Strategic Alliances

Chapter 10

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STRATEGIC ALLIANCES
an agreement reached between or among separate business entities for collaboration on a joint project or business which creates an ongoing separate entity.

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Examples
• Cross licensing • Joint Marketing, Distribution, and Sales Agreements • Joint Product Development Agreements • Alliances or Business Networks • Consortiums • Joint Ventures
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Why do Strategic Alliances
• • • • Expand market presence Sharing or developing technology Combining strong company attributes Pooling of financial resources

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Elements of success
• open and frequent communication • a well established hierarchy (who’s responsible for what) • a pre-determined dispute resolution mechanism • realistic expectations on both (all) sides • complementary strengths and weaknesses of partners • capable management of the alliance • non-competition between the partners
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Joint Ventures
• company owned by two or more firms for purpose of manufacturing, research, marketing and distribution, or all of these

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Advantages
• achieve something you couldn’t otherwise achieve • have more control and profit opportunities than licensing • if entering new markets:
– local partner has market knowledge and contacts – foreign partner has required manufacturing, marketing and financial resources

• reduces financial and political risk • overcomes host country FDI barriers • if strengthening existing business:
– can acquire new technology – reduces financial risk

• achieves economies of scale in supplies, R&D, marketing and distribution
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Disadvantages
• • • • requires top management attention possible incompatibility with partner inequities that grow over time higher political, economic risk than exporting, licensing

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How to Do a Successful Deal
1/ understand your capabilities and needs 2/ choose the best partner 3/ design the JV 4/ negotiate an Agreement

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Understand your capabilities and needs
• • • • Do you really need a partner? For how long? Success possibility? Is a JV the best option?

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Types of Joint Ventures
• Equity Joint Venture • Contractual or Unincorporated Join Venture • Limited Partnership

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Choose the best partner
• Has necessary and accessible skills and resources • Is compatible and has shared objectives • Is trust mutual? • Build an “engagement” period

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Design the JV
• Define scope and strategic operating freedom • Define parent’s duties, rewards (win-win) • Establish parent managerial roles

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Negotiate an Agreement
• • • • • • • • • • • Definitions Scope of operations Management Settlement of disputes – arbitration Organization and capitalization Financial arrangements Contractual links with parents Rights and obligations Intellectual property Termination force majeure

Seek Legal Counsel!

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Making the Venture Work
• give venture top management attention • manage cultural differences • watch out for inequities that grow over time • be flexible

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Legal Issues with Joint Ventures
• local majority equity may be required • restrictions on termination clauses • compensation may be payable to local party on termination • minimum foreign financial contribution • minimum profits to local firm • illegal if restricts competition, promotes price fixing, market sharing (esp. U.S., E.U.)
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