Strategic Alliances


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 Franchising Joint R&D Turnkey Project … commitment < < Joint Venture Purchase of Equity Share Equity Swap … .


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 .

produce or distribute a firm’s goods or services (without equity sharing) . Equity Joint Venture 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.

Complementary Alliances BusinessLevel Competition Reduction Alliances Competition Response Alliances Uncertainty Reduction Alliances Diversification Alliances CorporateLevel Synergistic Alliances Franchising .

 Horizontal Strategic Alliance ◦ A cooperative partnership in which firms at the same stage of the value chain share resources and capabilities. .Business-Level Strategic Alliances  Vertical Strategic Alliance ◦ A cooperative partnership across the value chain. ◦ Developed to respond to competitors’ actions. ◦ Intended to enhance the capabilities of the partners to compete in their markets. share risks. ◦ Are most effective when partners trust each other. and/or to reduce the competition.

Vertical and horizontal alliances Strategic alliances .

◦ 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). ◦ 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.Corporate-Level Strategic Alliances  Diversification by Alliance ◦ Integrating unique knowledge stocks to create products that serve new markets and customers.

supplier or outsourcing alliances Vertical where firms rely on upstream Alliance 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 Buyer Value Chain .Supplier Value Chain Partnerships that build on the complementarities among firms that make each more competitive Include distribution.

Used to increase the strategic competitiveness of the partners Buyer Value Chain Horizont al Alliance Buyer Value Chain Marketing agreements between Various Airlines .

. ◦ 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.International Strategic Alliances  Cross-border strategic alliances are the most prominent means of entering foreign markets.  Challenges ◦ Different cultures and a lack of trust hinders the transfer of knowledge or sharing of other resources.

Overcoming governmental barriers CONS .PROS/CONS of Strategic Alliance PROS .Technology/information leakage .Developing new technologies .Searching costs .Coordination costs .Access to new markets/technologies .Possible opportunistic behavior of partners .Capturing economies of scale .Sharing costs/risks .Monitoring costs .Organizational learning .



           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 .


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

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 Alliance agreement  Confidentiality      Mission.

and people. creating strategies for accommodating all partners’ management styles. Partner Assessment Contract Negotiation Alliance Operation Partner Assessment analyzing a potential partner’s strengths and weaknesses. . objectives and rationale. understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner.Stages of Alliance Formation Strategy Development Strategy Development studying the alliance’s feasibility. technology. focusing on the major issues and challenges and development of resource strategies for production. preparing appropriate partner selection criteria.

defining each partner’s contributions and rewards as well as protect any proprietary information.Stages of Alliance Formation (cont’d) Strategy Development Partner Assessment Contract Negotiation Alliance Operation Contract Negotiation determining whether all parties have realistic objectives. and measuring and rewarding alliance performance. and highlighting the degree to which arbitration procedures are clearly stated and understood. Alliance Operation addressing senior management’s commitment. addressing termination clauses. penalties for poor performance. . forming high calibre negotiating teams. finding the calibre of resources devoted to the alliance. linking of budgets and resources with strategic priorities.

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) .

Public Corporations 3 0 2 5 2 0 3 5 1 5 1 0 2 1 5 2 18 90 3 18 95 7 1 5 0 19 90 19 95 19 97 20 02 Source: Columbia University. European Trade Working Council for Chief Financial Officers Alliances .3 5 Alliances as a Percentage of Company Revenue Top 1. republished in “Stand and Deliver”.000 U.S. et all.

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 .

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 . • brand name and reputation    In order to partner effectively.Strategic perspective  Partnering to gain access to needed resources • knowledge and technologies. • foreign markets and customer segments.

technical training. quality management. • communication and coordination costs – discussing specifications... • measurement costs – necessary changes to product designs.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.  Not only cost of materials . . etc. customer complaints handling..

joint R&D of new product generations .Transaction costs – make or buy or partner?  Asset specificity – investment useful only  in a specific relationship • e. Long-term cooperation • economies of scale. factory built close to a client’s site Two approaches: 1.g. future products • think about transaction costs – not only component costs! 2. Rotating suppliers • bargaining to always get the best price • problem: new technologies. technology used only by one company. experience effects.

Longing of Partner for the Alliance .Success factor of Strategic Alliance Compatibility Existing Networks. Corporate Culture of Partner 3C Capability Resources and Core Competence of Partner Commitment Passion.

to conflicts resulting from incompatible cultures and objectives.Risks of Strategic Alliances  Strategic alliances can lead to competition rather than cooperation. and to reduced management control . to loss of competitive knowledge. 1996). 1997 Spekman et al.  . 1986. Dacin et al . A study of almost 900 joint ventures found that less than half were mutually agreed to have been successful by all parties (Harrigan.

Reasons for Failure 60% of partnerships fail! 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 0 50 20 Caution 28 31 32 Critical 42 49 54 73 100 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  ◦ 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 .

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. To operate under a JV. The Separation ◦ Separation is inevitable because JVs generally have a limited life and purpose. . all parties have decided to keep core business separate and limit interaction to joint operations.

Joint Venture
  

JV vs. Strategic Alliance

Strategic 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)
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

Joint Venture

Strategic Alliance



Companies A and B combine to form a new company C

Companies remain independent

Motives for IJV Formation New Markets Existing Markets Existing Products New Products .

Marketing and Distribution.  Joint Ventures are also used for: ◦ Acquiring technology in the core business ◦ Reducing financial risk .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. Divisional Mergers.   Research and Development.

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 : .

LG Electronics alliance portfolios .

Sun Microsystems alliance portfolios .

Sun Microsystems business and alliance strategy .

Dell computers alliance portfolios .

first-to-market with latest implementing valuechain. IBM) to move into enterprise market . Andersen Consulting technology • Generate revenue “outside the box” • Direct model (with both by aligning with Internet service suppliers and customers) offers providers ( technology) • Distribution alliances with • Desire to move into the valueadded enterprise computer market resellers and retailers to gain international presence • Technology transfer agreements (e. AOL) competitive advantage (low • Streamline logistics with suppliers by cost.g. • Assembler versus owner of IBM.Dell computers business and alliance strategy Business Strategy 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. EDS...

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

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

NEC did this while spending a far smaller portion of its revenue on R&D than its competitors. It shot past its competitors and emerged as one of the leading international companies with in-depth competence in all three key markets. .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.

.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 .


org/wiki/Strategic_alliance Thomson Canada limited Cross-Border Strategic Alliances and Foreign Market Entry (Larry D. Hitt.Reference         http://en. 국제경영 ( 박영사 . 1st edition) 강태구 . Investment. North Central University) Understanding business strategy (Hoskission.wikipedia. Hong Kong University of Science and Technology) Strategic alliances and their role in the management of technology (Dr. Qiu. and Strategic Alliances (Kristopher Blanchard. 2007) Pearson education glossary site . Tokyo institute of technology) Global Market Entry Strategies: Licensing. Krzysztof Klincewicz.

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