Cooperative Strategy: Strategic

Alliances
Prof. Supriti Mishra

7/5/2018 Prof. Supriti Mishra, IMIB 1

 General Motor’s Network of International
Alliances with other Automakers
SAIC
FUJI
JV to produce DAEWOO
20% owned;
car in China 50.9% owned;
Joint production
techn. & prod.
FIAT Collaboration
Technical
collaboration & 20% NUMMI
ownership till 2005 Makes cars in
US; 50% owned

SAAB
50% owned until IBC vehicles Ltd.
2008 Makes vans in
UK; 60% owned

Pugeot ISUZU
Joint development & 49% owned; co-
7% ownership production

Avtovaz Suzuki
Russian JV to
produce cars
GM 10% owned;
coproduction

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 Cooperative Strategy
• Firms work together to achieve a shared
objective
– IBM formed strategic alliances with a
competitor, Sun Microsystems, to offer an
operating platform that is compatible with Sun
software
• Both partners have adopted a cooperative strategy
to gain ground over Hewlett-Packard.
• IBM has teamed with SAP in an effort to target
solutions for small and mid-sized firms.

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Prof. Supriti Mishra, IMIB
 Cooperative Strategy
• Firms work together to achieve a shared
objective
– When Kodak’s core competencies “dried-up” with
the introduction of digital photography
• developed cooperative relationships with well-known
firms such as Sony, Canon, and Fuji
• also has a cooperative relationship with competitors
Hewlett-Packard and Xerox to supply components and
processes used by these competitors in their respective
competitive products.
• recently entered into an agreement with Sony that
allows each company to have access to the other’s
patent portfolio as well as sharing technological
capabilities.
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 Strategic Alliance
• Strategic alliance is an interfirm cooperative
agreement in which firms combine some of
their resources and capabilities to create a
competitive advantage for the partners
– Allows firms to work on existing resources and
capabilities while working with partners to
develop additional resources and capabilities as
the foundation for new CA

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 Types of Strategic Alliances

• Three types of strategic alliances

– Joint venture
– Equity strategic alliance
– Non-equity strategic alliance

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 Types of Strategic Alliances
• Joint venture
– Two or more firms create a legally independent
company to share resources and capabilities to
develop a competitive advantage
• Effective in establishing long-term relationships and in
transferring tacit knowledge
– Tacit knowledge can’t be codified and is learned through
experiences when people from partner firms work together in a
joint venture
– Typically partners own equal percentages and
contribute equally to the venture’s operations
• Maruti Suzuki, the most successful JV in India between GoI
and Suzuki
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 Types of Strategic Alliances
• Equity strategic alliance
– Two or more firms own a portion of the equity in
the venture they have created by combining some
of their resources and capabilities
• Many FDIs such as those made by Japanese and US
companies in China
• Etihad Airways invested in India’s Jet Airways for a 24%
equity stake, resulting in an investment of US $379
million.
• Citigroup Inc. has formed a strategic alliance with
Shanghai Pudong of 25 percent
– this served as a launch pad for Citigroup to enter the credit-card
business in China
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 Types of Strategic Alliances
Non-equity Strategic Alliance
• Two or more firms develop a
contractual relationship to
share some of their unique
resources and capabilities
• Firms do not establish a
separate independent
company, so don’t take equity
positions.
• Less formal and demand fewer
partner commitments.
• Unsuitable for complex projects
requiring effective transfers of
tacit knowledge between
partners.
7/5/2018 Prof. Supriti Mishra, IMIB
Types of Non-equity Strategic Alliance
• Licensing agreements
– Technology or product
licensing
– Ex. HP licenses some of its
intellectual property through
alliances
• Distribution agreements
• Supply contracts
• Outsourcing commitments
• R & D Collaboration (JV)
• Affiliate marketing
• Franchisee
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Incentives to Enter Into Strategic Alliances
• Most firms lack the full set of resources and
capabilities needed to reach their objectives
• Cooperative behavior allows partners to
create value that they couldn't develop by
acting independently
• Aligning stakeholder interests (both inside
and outside of the organization) can reduce
environmental uncertainty

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Incentives to Enter Into Strategic Alliances

• Information Exchange: Related to the desire to

reduce risk and search costs
– Technology companies cannot possibly acquire the
technology they need fast enough, so partnering
becomes essential
– Technology transfer (outright purchase or licensing by
one firm of the technology of another firm)
– Technological complementarity (each firm
contributes expertise to a joint project)
• Higher incidence in industries with rapidly changing
technologies, such as semi-conductors, biotechnology and
electronics

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Incentives to Enter Into Strategic Alliances
• Economies of scale
– New entrants have significant cost disadvantage
because to develop their own production
capabilities and continue expansion would require
significant expenditure of resources
• International Expansion
– Partnership provides a way for the domestic
company to expand internationally through the
alliance partner

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Incentives to Enter Into Strategic Alliances
• Information Exchange
• Small firms mitigate risk by spreading their involvement
among projects sponsored by several large firms
– New Biotechnological firms enter into strategic alliances to
spread their risk to established pharmaceutical company
• Large firms attempt to mitigate risk by supporting
multiple innovative efforts among a set of small firms
• During the stock market crisis of 1987, large pharma
companies supported small and young companies
• In large firms, alliances account for more than 20 percent of
revenue and are a prime vehicle for firm growth
• In some industries e.g., airlines, firms compete more as
alliance against alliance than firm against firm
• Star Alliance (23%) vs SkyTeam (20.4%) vs Oneworld (17.8%)
vs Others (28.8%)

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Incentives to Enter Into Strategic Alliances
• Complementary Resources
– Strategic alliances motivated by resource
complementarity are often established by firms that are
not in direct competition with each other but rather
operate along the same innovation chain
• Cetus corporation formed joint venture with Kodak to market
diagnostic kits, allied with Squibb to produce anti-effective
drugs, and joined with Ben Venue Therapeutic to market anti-
cancer drugs
• Leads to collaborative or relational advantage
– Large global companies establish multiple strategic
alliances
• ISRO has alliances with other countries and agencies whereby
its own advanced satellites such as INSAT are launched by
companies such as Arianne, while ISRO launches satellites for
other countries who don’t have satellite launching capability
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Strategic Alliances: Competitive Conditions
Market Characteristic
Slow-cycle • Firms’ competitive
advantages are shielded from
imitation for long period and
imitation is costly
•Markets are close to
monopolistic condition
•Ex. Railroads, historically:
Utilities, Telecommunications,
etc.
Fast-cycle •Markets are unstable,
unpredictable, and complex
•Hyper-competition
•Sustainable CA hard to come
by
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Prof. Supriti Mishra, IMIB
Reason
• Gain access to a restricted market
• Establish a franchisee in a new market
•Maintain market stability (e.g. establishing
standards)
• Ex. After the steel industry consolidation in the
US, Nucor’s 50/50 JV with Duferdofin to produce
steel joists and beams in Italy and sell those in
Europe and North Africa
• Speed up development of new goods &
services, new market entry
• Maintain market leadership
•Form industry technology standard
•Share risky R & D expenses
•Overcome uncertainty
•Ex. Hulu venture (www.hulu.com) among NBC
Universal (GE, 30%), ABC (Disney, 30%), Fox (News
Corp, 30%), and Time Warner (minority stake of
10%). CBS was the only non-participant in the
major networks.
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 Strategic Alliances
Market Characteristic Reason

Standard • CA is moderately shielded • Gain market power

Cycle from imitation typically
Markets allowing them to be sustained
for a longer period of time than
fast cycle market situations,
but for a shorter period than in
slow-cycle market
•Access to complementary resource
•Overcome trade barriers
•Meet competitive challenges from other
competitors
•Pool resources for large capital projects
•Learn new business techniques
•ICICI Bank and Vodafone India announced a
strategic alliance to launch a unique mobile
money transfer and payment
service called ‘m-pesa”

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 Business-Level Cooperative Strategy
• Business level cooperative strategies used to
grow and improve firm performance in
individual product markets
• Achieved through Complementary Strategic
Alliances (CSA)
– Firms share some of their resources and capabilities
in complementary ways to develop competitive
advantages
– Two forms
• Vertical
• Horizontal

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 Business-Level Cooperative Strategy
• Vertical CSA
– Partnering firms share resources & capabilities from
different stages of the value chain to create a
competitive advantage.
– Nintendo’s partnership with Electronic Arts, the game
developers
• Horizontal CSA
– Partnering firms share resources & capabilities from
the same stage of the value chain to create a
competitive advantage
– Pfizer’s marketing agreements with Aurobindo
Pharma and Claris Lifesciences Ltd. to produce and
sell 60 and 15 off-patent drugs and injectibles
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 Corporate-Level Cooperative Strategies
• Corporate-level cooperative strategies (CLCS)
help firm to diversify itself in terms of products
offered, markets served or both
– Diversifying strategic alliance
• Firms share some of their resources & capabilities to
diversify into new product or market areas
• Fujitsu, whose memory chips business was not doing
well, dumped its flash memory business to a joint
venture controlled by Advanced Micro Devices (AMD)
• The JV developed a new Flash memory semiconductor that will
market its solution under the new global product brand name,
Spansion

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 Corporate-Level Cooperative
Strategies
– Synergistic strategic alliance
• Firms share some of their resources & capabilities to
create economies of scope
• Cisco’s partnership with Accenture and TCS to market
its products around the world
– Franchising
• Firm uses a franchise as a contractual relationship to
describe and control the sharing of its resources and
capabilities with partners
– McDonald’s

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 International Cooperative Strategy
• Cross-Border Strategic Alliance
– International cooperative strategy in which firms with
headquarters in different nations combine some of their
resources and capabilities to create a competitive
advantage
• Why cross-border strategic alliance?
– Multinational corporations outperform firms that
operate only domestically
– Due to limited domestic growth opportunities, firms look
outside their national borders to expand business
– Some foreign government policies require investing firms
to partner with a local firm to enter their markets

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 International Cooperative Strategy
• Risks
– Partners may choose to act opportunistically
– Partner competencies may be misrepresented
– Partner may fail to make available the
complementary resources and capabilities that
were committed
– One partner may make investments specific to
the alliance while the other partner may not

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 Phases of Alliance

Bridging
Engagement
differences

Housekeeping Old married

Courtship
together couple

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 Risks in SA
• SA is generally seen as a risky strategy whose
success is often unrelated to an individual partner
firm’s efforts
• Managing alliances is much more complicated
and difficult than managing single firms, mainly
because of the additional factor of managing the
partner firm
• Studies show failure rate of SA can be as high as
50%
– Compared with other expansion strategies such as
acquisitions or subsidiaries, success rate of SA is lower

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 Types of Risks in SA
• Relational Risk
– Risk of unsatisfactory interfirm cooperation
– Alliance partners might be primarily motivated to enhance their self-
interest at the cost of the partner firms and even the alliance
• Such opportunistic behaviours may include shirking, appropriating partner’s
resources, distorting information, harboring hidden agenda and delivering
unsatisfactory products and services
– This risk unique to SA, single firms will not have such problems
– Internal to the relationship
• Performance Risk
– All other factors that adversely affect alliance performance
– Probability that an alliance may fail even when partner firms commit
themselves fully to alliance
– Sources of such risk:
• Environmental factors: government policy changes, war and economic recession
• Market factors: fierce competition, and demand fluctuations
• Internal factors: lack of competence in critical areas or sheer bad luck
– Such risks can be seen all types of businesses, not unique to SA
– External to the relationship
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 Risks in Managing Alliance Resources
• Resource management is about identifying, utilizing,
and securing valuable resources
• 4 different aspects in resource management in
business performance
Firms doing
I. Optimally using one’s existing resources business on
II. Developing new resources their own
III. Protecting one’s resources e.g. avoiding
unintended transfer & imitation Firms in SA
IV. Gaining access to other firm’s resources (for I & II also)

• Firms need to protect their resources from

unintended transfer & imitation

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 Types of Resources
• Property
– When there are clear property rights
– Firm’s ownership is absolute & protected by law
• Physical and financial resources
• Patents, contracts, logos and trademarks
– Properties cannot be freely obtained by others because of the ownership
barrier
• Knowledge
– Tacit skills and knowledge involved in one’s technological, managerial, and
organizational resources
– Protection available for knowledge is the knowledge barrier, as there are hardly
any ownership rights
• Can be imitated by others limiting competitive advantage
• A firm’s resource contribution to an alliance can be primarily property or
primarily knowledge – one particular type will be generally heavily
represented instead of an equal split between the two
– Coca Cola’s partnership with Danone of France to sell Minute Maid in Europe &
Latin America
– Danone provided property based resources i.e. distribution channels, Coca Cola
contributed both property i.e. production capacity and knowledge i.e.
marketing know how

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 Primary Risk

Relational Risk Performance Risk

Property Control orientation Flexibility orientation

(physical,
financial)
Primary

Knowledge Security Orientation Productivity Orientation

Resource
(technological,
managerial)

Strategic Alliance Orientations for Primary Risk & Resources

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 Control Orientation
• The relational risk in this situation for a firm is its properties
may be misused and other party may reap undue benefits
• To mitigate the risk, partners should ensure that properties
are used in consonance with its own interests and
intentions
– Contractual Control
• Specification of the details of usage of properties in alliance
agreement
– Managerial Control
• Tight monitoring of alliance operations ownership e.g. having one’s
own staff in key position in the alliance
• Kodak ensuring relationship managers in some of its alliances
– Equity Control
• Ensuring desirable behavior through equity ownership
• P & G acquiring $50 million stake in its Russian partner to better
control the alliance

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 Flexibility Orientation
• The performance risk here is the alliance may fail even if the partners
are fully committed
– The firm may risk loosing its invested resources, mainly properties
• Flexibility orientation enables a partner firm to be free from rigid,
engaging, and long-term engagements, enhancing the ability to adapt
to changing circumstances
• Types of flexibility
– Opting for short–term, recurrent contracts specifying an incremental
process of alliance making; additional investments are not made till results
from first one come
• Merck and Astra AB partnership – first distribution agreement to market Astra’s
new drugs, then setting up a new venture to handle a wide range of Astra products,
finally a 50% stake in the venture
– Partner firms can choose alliance forms that are relatively less engaging
• e.g. licensing, funded research, shared distribution rather than joint ventures or
minority equity alliances
• Abbott’s marketing alliance with biotech companies such as NAV
– Partner firms can emphasize exit provisions laying out how an alliance
termination be executed should there be one
• Specific costing and pricing formulas should be featured explicitly, so that there is
no uncertainty about who gets what in the alliance e.g. IBM’s partnership with
Kvant in Russia with an escape clause
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 Security Orientation
• The risk here is about the security of contributed
resources by firms
– Relational risk is mostly in terms of the likelihood of one’s
technological and managerial know-how being stolen by the
partner firm
– JVC of Japan and Thomson of France are VCR makers
• In their alliance JVC wanted Thomson’s knowledge of the fragmented
European market, Thomson was interested in the technical know-
how
– To ensure security of knowledge,
• Firms should attempt to limit the exposure of tacit knowledge and
know-how to their partner firms
– Instead of getting into JV in which firms work closely, they may choose to
work separately
• Firms should make it clear prior to the alliance that they are aware of
the possibility of unauthorized learning, are committed to prevent it
• Firms should warn their alliance staff to be careful about
unauthorized sharing of sensitive knowledge and information
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 Productivity Orientation
• High performance risk associated with knowledge
contribution by firms may not lead to acceptable alliance
performance
• Risk may arise due to
– Incompatible organizational routines and culture between firms
• Large firms with bureaucratic culture may have problems with small firms
having informal culture
• AT&T and Olivetti’s alliance to market office equipment failed because
AT&T’s bureaucratic organization culture clashed with Olivetti’s dynamic
and entrepreneurial culture
– Firms may have internal stickiness to adopt partner firm’s superior
knowledge
• Firms need to overcome organizational learning barriers
– Unsatisfactory performance may result when superior knowledge
and know-how of partner firms are not compatible with each
other

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Alliance Management Stages

(1) Risk in finding fit: No Misfit:

Selecting alliance Do both resource fit and strategic fit The alliance should
partners exist between the partner firms? not be formed
Yes
(2) Risk in maintaining flexibility: No Mismanagement of
Structuring the Is there a balance between structural risks:
alliance flexibility & rigidity? Poor performance
Yes

(3) Risk in managing collaboration: No

Mismanagement of
Operating the Is there a balance between risks:
alliance cooperation and competition? Poor performance
Yes

(4) Risk in planning for the future: No Mismanagement of

Evaluating the Is there a balance between a short- risks:
alliance term and long-term orientation? Poor performance
Yes

Effective Alliance Performance

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 Alliance Management Stages
• Selecting Alliance Partners
– Alliances between competitors, between strong and weak firms,
and between weak firms are likely to fail
– Alliances of strong equals have a high probability of success
– High levels of interfirm trust and complementarity of resources
are the essential conditions for success
• Risk in achieving partner fit
– Partner firms should have both resource fit and strategic fit
• Resource fit is about compatibility of resources between partners –
either complement or supplement each other
• Strategy fit is about compatibility of goals in alliances
– There could be different objectives of partners but they should
be compatible with each other
– Important to find out if a partner has a hidden agenda
• Sometimes alliances lead to acquisition

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 Alliances of Complementary Equals
Creates Value
Partner strength + Partner strength = Joint objective

Pepsico (canned beverages) Lipton (Tea) Canned ice tea

KFC (established brand, store Mitsubishi (real estate and KFC chain in Japan
format, and operation skills) site-selection skills)

Siemens (global presence in Corning (technological Fiber-optic-cable business

telecom and cable strength in optical fibers and
manufacturing technology) glass)

Ericsson (technological strength Hewlett-Packard (computer, Create and market network

in public telecom network) software, and access to management systems
electronics)

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 Managing Cooperative Strategy
• Two primary approaches
– Cost minimization
• Relationship with partner is formalized with contracts
• Contracts specify how cooperative strategy is to be
monitored and how partner behavior is to be controlled
• Goal is to minimize costs and prevent opportunistic
behaviors by partners
– Opportunity maximization
• Maximizing partnership's value-creation opportunities
• Informal relationships and fewer constraints allow
partners to
– take advantage of unexpected opportunities
– learn from each other
– explore additional marketplace possibilities
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• Partners need a high level of trust 36
Prof. Supriti Mishra, IMIB
 Managing Alliances
• As a governance mode, alliances are part market, part
Kale and
hierarchy
Singh – Couples market-type incentives with firm-like coordination,
while mitigating some of the hazards inherent to market-based
exchange
• Discrete activities
– Partner selection
• Search for optimal complementarity
• Division of labor
• Commitment/compatibility
• Governance/Design
– Selecting the appropriate structure
• Contract, equity, JV
– Depends upon purpose, level of trust
• Ongoing management
– Scope, incentive-based requirements, access to
people/facilities, alliance management function
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