Chapter 9

Understanding Alliances and

Cooperative Strategies
OBJECTIVES

1 Describe why strategic alliances are important

strategy vehicles

2 Describe the motivations behind alliances and

show how theyve changed over time

3 Explain the various forms and structures of

strategic alliances

4 Explain alliances as both business-level and

corporate-level strategy vehicles

5 Understand the characteristics of alliances in

stable and dynamic competitive contexts

6 Summarize the criteria for successful alliances

1
AN ALLIANCE THAT FITS LIKE A GLOVE

gloves Differentiate its

product

Extend the P&G Magla

brand

Expand into

Mr. Clean European markets

2
THE WHITE WAVE-DEAN ALLIANCE

$15 million

35% ownership
White Dean
Wave Foods

Leverage over retailers

(e.g., slotting fees)

3
BENEFITS OF STRATEGIC ALLIANCES

Companies which participate most

actively in alliances outperform the
least active firms by 5 to 7 percent
Why?

Share investments and rewards

Reduce risk
Reduce uncertainty
Focus resources on what each
partner does best
Foster economics of scale and scope

4
ALLIANCES ARE NOT STRATEGIES IN THEMSELVES

Arenas

An alliance is one vehicle

Staging Economic Vehicles for realizing a strategy
Logic

Differentiators

5
THE USE OF ALLIANCES AS STRATEGIC VEHICLE HAS BALLOONED

Alliances as percent of revenues

16%

As of 2007,
large MNCs have over 20%
of their total assets tied
up in alliances

2%

1980 1995

6
ALLIANCES OFFER BENEFITS, CONTRACTS CANNOT
Joint Investment
Increase returns by
encouraging firms to make
investments that theyd be
otherwise unwilling to make
(e.g., Wal-Mart supplier
becomes willing to invest in
new equipment)
Knowledge sharing
Consistent information-
sharing routines enhances
learning (e.g., John Deere
exchanges key employees
with alliance partner Hitachi)
Complementary Resources
Opportunity to create a
stock of resources that is
unavailable to competitors.
This may create a shared
advantage (e.g., Nestl and
Coke combined resources
to offer canned tea and
coffee products
Informal management
Alliances may make it
more cost effective to
manage an activity than
arms-length transactions
or acquisitions
7
ALLIANCES MAY BUILD COMPETITIVE ADVANTAGE

Alliances may serve to build a competitive advantage if

Rivals cannot ascertain what generates the returns because of causal
ambiguity surrounding the alliance
Rivals can figure out what generates the returns but cannot quickly
replicate the resources owing to time decompression diseconomies
Rivals cannot imitate practices or investments because they are missing
complementary resources (they have not made the previous investments
that make subsequent investments economically viable) and because the
current costs associated with prior investments are now prohibitive
Rivals cannot find a partner with the necessary complementary strategic
resources
Rivals cannot access potential partners resources because they are
indivisible
Rivals cannot replicate a distinctive and socially complex institutional
environment that has the necessary formal and informal controls that
make managing alliances possible

8
MOTIVATION FOR ALLIANCES HAS CHANGED OVER TIME
Product performance Learning and
focus Position focus capabilities focus
1970s 1980s Post 2000

Ensure constant stream

Produce with latest
Build industry stature of new prospects with
technology
advancing technology

Market beyond national Proactively maximize

Consolidate position
borders delivered value

Sell product stressing Gain economies of scale Optimize total cost by pro-
performance and scope duct/customer segment

Gain advantage in res-

ponse to changing condi-
tions and responsibilities
Source: Adapted from J. Harbison and P. Pekar, Smart Alliances: A Practical Guide to Repeatable Success (San Francisco: Jossey-
Bass, 1998) 9
THE WAL-MART CIFRA ALLIANCE

Knowledge of Wal-Marts business model

Wal-Mart Cifra

Knowledge of the
market in Mexico

10
ALLIANCES CAN TAKE MANY FORMS

Examples of cooperative arrangements in the continuum of organizational forms

Keiretsu in Japan or Caltrex, which was
Chaebols in South jointly owned by
Korea Chevron and
Permanent Texaco prior to their
merger.
Outsourcing Many technology Examples include Anheuser-Buschs Stand-alone joint
standards consortia technology collaborations cross ownership with ventures like Dow-
Long-term like the PowerPC chip Kirin in Japan and Corning.
between Motorola, IBM, Modelo in Mexico
and Apple
Purchase agreements Agreements to Cross-licensing like that
that are renewable distribute products between Disney and Pixar
annually or every or services or R&D partnerships like
several years Millennium Pharma-
ceuticals and some of its
Transactional smaller partners
Simple purchase order Short-term agreements on functions like
for commodities, some- advertising or manufacturing to achieve
times called a spot efficiencies for example, contract brewing of
transaction Miller Beer by Anheuser Busch
No Linkages Beyond Information Asset, Resource, and Cross-Equity Shared Equity
Level of Transaction Sharing Capability Sharing (partners take
Commitment ownership in one
party or each other)

Non-Equity Alliances Equity Alliances

Source: Adapted from J. Harbison and P. Pekar, Smart Alliances: A Practical Guide to Repeatable Success (San Francisco: Jossey-
Bass, 1998 11
MULTI-PARTY ALLIANCES

2 party alliances Multiparty alliances

Example: SEMATECH, a consortium

of semiconductor manufacturers

12
WHO MIGHT BECOME AN ALLIANCE PARTNER?

Rivals

Complementors New
entrants
Any other
organization could
Firms become an alliance
partner

Substitutes Suppliers

Customers

13
2 TYPES OF BUSINESS STRATEGY ALLIANCES

Examples

Partner with one or more suppliers or Timkin and

customers. Typically done to create more suppliers
1 Vertical value for the end customer and to lower total
production costs along the value chain

Partner with a rival or potential competitor to Mondavi and

gain access to multiple segments of the top foreign wine
2 Horizontal
industry and reduce risk, improve efficiency, producers
or foster learning

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EXAMPLES OF NETWORKS OF BUSINESS ALLIANCES

Coopetition is essentially the notion that companies are com-

plementors when they make markets and competitors when
they divide markets. This relationship is called a value net

Timken Co. is getting its cus- Only recently are firms

tomers to think of them as more recognizing that
than simply a bearings supplier by Your working
employing sophisticated bundling Company with suppliers is as
processes to combine basic important as listening to
bearings with additional the customer.
components in order to provide
companies with exactly what they
need. As a result, their bundled Most often ignored
products are a source of reliability source of value creation
and cost reduction for their
customers like Caterpillar. Also,
Timkens acquisitions dont create Suppliers
value simply due to added product
lines, but instead due to the greater
value added by a more complex
and tailored bundle
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RISKS ARISING FROM ALLIANCES

Failure to make complementary

Poor contract management
resources available

Misrepresentation of resources Being held hostage through

and capabilities specific investments

Misappropriation of resources Misunderstanding a partners

and capabilities strategic intent

16
RISKS ARISING FROM ALLIANCES

Redhook Ale

?
Was Redhook Ale held captive by
its alliance with Anheuser Busch?

17
FIVE LEVERS FOR INCREASING THE PROBABILITY OF ALLIANCE SUCCESS

Understand the determinants of trust

Be able to manage knowledge and learning

Understand alliance evolution

Know how to measure alliance performance

Create a dedicated alliance function

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BENEFITS OF TRUST

Trust and Competitive Advantage

Dedicated Knowledge
Asset Sharing
Investments Routines

Interfirm
Trust

TRUST is one partys confidence that the other party in the exchange relationship will fulfill its promises and
commitments and will not exploit its vulnerabilities
Trust and alliances are a conundrum from a classical economics perspective assumption of opportunism means firms
must choose market or hierarchy, make or buy, not an alliance
BUT
Trust lowers transaction costs Increases knowledge sharing
Search costs Increases investments in dedicated
Contracting costs AND assets
Monitoring costs
Enforcement costs
19
FOUR KEY FACTORS AFFECT TRUST

Initial
conditions

Negotiation
process

Trust

Reciprocal
experiences

Outside
behavior

20
COMPONENTS OF A DEDICATED ALLIANCE FUNCTION

Alliance Partner Alliance

Alliance Assessment
business case assessment negotiation and
management and termination
and selection governance

Value-chain Partner Negotiations Problem-tracking Relationship-

analysis form screening form matrix template evaluation form
Needs-analysis Technology and Needs-vs.-wants Trust-building Yearly status
checklist patent-domain checklist work sheet report
maps
Manufacturing- Alliance-contract Alliance-contact Termination
vs.-partnering Cultural-fit template list checklist
analysis evaluation form
Alliance-structure Alliance- Termination-
Due-diligence guidelines communication planning work
team infrastructure sheet
Alliance-metrics
framework

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WHEN DO PARTNERS FIT?

Firms must address a number of

issues to determine fit

Why?

Strategic fit?
Resource fit?
Cultural fit
Structural fit?
Other questions?

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