1. Chapter © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 International Strategic Alliances: Design and Management

2. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives Know the steps for implementation of successful international strategic alliances Understand how to link value chains in international strategic alliances Understand the importance of choosing the right partners for alliances Know the important characteristics to look for in potential alliance partners Know the steps for implementation of successful international strategic alliances Understand how to link value chains in international strategic alliances Understand the importance of choosing the right partners for alliances Know the important characteristics to look for in potential alliance partners

3. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives Know the differences between equity-based international joint ventures and other types of international cooperative alliances Know the basic components of an international strategic alliance contract Understand the control systems and management structures used in alliance organization Know the differences between equity-based international joint ventures and other types of international cooperative alliances Know the basic components of an international strategic alliance contract Understand the control systems and management structures used in alliance organization

4. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives Appreciate the unique problems in human resource management Realize the importance of interfirm commitment and trust Understand how companies assess the performance of their international strategic alliances Know when companies should continue or dissolve their international strategic alliances Appreciate the unique problems in human resource management Realize the importance of interfirm commitment and trust Understand how companies assess the performance of their international strategic alliances Know when companies should continue or dissolve their international strategic alliances

5. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Strategic Alliances Issues Increasingly popular strategy to develop new product and to expand into new markets Offer fast and flexible ways to gain complementary resources However, strategic alliances are inherently unstable Failure rate of 30% to 60% Even profitable alliances can be torn by conflict Increasingly popular strategy to develop new product and to expand into new markets Offer fast and flexible ways to gain complementary resources However, strategic alliances are inherently unstable Failure rate of 30% to 60% Even profitable alliances can be torn by conflict

6. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.1: Implementing a Strategic-Alliance Strategy

7. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Where to Link in the Value Chain Benefits of strategic alliances Gain access to local partner’s knowledge of market, meet government requirements, share risks, share technology, economies of scale, access lower cost raw materials or labor. Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks Depends on the objective that the firm seeks to achieve Benefits of strategic alliances Gain access to local partner’s knowledge of market, meet government requirements, share risks, share technology, economies of scale, access lower cost raw materials or labor. Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks Depends on the objective that the firm seeks to achieve

8. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.3: Value-Chain Links in US International Alliances

9. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Choosing a Partner: The Most Important Choice? Key criteria for picking an appropriate alliance partner - Seek strategic complementarity Understand objectives and seek complementarity - Pick a partner with complementary skills One that enhances but does not necessarily duplicate an alliance partner’s skills Key criteria for picking an appropriate alliance partner - Seek strategic complementarity Understand objectives and seek complementarity - Pick a partner with complementary skills One that enhances but does not necessarily duplicate an alliance partner’s skills

10. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Criteria for Choosing Partners - Seek out companies with compatible management styles - Seek a partner that will provide the “right” level of mutual dependency - Avoid the “anchor” partner Anchor partner: a partner that holds back the strategic alliance because it cannot or will not provide its share of the funding - Seek out companies with compatible management styles - Seek a partner that will provide the “right” level of mutual dependency - Avoid the “anchor” partner Anchor partner: a partner that holds back the strategic alliance because it cannot or will not provide its share of the funding

11. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Criteria for Choosing Partners (cont.) - Be cautious of the “elephant-and-ant” complex Occurs when two companies are greatly unequal in size - Assess operating-policy differences with potential partners - Assess the difficulty of cross-cultural communication with a likely partner - Be cautious of the “elephant-and-ant” complex Occurs when two companies are greatly unequal in size - Assess operating-policy differences with potential partners - Assess the difficulty of cross-cultural communication with a likely partner

12. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.4: International Strategic Alliances for Small Multinational Companies

13. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Choosing an Alliance Type Three main types of strategic alliances - Informal international cooperative alliances - Formal international cooperative alliances - International joint venture Three main types of strategic alliances - Informal international cooperative alliances - Formal international cooperative alliances - International joint venture

14. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Informal International Cooperative Alliance Non-legally binding agreements between companies from two or more countries to cooperate on any value chain activity - Agreements of any kind - Provide links anywhere on their value chains -Limited scope of involvement with other company -May resist revealing proprietary information Non-legally binding agreements between companies from two or more countries to cooperate on any value chain activity - Agreements of any kind - Provide links anywhere on their value chains -Limited scope of involvement with other company -May resist revealing proprietary information

15. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Formal Cooperative Alliances Non equity alliance with formal contracts specifying what each company must contribute to the relationship Calls for high degree of involvement among partners Formal contract specifying contribution of each Sharing of proprietary information Backing out of this alliance more difficult Popular in high tech industries because of high costs and risks Non equity alliance with formal contracts specifying what each company must contribute to the relationship Calls for high degree of involvement among partners Formal contract specifying contribution of each Sharing of proprietary information Backing out of this alliance more difficult Popular in high tech industries because of high costs and risks

16. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. International Joint Ventures (IJV) Separate legal entity owned by two or more parent companies from different countries Self standing legal entity Require formal agreements No need for equal ownership Equity based on cash or other contributions Ex.: One partner brings technology while other partner brings financial contributions Separate legal entity owned by two or more parent companies from different countries Self standing legal entity Require formal agreements No need for equal ownership Equity based on cash or other contributions Ex.: One partner brings technology while other partner brings financial contributions

17. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.5: Types of Alliances

18. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiating the Agreement IJV negotiation issues - equity contributions - management structure - “prenuptial” agreements regarding dissolution IJV negotiation issues - equity contributions - management structure - “prenuptial” agreements regarding dissolution

19. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.6: Selected Questions for a Strategic- Alliance Agreement

20. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Design in Strategic Alliances Design depends on the type of alliance chosen Informal ICAs often do not require formal design Formal ICAs may require separate organization unit housed in one company, with employees from both IJVs are separate legal entities, and require separate organization to carry out the alliances objectives Design depends on the type of alliance chosen Informal ICAs often do not require formal design Formal ICAs may require separate organization unit housed in one company, with employees from both IJVs are separate legal entities, and require separate organization to carry out the alliances objectives

21. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Decision-making Control Two areas of decision making - Operational decisions (daily running of organization) -Strategic decisions (for long term survival) -Majority owners do not necessarily control both In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management. In non equity ICAs, strategic decisions remain with parent companies Two areas of decision making - Operational decisions (daily running of organization) -Strategic decisions (for long term survival) -Majority owners do not necessarily control both In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management. In non equity ICAs, strategic decisions remain with parent companies

22. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Management Structures Dominant parent: controls or dominates strategic and operational decision making - Often has majority ownership - Treats the IJV as wholly owned subsidiary Shared management: both parent companies contribute approximately the same number of managers to the alliance organization Dominant parent: controls or dominates strategic and operational decision making - Often has majority ownership - Treats the IJV as wholly owned subsidiary Shared management: both parent companies contribute approximately the same number of managers to the alliance organization

23. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Management Structures Split control management control: partners usually share strategic decision making and split functional decision making Independent management structure: alliance managers act more like managers from a separate company - IJVs often recruit managers from outside the parent companies Split control management control: partners usually share strategic decision making and split functional decision making Independent management structure: alliance managers act more like managers from a separate company - IJVs often recruit managers from outside the parent companies

24. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Management Structures Rotating management: key positions rotate among partners - Popular in developing countries - Trains management talent and transfers expertise Rotating management: key positions rotate among partners - Popular in developing countries - Trains management talent and transfers expertise

25. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Choosing a Strategic Alliance Management Structure If partners have similar technologies/ know-how and contribute equally- Shared management structure preferred If partners have different technologies but contribute equally- Split management structure preferred If one partner has dominant equity position, or is more important to one partner - Dominant management structure more likely If partners have similar technologies/ know-how and contribute equally- Shared management structure preferred If partners have different technologies but contribute equally- Split management structure preferred If one partner has dominant equity position, or is more important to one partner - Dominant management structure more likely

26. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Choosing a Strategic Alliance Management Structure For joint ventures Mature joint ventures move to independent structures as the joint venture’s management team gains more expertise Joint ventures in countries with a high degree of government intervention produce IJVs with local partner dominance Independent management structures are more likely when the market is expanding, the venture does not require much capital, or the venture dose not require much R&D input from its parents For joint ventures Mature joint ventures move to independent structures as the joint venture’s management team gains more expertise Joint ventures in countries with a high degree of government intervention produce IJVs with local partner dominance Independent management structures are more likely when the market is expanding, the venture does not require much capital, or the venture dose not require much R&D input from its parents

27. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Commitment and Trust: Soft Side of Alliance Management Commitment: taking care of each other and putting forth extra effort to make the venture work - Attitudinal commitment: willingness to dedicate resources and efforts and face risks to make the alliance work If partners demonstrate these aspects of commitment, alliance will develop based on the principles of fair exchange. Fair Exchange- Occurs when partners believe that they receive benefits from the relationship equal to their contributions Commitment: taking care of each other and putting forth extra effort to make the venture work - Attitudinal commitment: willingness to dedicate resources and efforts and face risks to make the alliance work If partners demonstrate these aspects of commitment, alliance will develop based on the principles of fair exchange. Fair Exchange- Occurs when partners believe that they receive benefits from the relationship equal to their contributions

28. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Calculative Commitment Commitment also has a practical side: calculative commitment Alliance partner evaluations, expectations, and concerns regarding potential rewards from the relationship Businesses require tangible outcomes for a relationship to continue Commitment also has a practical side: calculative commitment Alliance partner evaluations, expectations, and concerns regarding potential rewards from the relationship Businesses require tangible outcomes for a relationship to continue

29. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trust Commitment and trust go hand in hand Credibility trust: confidence that the partner has the intent and ability to meet promised obligations and commitments Benevolent trust: confidence that the partner will behave with goodwill and with fair exchange Commitment and trust go hand in hand Credibility trust: confidence that the partner has the intent and ability to meet promised obligations and commitments Benevolent trust: confidence that the partner will behave with goodwill and with fair exchange

30. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.7: The Trust/Commitment Cycle

31. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why Is Trust Important? When there is no trust, partners hold back or take advantage of each other. Formal contracts can never identify all issues that will arise Technology and knowledge also include tacit elements that can only be shared when there is trust. When there is no trust, partners hold back or take advantage of each other. Formal contracts can never identify all issues that will arise Technology and knowledge also include tacit elements that can only be shared when there is trust.

32. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Building and Sustaining Trust and Commitment Pick your partner carefully Know each side’s strategic goals Seek win-win situations Go slowly Invest in cross-cultural training Invest in direct communication Find the right levels of trust and commitment Pick your partner carefully Know each side’s strategic goals Seek win-win situations Go slowly Invest in cross-cultural training Invest in direct communication Find the right levels of trust and commitment

33. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.8: The “Right” Levels of Trust and Commitment

34. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Assessing the Performance of an International Strategic Alliance If strategic intent is to produce immediate results, standard financial and efficiency measures can be used. Other strategic alliance provide indirect strategic benefits, and may never generate profits. IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning, and subjective measures like satisfaction and harmony If strategic intent is to produce immediate results, standard financial and efficiency measures can be used. Other strategic alliance provide indirect strategic benefits, and may never generate profits. IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning, and subjective measures like satisfaction and harmony

35. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.9: Selected Performance Criteria for Strategic Alliance

36. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. If the Alliance Does Not Work Negotiate an end or improve implementation Know when to quit/invest more Avoid “escalation of commitment” - Companies continue in an alliance longer than necessary because of past financial and emotional investments. Plan end at the beginning —“prenuptial agreements” Death not always failure, many alliances are short term Negotiate an end or improve implementation Know when to quit/invest more Avoid “escalation of commitment” - Companies continue in an alliance longer than necessary because of past financial and emotional investments. Plan end at the beginning —“prenuptial agreements” Death not always failure, many alliances are short term

37. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Dedicated Strategic Alliance Units Specialized units to manage alliance Provide processes and procedures that help managers identify the need for an alliance Evaluate partners Negotiate agreements Structure the alliance organizations Develop specific performance indicators Specialized units to manage alliance Provide processes and procedures that help managers identify the need for an alliance Evaluate partners Negotiate agreements Structure the alliance organizations Develop specific performance indicators

38. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Key Lessons from Cross- Border Alliances Understand and appreciate business and cultural differences Keep strong executive support Communicate Negotiate logic before control Commitment, trust and dedication Have “checkpoint” as the alliance is being implemented Review alliance’s viability Understand and appreciate business and cultural differences Keep strong executive support Communicate Negotiate logic before control Commitment, trust and dedication Have “checkpoint” as the alliance is being implemented Review alliance’s viability

39. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Conclusion Use of international strategic alliances continues to grow in international business Chapter provides solid understanding of the basics and how to manage strategic alliances Strategic alliances are prone to failure and great effort must be taken to make them successful Use of international strategic alliances continues to grow in international business Chapter provides solid understanding of the basics and how to manage strategic alliances Strategic alliances are prone to failure and great effort must be taken to make them successful