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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 6: Engaging in Cross- Border Collaboration Managing.

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Presentation on theme: "Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 6: Engaging in Cross- Border Collaboration Managing."— Presentation transcript:

1 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 6: Engaging in Cross- Border Collaboration Managing across Corporate Boundaries and Reading 6-1: The Design and Management of International Joint Ventures

2 What is a Strategic Alliance? A formal and mutually agreed commercial collaboration between companies The partners pool, exchange or integrate specific business resources Yet they remain separate businesses, making alliances distinct from mergers and acquisitions 6-2

3 Strategic Alliances One of innumerable forms of commercial interaction One of four forms/modes of investment 6-3

4 6-4 Range of Strategic Alliances Joint Venture (Equity Participation) Co-production/ Buyback R & D Consortia Cross Licensing Franchising Patent Licensing Cooperation Agreement High Low CompetitionCooperation Level of Interaction Type of Arrangement Strategic Alliances

5 6-5 In the 1960s and 1970s Alliances were Primarily used in Peripheral Markets and Technologies Peripheral Critical Markets PeripheralCritical Technologies Alliance Alliance Frontier

6 6-6 In the 1980s the Alliance Frontier Moved to Encompass More Important Markets and Technologies Alliance Peripheral Critical Markets PeripheralCritical Technologies Alliance Frontier Examples Ford - Mazda Philips - Siemens Rolls Royce + Japanese

7 6-7 In the 1990s New Alliance Frontiers were Crossed Alliance Equity Non Equity Duration of Agreement Long or UnspecifiedShort Ownership Alliance Frontier

8 6-8 And Now We Are In The Age of International + Alliance Capitalism… Strategic Alliance Emphasis Geographic Scope Equity JV Non-Equity Do It Yourself Domestic Regional International TIME

9 6-9 …Where Alliances are Occurring Between Entrepreneurial Start-ups and Large Firms, and Speed of Establishment is Increasing Entrepreneurial Firms Large Firms Time-Frame YearsMonths Linkages Between Alliance Frontier

10 Popular View Says JVs are: A transitional organization form. Less profitable. Impossible to manage. A sure way to lose ones technology. Only undertaken as a last resort. 6-10

11 Why Strategic Alliances 1-11 Technology Exchange Global Competition Industry Convergence Economies of Scale Reduction of Risk Alliances as an Alternative to Mergers

12 Objective Reality Average age of international JVs nearly 10 years (similar to greenfield startups; longer than acquisitions). Profitability identical with other organizational alternatives. Managing has become easier, so usage up. 40% of all investments in Asia Pacific are JVs. 6-12

13 Objective Reality (contd) Some companies which possess strong technology often prefer to use JVs. (i.e., Japanese firms with a Kyousei - group coordination - philosophy) The days of government regulation forcing the use of JVs are behind us. 6-13

14 6-14 Effect of Foreign Equity Holding on Subsidiary Mortality Risk? Stability Similar to Wholly-owned Subsidiaries Except with Small Equity Holdings 1:1 = equivalent to wholly owned subsidiary Source: Dhanaraj, Charles and Paul W. Beamish, 2004. Effect of Equity Ownership on the Survival of International Joint Ventures, Strategic Management Journal, 25(3): 295-305. Mortality Risk 4:1 3:1 2:1 1:1 0 Foreign equity in the subsidiary (%) 020408060100

15 Strategic Alliance Advantages and Disadvantages 1-15 On the PLUS side…. Reduce costs & risks Gain access to complimentary assets and new markets Opportunities to learn from partner Possibilities to use alliances and networks as an operational (real) option rather than a financial option. On the DOWN side… Risk of choosing the wrong partner Costs of negotiation, coordination Partner opportunism Learning race (tacit vs. explicit knowledge)

16 Selection: Resource Based Considerations 1-16 VALUE: The creation of value means generating economies of scale for cost reduction, or complimentary skills for tapping new opportunities. Alliances might reduce costs, risks and uncertainties. Alliances allow partners to tap into complimentary assets. Alliances facilitate opportunities to learn. RARITY: Good alliances represent unique situations. Capability rarity. Partner rarity & First Mover Advantage IMITIBILITY: The alliances benefits to the partners should be hard for others to imitate. At the firm level (ex. McDonalds in Moscow). At the alliance level. ORGANIZATION: Do the alliance partners provide resources to manage the partnership?

17 Joint Venture Checklist Test the strategic logic. Do you really need a partner? For how long? Does your partner? How big is the payoff for both parties? How likely is success? Is a joint venture the best option? Ensure congruent performance measures exist. 6-17

18 Joint Venture Checklist (contd) Partnership and fit. Does the partner share your objectives for the venture? Does the partner have the necessary skills and resources? Will you get access to them? Will you be compatible? Can you arrange an engagement period? Is there a comfort versus competence trade-off? 6-18

19 6-19 What Do You Want From Your Partner?

20 6-20 Partner Selection: Comfort vs. Competence LowerHigher Partner Competence Lower Higher Partner Comfort

21 Joint Venture Checklist (contd) Shape and design. Define the ventures scope of activity and its strategic freedom vis-à-vis its parents. Lay out each parents duties and payoffs to create a win-win situation. Ensure that there are comparable contributions over time. Establish the managerial role of each partner. 6-21

22 6-22 Scope of Activity

23 Control in Joint Ventures One parent dominates the ventures decision making (…but is this a joint venture?) Parents are both involved in decision making shared split 6-23 Two types:

24 6-24 Shared Control JV Board of Directors A B Parent AParent B R&DOPSFINMKT

25 6-25 Split Control JV Board of Directors A B Parent AParent B R&DOPSFINMKT

26 Limiting Opportunism: Contracts Vs. Trust 1-26 Contractual controls limit opportunism by specifying the exact role and performance criteria of the strategic partners. GOOD FOR SITUATIONS REQUIRING ECONOMIES OF SCALE. Trust takes longer, relationships and informal interdependence. GOOD FOR SITUATIONS REQUIRING FLEXIBILITY AND TAKING ADVANTAGE OF UNFOLDING OPPORTUNITIES.

27 Joint Venture Checklist (contd) Doing the deal. How much paperwork is enough? Trust versus legal considerations? Agree on an endgame. 6-27

28 Joint Venture Checklist (contd) Making the venture work. Give the venture continuing top management attention. Manage cultural differences. Watch out for inequities. Be flexible. 6-28

29 6-29 In Summary, a True Alliance Differs from a Pseudo Alliance The True Alliance The Pseudo Alliance Planned level of parent input and involvement ContinuingOne-time Distribution of risks/rewards Roughly evenUneven Parent attitude toward the JV A unique organization with unique needs One more subsidiary The formal agreement Flexible guideline Frequently referenced rulebook Performance objectives Clearly specified and congruent Partially overlapping/ ambiguous

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