues    Inventory pooling across the entire distributor network Each distributor checks inventories of other distributors to locate a needed product or part.   lowers total inventory costs increases service levels.

DI relationship requires:     a large commitment of resources and effort for the manufacturer a long-term alliance. some of whom they may not know. trust among the participants. It is not surprising that distributors might be nervous about losing these skills and abilities. Tends to take certain responsibilities and areas of expertise away from certain distributors. and concentrate them on a few distributors. pledges and guarantees from the manufacturer to ensure distributor commitment.Issues in DI     Distributors may be skeptical of the rewards of participating in such a system Participating distributors will be forced to rely upon other distributors. to help them provide good customer service. 8-45 .

How Strategic Alliances Create Value Improve Current Operations Value Creation Shaping the Competitive Environment Facilitating Entry and Exit 8-46 .

Improving Current Operations Exploiting economies of scale • a partner brings increased market share and/or manufacturing capacity Learning from partners • a partner brings technology and/or market knowledge Risk and cost sharing • a partner bears a portion of the risk and/or cost of the alliance 8-47 .

Shaping the Competitive Environment Facilitating technology standards • partners may agree on a standard and avoid a market battle for the standard Facilitating tacit collusion • partners may communicate within an alliance in subtle. legal ways whereas the same communication between competitors outside an alliance would be illegal 8-48 .

and legitimacy with governments and customers 8-49 .Facilitating Entry and Exit Low-cost entry into new industries • a partner provides instant access and legitimacy Low-cost exit from industries • a partner is an informed buyer Managing uncertainty • alliances may serve as „real options‟ Low-cost entry into new geographic markets • partners provide local market knowledge. access.

Challenges to Value Creation and Allocation Incentives to Misappropriate Value (Cheat) An alliance is an exchange context in which: • partner inputs may be difficult to monitor • actual value creation may be difficult to monitor • value appropriation (allocating the value) may be: • difficult to monitor • subject to power dynamics 8-50 .

Challenges to Value Creation and Allocation Three Forms of Misappropriating Value Adverse Selection misrepresenting the value of inputs Moral Hazard Holdup providing inputs of lesser value than promised exploiting the transactionspecific investment of partners 8-51 .

NO! However.Sustained Competitive Advantage Are strategic alliances rare? As a form of organizing economic exchange. • firms may form a combination of complementary resources within an alliance that is rare • the stock of such complementary resources may be limited so that first movers have a rare combination 8-52 . The sources of value creation within alliances may be rare.

Sustained Competitive Advantage Are strategic alliances costly to imitate? As a form of organizing economic exchange. NO! • the organizational form per se is easily duplicated However. causal ambiguity. and/or historical uniqueness 8-53 . The resource combinations that create value in alliances may be very costly: • the value creating combination depends on social complexity (trust).

Sustained Competitive Advantage Are strategic alliances substitutable? Internal Development Mergers & Acquisitions If: • no partner is available Substitutes for Strategic Alliances If: • there are no anti-trust issues • low uncertainty about the investment • firms can be integrated easily • value of combined firms is not tied to independence 8-54 • transaction-specific investment is high • low uncertainty about the investment .

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