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Chapter 6: Engaging in CrossBorder Collaboration

Managing across Corporate Boundaries

Reading 6-1: The Design and Management of International Joint Ventures


Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

What is a Strategic Alliance?
A formal and mutually agreed commercial collaboration between companies The partners pool, exchange or integrate specific business resources Yet they remain separate businesses, making alliances distinct from mergers and acquisitions

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Strategic Alliances • • One of innumerable forms of commercial interaction One of four forms/modes of investment Partially Owned Existing Capital Participation Joint Venture Wholly Owned Acquisition New Greenfield 6-3 .

Range of Strategic Alliances Joint Venture High (Equity Participation) Co-production/ Buyback Level of Interaction R&D Consortia Cross Licensing Franchising Patent Licensing Cooperation Agreement Strategic Alliances Low Competition Type of Arrangement Cooperation 6-4 .

In the 1960s and 1970s Alliances were Primarily used in Peripheral Markets and Technologies Critical Markets Peripheral Alliance Critical Technologies Alliance Frontier Alliance Alliance Peripheral 6-5 .

Mazda • Philips .In the 1980s the Alliance Frontier Moved to Encompass More Important Markets and Technologies Critical Critical Alliance Markets Peripheral Technologies Alliance Frontier Alliance Alliance Peripheral Examples • Ford .Siemens • Rolls Royce + Japanese 6-6 .

In the 1990s New Alliance Frontiers were Crossed Duration of Agreement Short Long or Unspecified Non Equity Ownership Alliance Alliance Frontier Alliance Equity Alliance 6-7 .

And Now We Are In The Age of International + Alliance Capitalism… Equity JV Strategic Alliance Emphasis Non-Equity Do It Yourself Domestic Regional International 6-8 Geographic Scope .

…Where Alliances are Occurring Between Entrepreneurial Start-ups and Large Firms. and Speed of Establishment is Increasing Months Large Firms Time-Frame Years Linkages Between Alliance Frontier Entrepreneurial Firms 6-9 .

A sure way to lose one’s technology. • • • • • 6-10 . Only undertaken as a last resort. Impossible to manage.Popular View Says JVs are: A transitional organization form. Less profitable.

Why Strategic Alliances •Technology Exchange •Global Competition •Industry Convergence •Economies of Scale •Reduction of Risk •Alliances as an Alternative to Mergers 1-11 .

40% of all investments in Asia Pacific are JVs. longer than acquisitions). Managing has become easier. Profitability identical with other organizational alternatives. • • • 6-12 . so usage up.Objective Reality Average age of international JVs nearly 10 years (similar to greenfield startups.

Objective Reality (cont’d) Some companies which possess strong technology often prefer to use JVs.philosophy) The days of government regulation forcing the use of JVs are behind us.. • • 6-13 coordination . Japanese firms with a Kyousei . (i.

Strategic Management Journal. 6-14 . “Effect of Equity Ownership on the Survival of International Joint Ventures”. Beamish. 25(3): 295-305.Effect of Foreign Equity Holding on Subsidiary Mortality Risk? Stability Similar to Wholly-owned Subsidiaries Except with Small Equity Holdings 4:1 Mortality Risk 3:1 2:1 1:1 0 0 20 40 60 80 100 Foreign equity in the subsidiary (%) 1:1 = equivalent to wholly owned subsidiary Source: Dhanaraj. Charles and Paul W. 2004.

coordination •Partner opportunism •Learning race (tacit vs. •Reduce costs & risks •Gain access to complimentary assets and new markets •Opportunities to learn from partner •Possibilities to use alliances and networks as an operational (real) option rather than a financial option. On the DOWN side… •Risk of choosing the wrong partner •Costs of negotiation. explicit knowledge) 1-15 .Strategic Alliance Advantages and Disadvantages On the PLUS side….

ORGANIZATION: Do the alliance partners provide resources to manage the partnership? 1-16 . Alliances might reduce costs. Alliances allow partners to tap into complimentary assets. Partner rarity & First Mover Advantage IMITIBILITY: The alliance’s benefits to the partners should be hard for others to imitate. or complimentary skills for tapping new opportunities. At the alliance level. McDonalds in Moscow). Capability rarity. Alliances facilitate opportunities to learn. risks and uncertainties.Selection: Resource Based Considerations VALUE: The creation of value means generating economies of scale for cost reduction. RARITY: Good alliances represent unique situations. At the firm level (ex.

6-17 .Joint Venture Checklist • Test the strategic logic. • Do you really need a partner? For how long? Does your partner? • How big is the payoff for both parties? How likely is success? • Is a joint venture the best option? • Ensure congruent performance measures exist.

Joint Venture Checklist (cont’d) • Partnership and fit. • Does the partner share your objectives for the venture? Does the partner have the necessary skills and resources? Will you get access to them? Will you be compatible? Can you arrange an “engagement period”? Is there a comfort versus competence trade-off? • • • • 6-18 .

What Do You Want From Your Partner? Parent A WANTS ACCESS TO PARTNER’S KNOWLEDGE WANTS ACCESS TO PARTNER’S KNOWLEDGE WANTS ACQUISITION OF PARTNER’S KNOWLEDGE WANTS ACQUISITION OF PARTNER’S KNOWLEDGE Parent B The Classic “Joint” Venture Mixed Motive A cooperative alliance A pseudo alliance (very stable) (eventually unstable)   Mixed Motive A pseudo alliance (eventually unstable)  “Race to Learn” A competitive alliance (very unstable)  6-19 .

Partner Selection: Comfort vs. Competence Higher Unstable Target Partner Comfort Non-Starter Lower Lower Higher 6-20 Unstable Partner Competence .

• • 6-21 . Lay out each parent’s duties and payoffs to create a win-win situation.Joint Venture Checklist (cont’d) • Shape and design. Ensure that there are comparable contributions over time. • Define the venture’s scope of activity and its strategic freedom vis-à-vis its parents. Establish the managerial role of each partner.

vs. Large Scale New Business Forever 6-22 . vs. vs.Scope of Activity Narrow Single. Wide Multi-Country Complete Value Chain Multi Industry vs. vs. Geographic Market Single Function Single Industry/Customer Group Modest Investment Existing Business Limited Term vs. vs.

Control in Joint Ventures Two types: • • One parent dominates the venture’s decision making (…but is this a “joint” venture?) Parents are both involved in decision making • • shared split 6-23 .

Shared Control Parent A Parent B JV Board of Directors A B R&D OPS FIN MKT 6-24 .

Split Control Parent A Parent B JV Board of Directors A B R&D OPS FIN MKT 6-25 .

GOOD FOR SITUATIONS REQUIRING FLEXIBILITY AND TAKING ADVANTAGE OF UNFOLDING OPPORTUNITIES. 1-26 . •Trust takes longer. Trust •Contractual controls limit opportunism by specifying the exact role and performance criteria of the strategic partners.Limiting Opportunism: Contracts Vs. GOOD FOR SITUATIONS REQUIRING ECONOMIES OF SCALE. relationships and informal interdependence.

Joint Venture Checklist (cont’d) • Doing the deal. • How much paperwork is enough? Trust versus legal considerations? Agree on an endgame. • 6-27 .

Be flexible. • • • 6-28 . Watch out for inequities. Manage cultural differences.Joint Venture Checklist (cont’d) • Making the venture work. • Give the venture continuing top management attention.

In Summary. a True Alliance Differs from a Pseudo Alliance The True Alliance Planned level of parent input and involvement Distribution of risks/rewards Parent attitude toward the JV The Pseudo Alliance One-time Continuing Roughly even A unique organization with unique needs Uneven One more subsidiary The formal agreement Performance objectives Flexible guideline Clearly specified and congruent Frequently referenced rulebook Partially overlapping/ ambiguous 6-29 .