UNIT 3-Global Strategy Management

Strategic Alliances- Global and Local

•What Is a Strategic Alliance?
• A strategic alliance is an arrangement between two companies to undertake a mutually beneficial
project while each retains its independence.
• The agreement is less complex and less binding than a  Joint venture, in which two businesses pool
resources to create a separate business entity.
• A company may enter into a strategic alliance to expand into a new market, improve its product line, or
develop an edge over a competitor.
• The arrangement allows two businesses to work toward a common goal that will benefit both.
• The relationship may be short- or long-term and the agreement may be formal or informal.
• While the strategic alliance can be an informal alliance, the responsibilities of each member are clearly
defined. The needs and benefits gained by the partnered businesses will dictate how long the coalition is
in effect.
• Strategic alliances can come in many sizes and forms:
• An oil and natural gas company might form a strategic alliance with a research laboratory to develop
more commercially viable recovery processes.
• A clothing retailer might form a strategic alliance with a single manufacturer to ensure consistent quality
and sizing.
• A website could form a strategic alliance with an analytics company to improve its marketing efforts.
 
 Global Strategic Alliance
A global strategic alliance 
is usually established when a company wishes to edge into a related business or new
geographic market, particularly one where the government prohibits imports in order
to protect domestic industry.
Three Types of Global Strategic Alliances
1.Joint Venture.
A joint venture is a child company of two parent companies. Joint venture bolsters a core
business strategy, creates a competitive advantage, and abates competitors from moving in on a
marketplace. It allows individual companies to achieve more together than they would have on
their own.
2 Equity Strategic Alliance. An equity strategic alliance occurs when one company
purchases equity in another business (partial acquisition), or each business purchases equity in
each other (cross-equity transactions).
An example of an equity strategic alliance is Tesla’s relationship with Panasonic. Their relationship
began with a $30 million investment from Panasonic to accelerate battery technology for electric
vehicles and grew to include building a lithium-ion battery plant in Nevada.
3.Non – Equity Strategic Alliance. In a non-equity strategic alliance, organizations create
an agreement to share resources without creating a separate entity or sharing equity. Non-equity
alliances are often more loose and informal than a partnership involving equity. These make up
the vast majority of business alliances.
Frame Work for Strategic Alliances
 Strategic Alliance frame work Contd
Complementarities
,The first step is to engage in a broad search for possible partners that have essential resources. A more
rigorous search, particularly in an R&D setting, may include sources such as patents, publications, or
technologies that would help the firm unearth potential partners with complementarities that managers would
not otherwise find.
Goal Congruence
Managers sometimes make the mistake of assuming that if a partner has strong complementary resources,
they will have similar goals and benefit from an alliance. However, goal congruence is a very separate issue and
this may be the most important area in which to dig deeper . For example, consider a small biotech firm that
has developed a new compound and is considering licensing it to a larger Pharmaceutical firm that has
capabilities to take the compound through trials and bring it to market. The complementarities are quite
evident since it is clear what each party brings to the table. However, the larger firm will have a substantial
portfolio and could choose to stop development at a point that the small firm would want to continue
investing. It is essential to identify such possible challenges up front so they are specified in the contract and
remedies are spelled out.
Compatibility
Once it is clear that a potential partner has complementary resources and goals are congruent, one might think
that the deal is done. However, even two very willing partners might find it challenging to work together in the
face of organizational or cultural incompatibilities. Who is responsible for making decisions? it is critical to
identify these issues up front and develop strategies for how the firms can work together effectively.
Change
changes in complementarities or other factors, such as new opportunities, may shift goal congruence as well.
One might think that compatibility would not shift however, if there is a leadership change or a change in
organizational structure, this could put a once compatible partnership in jeopardy
.
Value potential of GSA
1.Unique business value in the form of lower costs, expert integration with existing production
systems and fast, easy startups or transitions.
2.Alliance partners are able to collaborate on bringing new production-enhancing technologies to the
market.
3.Economies of scale from successful strategic alliances
4.Changing the competitive environment through:
Creating technology standards (for example, Sony and Panasonic announce to work together to
produce a new-generation TV). This would help set a new standard in a competitive environment.
5.A strategic alliance enables your firm to:
Gain new client base and add competitive skills. ...
Enter new business territories. ...
Create different sources of additional income. ...
Level industry ups and downs. ...
Build valuable intellectual capital. ...
Affordable alternative to merger/acquisitions. ...
Reduce risk
6.Customers derive value from strategic alliances by having the convenience of a full-service one-stop
shop

 
 Partner Analysis in GSA

1. Financial fitness: Metrics such as sales revenues, cash flow, net income,

return on investment, and the expected net present value of an alliance
measure its financial fitness.
2. Strategic fitness: Nonfinancial metrics such as market share, new-product
launches, and customer loyalty can help executives measure the strategic
fitness of a deal; 
3. Operational fitness: The number of customers visited and staff members
recruited, the quality of products and manufacturing throughput are examples
of operational fitness
4. Relationship fitness: Questions about the cultural fit and trust between
partners, the speed and clarity of their decision making, the effectiveness of
their interventions when problems arise, and the adequacy with which they
define and deliver their contributions all fall under the heading of relationship
fitness
 Negotiation Process for GSA

The Negotiation Process

The design and negotiation of an alliance is both a critical and pivotal point in the alliance process.
The negotiation process involves
pre negotiation preparations such as putting together the negotiating team, conducting the
negotiation itself, and finalizing the ultimate agreement.
The agreement should address, among other things,
The mission of the alliance,
Structure and governance,
Ownership and control details,
Identification of performance objectives and milestones,
Conflict resolution procedures, and
Provision for termination of the partnership.
Finally, key to a successful alliance is a strong relationship between the partners supported by mutual
trust and commitment. A good contract is no substitute for a good relationship
Alliance negotiations should endeavor to accomplish three things:
1. Establish the potential partners’ mutual interest and test their strategic fit
2. Provide an opportunity to create a foundation of trust and to develop a problem-solving attitude
3. Establish a business and operational plan for the proposed enterprise
 Designing a GSA

Global strategic alliances present unique opportunities for organizations and their managers
to gain competitive advantages.
Global strategic alliances represent an important series of structural designs that enable
firms to enhance and redesign their information processing capabilities and scope of
organizational learning when competing in highly complex and diversified product-markets
Economic factors Influencing design of Strategic Alliances
Economies of Scale and Critical Mass
Learning New Skills and Technologies
Shaping of Industry Evolution
Risk Reduction
Cultural Factors
• Power Distance :Inequalities
• Uncertainty avoidance Acceptance
• Individualiam-collectivism
The Interaction of Economics and Values
 Designing GSA… Contd

• Organization structures for GSA

• Formalization. Formalization pertains to the amount of written
documentation in the organization
• Specialization. Specialization is the degree to which organizational tasks
are subdivided into separate jobs.
• Standardization. Standardization is the extent to which work activities are
performed in a uniform manner.
• Centralization. Centralization refers to the hierarchical level of authority
that has the authority to make a decision
Implementation of Global Strategic Alliances
 Global Multilateral Alliances
• Global multilateralism refers to an alliance of multiple
countries pursuing a common goal.
 ‘Alliance Constellation’ Management
A constellation is a set of firms, linked through alliances, that compete in a
specific business domain.
• Airbus competed with great success against Boeing. The Star Alliance with its dozen or so
members altered the nature of competition within the airline industry. Coca-Cola and Pepsi
both managed complex constellations of bottlers and distributors around the world. And
both Visa and MasterCard were successful organizations that governed hundreds of member
firms.
constellations can be used to pursue any number of strategic goals, including
• Linking Markets: Companies sometimes form constellations to connect local markets and, in
the process, provide customers with broader geographic coverage.
• Combining Skills: Companies also form constellations to assemble a diverse basket of skills,
sometimes to launch a totally new business.
• Building Momentum: Constellations are also used to create market momentum-that is, to
persuade customers, suppliers or competitors to adopt a new technology or business
protocol.
• Reducing Costs: On occasion, companies form constellations to reduce costs.
• Sharing Risk: Companies also assemble multiple partners to share large investments or risks.
• Alliance Constelletions must pay careful attention to:
• group size,
• membership mix,
• internal rivalry and
• governance.
5 key components for the Success of a Strategic
Alliance
 Criteria for Successful Alliances
Five strategic criteria in depth provide insight into how the
strategic value of alliances can be leveraged.
• Critical to a business objective. ... common type of alliance generates revenue
through a joint go-to-market approach, not every alliance that produces revenue is
strategic
• Competitive advantage and core competency. ...  to play a key role in developing or
protecting a firm’s competitive advantage or core competency. Learning alliances are
the most common form of competitive/competency strategic alliances
• Blocking a competitive threat. ... a strategic alliance with a volume partner in an
adjacent market can successfully block the competitive threat.(Cost and
Differentiation alliance partners)
• Future strategic options. ... From a longer-term perspective, an alliance that is not
fundamental to achieving a business objective today could become critical in the
future. Hence it is necessary to plan for Future eventualities and disruptive changes
• Risk mitigation. When an alliance is driven by intent to mitigate significant risk to an
underlying business objective, the nature of the risk and its potential impact on the
underlying business objective are the key determinants of whether or not it is truly
strategic (Multiple suppliers, Involvement in new product development projects)
10 Advantages of the Global Strategic Alliance
• Get instant market access, or at least speed your entry into a new market
• Exploit new opportunities to strengthen your position in a market where
you already have a foothold
• Increase sales
• Gain new skills and technology
• Develop new products at a profit
• Share fixed costs and resources
• Enlarge your distribution channels
• Broaden your business and political contact base
• Gain greater knowledge of international customs and culture
• Enhance your brand image in the world marketplace
 Global Mergers& Acquisions

• Global merger occurs when two businesses agree to join together under one
management beyond the boundaries of one specific country. The management may
include individuals from both companies .
Examples:, Bajaj KTM, Whirlpool Kelvinator,Vedanta Cairns, Tata Johnson, Tata Toyo, Mahindra
Sassoyong
• Acquisition occurs when one business gains control of another and becomes the
owner, which can be achieved by buying 51% or more of the shares.
Examples: Cadbury/Kraft (hostile takeover)ArcelorMittal(Hostile takeover), Vedanta
Cairns
Heineken/Femsa Cerveza (friendly takeover).  Spreads risk over different
countries/regions
• Reasons& Advantages
- Helps a business enter new markets/trading blocs
- Helps to acquire national/international brand names
- Secures resources/supplies
- Maintains or increases global competitiveness and reduce business risks
 Rationale behind Global Mergers and
Acquisitions
1.Gain scale and/or scope A good M&A strategy focused on gaining economies of scale or
economies of scope in turn helps in the growth of the company by leaps and bounds.
Companies get access to new markets, new customers, new products, new services and/or
new geographic regions. May also help the companies gain a stronger foothold in the
industry.
2.Growth
• Acquiring new products of the target company
• Accessing new markets
• Capturing additional market share
• Accessing new customer base
3.Synergies The term synergy can be thought of as leveraging the combined strengths of two
companies such that when two companies come together, their sum capabilities are more
than their individual capabilities. Synergy is the most common reason why companies indulge
in M&A.
i)Operating Synergies ii) Financial Synergies
4.Diversification Company can add on new products or take over the existing products of the
merging company and create profit.
 Contd…

5.Enhance research, development and management efficiency

To enhance research and development. Acquire newer technologies in order to
produce better products for the consumers.
6.Integrate To integrate a company throughout its value chain. Integration may be
done for capacity building, technology sharing, increasing market share and
competitiveness
i) Vertical Integration ii) Horizontal Integration
7.Tax issues A company with a large taxable income may look to merge with a
company which has large carry-forward tax losses. By opting for such a deal, the
acquiring company can lower its tax liabilities. However, such a merger will not be
approved by regulators unless the company succeeds in hiding this reason with other
strong motivations to merge.
8.Other motives
• National champions, international goals, unique capabilities
• Personal greed, Stop acquisition threats (White Knight Phenomenon)
 M&A/Acquisition-Performance
The ‘Integration Process’
The Challenges to success of M&A/Acquisition
• Companies often fail to realise the importance of the post merger stage, integration,
which can be detrimental to deals. While stakeholders involved in M&As will focus on
effectiveness, efficiency, growth potential and increased profitability, It is the human
factors which can affect M&A performance and the success of M&A transactions.
• The opportunity to merge or acquire is often presented to shareholders as a strategy for
wealth creation, but it is estimated that more than half of all M&As prove financially
unsuccessful  largely for lack of effective planning and integration 
• Human factors are about the impact that M&As have on people in the workplace; the
psychological difficulties that people experience, the culture clashes that can emerge
in organisations during the post-merger integration period,
• In the strategic planning phase, personnel should assess the corporate cultures of the
two organisations to identify areas of divergence which could hinder the integration
process. Communication methods, compensation policies, skills set, and company
goals need to be assessed. Before reaching the deals, companies should agree on what
elements of their respective cultures should be retained and how they will rectify
significant differences
 The ‘Integration Phase’ M&A/Acquisition

• M&A integration or Post-

merger integration (PMI) is the process of
bringing two or more companies together
with the aim of maximizing synergies to
ensure that the deal lives up to its predicted
value. The same process is sometimes referred
to as post acquisition integration
 The M&A Integration Contd…
The 9 Stage Process
Install:Integration management office (IMO). Integration leaders and the
Steering Committee and prepare
1. Vision for mergers & acquisitions as a major factor in integration
strategy
2. M&A integration program and Governance Mechanism
3. Functional charters and Day One vision
4 kick off the functional work streams
5. Operating model and organization design
6. Business and functional integration
7. Drive M&A integration execution and maintain momentum
8. M&A value creation and synergies
9. Change management and communications
 The Transition Phase
• Transition The transition phase is characterized by uncertainties and problems
emerging when the acquiring organization prepares for capability transfer and
value creation
• How do you approach the transition the phase? What do you focus on during the
transition?
• It is important for acquiring companies to identify factors for synergy creation
when finding acquisition objects. Regardless of what strategic objective an
organization has, the value from the acquisition depends on how well
managements handle the Merger and acquisition process
• Strategic and organizational fit
• Strategic fit is ”the degree to which the target firm augments or complements the
parent’s strategy and thus makes identifiable contributions to the financial and
nonfinancial goals of the parent
• Organizational fit to the consistency of administrative practices, leadership styles,
organizational structures and cultures
 M&A Consolidation Phase

• The consolidation phase is a stage in the industry life cycle where

competitors in the industry start to merge with one another. Companies will
seek to consolidate in order to gain a larger portion of overall market share
and to take advantage of synergies.
• Mergers and Acquisitions are one of the fastest ways to grow shareholders’
value. Though it delivers many benefits to an organization in respect to
market, revenue and cost, it also brings in many challenges related to
system, processes and people.
• Consolidation process in an amalgamation 0r M&A necessarily means
consolidation of the merged entity in following performance areas
• Business process -Optimisation ,ready for future business growth
• Human-Total integrations of HR processes as a single merged unit
• System/technology :Common Integrated Value chain with consolidated ERP
and other communication process