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Chapter 9

Strategic
Alliances

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall.

9-1

Strategic Alliances

The Strategic Management Process
External
Analysis

Mission

Strategic
Choice

Objectives

Strategy
Implementation

Competitive
Advantage

Which Businesses
to Enter?

Internal
Analysis

Corporate Level
Strategy

• Vertical Integration
• Diversification
• Strategic Alliances
• mode of entry

Copyright © 2012 Pearson Education,
Inc.Management
publishing as Prentice
Hall.
Strategic
& Competitive

Advantage – Barney & Hesterly

9-22

Management publishing as Prentice Hall. Strategic & Competitive Advantage – Barney & Hesterly 9-33 . or sell products or services Copyright © 2012 Pearson Education.Strategic Alliances Strategic Alliances Defined Strategic Alliance: Any cooperative effort between two or more independent organizations to develop. manufacture. Inc.

Inc.Management publishing as Prentice Hall. Strategic & Competitive Advantage – Barney & Hesterly 9-44 .Strategic Alliances Motivation for Alliances Create economic value by: • accessing complementary resources and capabilities • leveraging existing resources and capabilities An alliance is an organizational form of exchange that: • should produce a gain from trade due to some comparative or absolute advantage Implication: Choose partners that are better at something than you are (complementary resources) Copyright © 2012 Pearson Education.

Bananas Copyright © 2012 Pearson Education. Strategic & Competitive A ½ hour gain from trade! Advantage – Barney & Hesterly 9-55 . = 6 bu. = 1 lb. Wheat and 4 lbs./hr. Banana. Mexico 6 1 4 5 Exchange Rate: 1 bu.Strategic Alliances Motivation for Alliances Gains from Trade Canada Wheat bushels/hr. Bananas lbs. Canada can get: 6 bu. Wheat and 6 lbs. Inc.Management publishing as Prentice Hall. = 12 bu. or 2 hrs. Wheat By trading. Canada: 2 hrs.

Strategic & Competitive A 4 hour gain from trade! Advantage – Barney & Hesterly 9-66 . = 1 bu./hr. Mexico: 2 hrs. Bananas.Strategic Alliances Motivation for Alliances Gains from Trade Canada Wheat bushels/hr. Wheat and 5 lbs. Wheat and 5 lbs. = 10 lbs. Mexico 6 1 4 5 Exchange Rate: 1 bu. = 1 lb. Bananas Copyright © 2012 Pearson Education. or 2 hrs. Bananas lbs.Management publishing as Prentice Hall. Mexico can get: 5 bu. Inc. Bananas By trading.

Management publishing as Prentice Hall.Strategic Alliances Three Types Of Alliances Nonequity Alliance Contracts • licensing • supply & distribution agreements Joint Venture Equity Alliance Cross Equity Holdings • partners own stakes in eachother Copyright © 2012 Pearson Education. Inc. Strategic & Competitive Joint Equity Holdings • independent firm is created Advantage – Barney & Hesterly 9-77 .

Strategic Alliances How Strategic Alliances Create Value Improve Current Operations Value Creation Shaping the Competitive Environment Facilitating Entry and Exit Copyright © 2012 Pearson Education. Strategic & Competitive Advantage – Barney & Hesterly 9-88 .Management publishing as Prentice Hall. Inc.

Inc.Strategic Alliances How Strategic Alliances Create Value 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 Copyright © 2012 Pearson Education. Strategic & Competitive Advantage – Barney & Hesterly 9-99 .Management publishing as Prentice Hall.

Strategic & Competitive Advantage – Barney & Hesterly 9-10 10 . Inc.Management publishing as Prentice Hall.Strategic Alliances How Strategic Alliances Create Value 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 Copyright © 2012 Pearson Education.

Management publishing as Prentice Hall. Inc. Strategic & Competitive Advantage – Barney & Hesterly 9-11 11 . access.Strategic Alliances How Strategic Alliances Create Value 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. and legitimacy with governments and customers Copyright © 2012 Pearson Education.

Management publishing as Prentice Hall. Inc.Strategic Alliances 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 Copyright © 2012 Pearson Education. Strategic & Competitive Advantage – Barney & Hesterly 9-12 12 .

Inc.Strategic Alliances Challenges to Value Creation and Allocation Three Forms of Misappropriating Value Holdup Adverse Selection Moral Hazard misrepresenting the value of inputs providing inputs of lesser value than promised exploiting the transactionspecific investment of partners Copyright © 2012 Pearson Education.Management publishing as Prentice Hall. Strategic & Competitive Advantage – Barney & Hesterly 9-13 13 .

Strategic & Competitive Advantage – Barney & Hesterly 9-14 14 . Inc. NO! However. The sources of value creation within alliances may be rare. • 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 Copyright © 2012 Pearson Education.Management publishing as Prentice Hall.Strategic Alliances Sustained Competitive Advantage Are strategic alliances rare? As a form of organizing economic exchange.

Management publishing as Prentice Hall. The resource combinations that create value in alliances may be very costly. and/or historical uniqueness Copyright © 2012 Pearson Education. Strategic & Competitive Advantage – Barney & Hesterly 9-15 15 . NO! • the organizational form per se is easily duplicated However. if not impossible.Strategic Alliances Sustained Competitive Advantage Are strategic alliances costly to imitate? As a form of organizing economic exchange. causal ambiguity. Inc. to imitate if: • the value creating combination depends on social complexity (trust).

Strategic Alliances Sustained Competitive Advantage Are strategic alliances substitutable? Internal Development Mergers & Acquisitions If: • no partner is available If: Substitutes for Strategic Alliances • transaction-specific investment is high • low uncertainty about the investment Copyright © 2012 Pearson Education.Management publishing as Prentice Hall. Strategic & Competitive • 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 Advantage – Barney & Hesterly 9-16 16 . Inc.

Strategic Alliances Organizing Strategic Alliances Governance Responses to the Challenges of Value Creation and Allocation Formal/Codified Explicit Contracts & Legal Sanctions • creates mutual understanding • imposes costs for cheating • conflict resolution Joint Ventures Equity Investments • aligns interests of partners through ownership of independent firm • direct effect • aligns interests of partners through ownership in each other • indirect effect Copyright © 2012 Pearson Education.Management publishing as Prentice Hall. Strategic & Competitive Advantage – Barney & Hesterly 9-17 17 . Inc.

Strategic & Competitive Firm Reputations • the shadow of the future constrains cheating Advantage – Barney & Hesterly 9-18 18 .Management publishing as Prentice Hall.Strategic Alliances Organizing Strategic Alliances Governance Responses to the Challenges of Value Creation and Allocation Informal Trust • may allow partners to exploit opportunities that would be infeasible with other mechanisms Copyright © 2012 Pearson Education. Inc.

Strategic Alliances Organizing Strategic Alliances Governance Responses to the Challenges of Value Creation and Allocation These responses are not mutually exclusive: • contracts may be used with equity investments and joint ventures along with firm reputation and trust • reputation and trust come into play in every type of alliance Reputation and trust may be sources of competitive advantage because they are costly to imitate Copyright © 2012 Pearson Education.Management publishing as Prentice Hall. Inc. Strategic & Competitive Advantage – Barney & Hesterly 9-19 19 .

Management publishing as Prentice Hall. Inc. Strategic & Competitive Advantage – Barney & Hesterly 9-20 20 .Strategic Alliances Summary Successful alliance managers will: • create alliances that will produce gains from trade—complementary resources • identify the sources of value creation • assess the likelihood of challenges to value creation and allocation • adopt appropriate governance responses to the challenges to value creation and allocation Copyright © 2012 Pearson Education.

Strategic Alliances Summary Alliances may generate competitive advantage if: • combinations of complementary resources meet the VRIO criteria • governance responses meet the VRIO criteria The Big Challenge of Strategic Alliances: Maximizing gains from trade while minimizing the threat of cheating Copyright © 2012 Pearson Education. Inc.Management publishing as Prentice Hall. Strategic & Competitive Advantage – Barney & Hesterly 9-21 21 .

Payoff Matrix Strategy A Strategy B Strategy A I.Management publishing as Prentice Hall. $-0II. $1.000 II. $1. $5. $5.000 I.000 II. $3. $-0- Strategy B Team II Team I I. Strategic & Competitive Advantage – Barney & Hesterly 9-22 22 .000 Copyright © 2012 Pearson Education.000 II.Strategic Alliances Prisoner’s Dilemma Game On each round of play each team can choose either Strategy A or Strategy B.000 I. $3. Inc. The objective is to maximize your payoff.

Strategic & Competitive Advantage – Barney & Hesterly 9-23 23 .Strategic Alliances Payoff Schedule Team I Team II Round 1 _____________ _____________ Round 2 _____________ _____________ Round 3 _____________ _____________ Round 4 _____________ _____________ Round 5 _____________ _____________ Round 6 _____________ _____________ Total _____________ _____________ Copyright © 2012 Pearson Education. Inc.Management publishing as Prentice Hall.

Management publishing as Prentice Hall. Copyright ©2012 Pearson Education. Printed in the United States of America.Strategic Alliances All rights reserved. electronic. recording. or transmitted. Inc. or otherwise. No part of this publication may be reproduced. Strategic & Competitive Advantage – Barney & Hesterly 9-24 24 . publishing as Prentice Hall Copyright © 2012 Pearson Education. stored in a retrieval system. photocopying. Inc. in any form or by any means. mechanical. without the prior written permission of the publisher.