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Strategic Alliance Cooperation and competition among firms Prof. Alessandro Arrighetti Lentini Giusy Erika Martorana Giuseppe Reale Simone Luca.

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Presentation on theme: "Strategic Alliance Cooperation and competition among firms Prof. Alessandro Arrighetti Lentini Giusy Erika Martorana Giuseppe Reale Simone Luca."— Presentation transcript:

1 Strategic Alliance Cooperation and competition among firms Prof. Alessandro Arrighetti Lentini Giusy Erika Martorana Giuseppe Reale Simone Luca

2 We are going to talk about … What is a strategic Alliance? Types of Strategic Alliances Reasons to make a Strategic Alliance Factors of Risks/Success Trends The italian case

3 Strategic Alliance The greater change in corporare culture Conventional definition Other definition oriented about the aimed and role, or oriented about duration and upon particular activities

4 Strategic alliance Much of the discussion regarding allaiances has typically focused on alliances between two company, but in the last years there was a trend toward multi- company alliances As an example a six-company strategic alliance was formed between Apple- Sony – Motorola-Philips – AT&T – Matsushita Anyway in general we can say that companies are forming alliance to obtain technology, to gain access to specific market, to reduce financial risks, to achieve or ensure competitive advantages

5 Strategic alliance Factors that must be considered in order to achieve and enhance the strategic alliance over the time

6 Types of alliances An Alliance can take many form, but every alliance is different and has its own story, that adapt it to specific situation. We want to summarize the form of alliance in 4 examples: Transaction : this includes Network, Temporary alliance. Relationship based on particular contract: Licensing, Franchising Relationship based on sharing resources: Consortia, Joint ventures.. Form of integration: merger and acquisition

7 Types of alliances There is a debate about what really is a strategic alliance or a simply alliance or partnership Are not considered really strategic alliance merger and acquisition Also the transaction are not considered strategic alliance

8 Types of alliances While the alliance is strategic when : Duration is over 5 years; There is contribution of the best resources and capabilities; Shared objectives and strategies; Create a competitive advantage over rivals; Willingness to share the "core competencies"

9 Joint Ventures In this category includes joint ventures,which is the most common form of strategic alliance. A business arrangement in which two or more parties agree to pool their resources for the purpose of make a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants' other business interests.

10 Why a company looks for a strategic alliance? 1. Access to specific markets; 2. Acquiring means of distribution; 3. Gaining access to new technology, and converging technology; 4. Learning and internalization of tacit, collective and embedded skills; 5. Obtaining economies of scale; 6. Achieving vertical integration; 7. Diversifying into new businesses; 8. Reducing financial risk; 9. Cost sharing, pooling of resources; 10. Developing products, technologies, resources; 11. Risk reduction and risk diversification; 12. Developing technical standards; 13. Overcoming barriers.

11 Obtain new technologies : Do you remember the CD-R? In the 80s the development of the CD would have allowed the creation of a disk with a capacity of more than 600 MB of data. The initial project born thanks to the cooperation between Philips and DuPont who later decide to retire due to the huge initially investment and Philips has to look for another partner to develop the project. The compact disc was designed with a global standard by virtue of a series of alliances: 1- between Philips and Sony which not only contributed to the planning of the cd and sound reproduction, but with its presence in the alliance dissuaded other Japanese producers from seeking alternative solutions; 2- to spread the usage of the cd and the standard, Philips ceded the production licensing in exchange of modest royalties; 3- Philips and DuPont made a joint venture to produce and sell optics components for the audio-video market; 4- Philips and Sony jointly launched the mini-CD. Enter into an alliance can be the best way to establish standard of technology in the sector especially for those companies who can not provide the technology that they need to compete on the market on their own.

12 Obtaining economies of scale: Dividing fixed cost of production and distribution, seeking to improve the volume. The case of Nestlé-Haagen Dazs Häagen-Dazs is an ice cream brand that has franchises throughout the United States and many other countries around the world. In 1999 Nestlé announced an alliance for production and marketing with Haagen Dazs. «We belive we can grow better togther than separately» said a Haagen Dazs spokenperson Nestlé would contribute its frozen dessert technology, while Haagen Dazs would contribute to distribution through the network of point of sale with its name.

13 «Anticipating a play» In many sectors, the first company to enter the market with a new product achieves advantages that are difficult for the competition to overcome. In 2000 Alcatel and Fujitsu made a joint venture in order to develop 3G systems, with particular focus on producing network systems. Fujitsu get an advantageous position and dominates the local cellular phones market and Alcatel plans to use its experience in Europe. The strategic alliance can have the scope of utilizing the pioneering experience of one of the partners. If this experience is brought to the alliance, it confers the advantages on the other partners as well.

14 «To go fast, go alone. To go far, go together» African proverb While many organizations often rush to jump on the bandwagon of strategic alliances, few succed. Today the true failure rate of alliances generally is estimated probably in the range of 25-30%. In earlier reports estimates of up to 70% (kaimbach and Roussel,1999) have been made, which is quite strange considering how much organizations are investing in alliances. Risks and problems facing strategic alliances Clash of cultures and «incompatible personal chemistry»; Lack of trust; Lack of clear goals and objective; Lack of coordination between management teams; Differences in operating procedures and attitudes among partners; Relational risk; Performance risk;

15 Clash of cultures and «incompatible personal chemistry»; Lack of trust; Lack of clear goals and objective; Lack of coordination between management teams; Differences in operating procedures and attitudes among partners; Relational risk; Performance risk; Cultural clash is probably one of the biggest problems that corporations in alliances face today. «This cultural problems consist of language, ego and different attitudes to business » Kilburn 1999 US companies tend to evaluate performance on the basis of profit, market share and specific financial benefits. Japanese companies tend to evaluate primarly on how an operation helps build its strategic position, particularly by improving its skills.

16 Clash of cultures and «incompatible personal chemistry»; Lack of trust; Lack of clear goals and objective; Lack of coordination between management teams; Differences in operating procedures and attitudes among partners; Relational risk; Performance risk; What will happen if one company is successful and the other experiences a failure? Building trust is the most important and most difficult aspect of a successful alliance. Alliance need to be formed to enhance trust between individuals. In today business world, many strategiec alliances are formed for the wrong reasons. Many company enter into alliances to combat industry competitors. Corporate manangement feels this type of action will deter competitors from focusing on their company. On the contrary the alliance may put the companies in the spotlight causing more competition.

17 Clash of cultures and «incompatible personal chemistry»; Lack of trust; Lack of clear goals and objective; Lack of coordination between management teams; Differences in operating procedures and attitudes among partners; Relational risk; Performance risk; Action taken by subordinates that are not congruent with top-level management can prove particularly disruptive, especially in instances where companies remain competitors in spite of their strategic alliance.

18 Clash of cultures and «incompatible personal chemistry»; Lack of trust; Lack of clear goals and objective; Lack of coordination between management teams; Differences in operating procedures and attitudes among partners; Relational risk; Performance risk; Relational risk is concerned with the probability that partner firms lack commitment to the alliance and that their possible opportunistic behavior could undermine the prospect of an alliance. Liz Claiborne (now Fifth & Pacific Companies Inc. is a fashion company founded in 1976 that designs and markets a wide range of women's and men's apparel, accessories and fragrance products.) and Avon where partners in a joint venture. After Avon acquired Parfum Stern, a high-end cosmetics firm, Liz Claiborne regarded Avon as a direct competitor and their relationship began to deteriorate and the joint venture was acquired by Liz Claiborne. Partner firms are more interested in pursuing their self interest than the common interest of the alliance.

19 Clash of cultures and «incompatible personal chemistry»; Lack of trust; Lack of clear goals and objective; Lack of coordination between management teams; Differences in operating procedures and attitudes among partners; Relational risk; Performance risk; Performance risk is the probability that an alliance may fail even when partner firms commit themselves fully to the alliance. The source of performance risk include: environmental factors such as government policy changes, war and economic recession; market factors such as competition and demand fluctuations; Internal factors such a lack of competence in critical areas;

20 Success factors for strategic alliances What does it take for strategic alliances to succeed? According to Technology Associates and Alliances

21 Senior management commitment Similarity of management philosophies Partner selection Effective and strong management team Frequent performance feedback Clearly defined,shared goals and objectives Communication between partners The commitment of the senior management of all companies involved in a strategic alliance is a key factor in the alliance’s success. The full commitment of senior management is important to implement, monitor, manage the alliance both to receive resources the alliance need and to convince others of the importance of the alliance and demostrate a strong leadership role. Ohmae,(Japanese organizational theorist,1992) said that « when Americans and European come to Japan, they all want 51 percent. That’s the magic number because it ensures majority position and control over personnel, brand decisions and investment choices. But good partnership, like good marriages, doesn not work on the basis of ownership or control. It takes effort and commitment from both sides if either is to realize the hoped-for benefits »

22 Senior management commitment Partner selection Similarity of management philosophies Effective and strong management team Frequent performance feedback Clearly defined,shared goals and objectives Communication between partners The best way to have success in an alliance is to select an appropriate partner and itemizing the «rules» of the alliance. Yet done correctely, they help ensure a higher quality, longer lasting relationship. Companies, to best succed, form partnership with those companies whose management philosophies, strategies and ideas are most similar to their own. The relatioship between KLM and Northwest Airlines has been described by KLM president as a classic clash of culture, a collision of two diametrically opposed philosophies. The European way of KLM is based on the belief that investments should be prudent and long-term while the US way of Northwest is based on the belief that sharp deal-making including leveraged buy-outs can boost stock prices and work well with a sound operating strategy. The philosophical difference were due to cultural differences. In order to ensure the best chance of success companies should seek partners who do have similar philosophies.

23 Senior management commitment Similarity of management philosophies Partner selection Effective and strong management team Frequent performance feedback Clearly defined,shared goals and objectives Communication between partners A Mckinsey study found that 50% of allinaces fail due to poor management. As alliance complexity rises, the challenge become more acute and difficult to drive. The best strategy to grow via alliances may be to move slowly, starting from simple alliances and then move towards more complex ones as alliance experience and talent is acquired. In order for strategic alliances to succeed, their performance must be continually assessed and evaluate against the short and long-term goals and objective for the alliance in order to mantain high level of commitment, interdependence and trust, communication quality and information sharing.

24 Senior management commitment Similarity of management philosophies Partner selection Effective and strong management team Frequent performance feedback Clearly defined,shared goals and objectives Communication between partners The airlane industry has seen many obstacle in recent years. Simon Heale, managing director of Pacific Airways, said that alliances will not be advantageous if the partners do not have a clear focus on the goals. He also mentioned that an airlane may not be able to keep standards consistent when it has a franchisee alliance. Consumer will associate the small franchisee with the international airlane and expect the same standars. When the standards are not delivered this leads to negative repercussions for the brand. It has been increasingly difficult to form a successful alliance in the airline industry.

25 Senior management commitment Similarity of management philosophies Partner selection Effective and strong management team Frequent performance feedback Clearly defined,shared goals and objectives Communication between partners Communication is an essential attribute for the alliance to be successfull. Without effective communication between partners the alliance will dissolve as a result of doubt and mistrust. The two airline company, KLM and Northwest airlane, lack of communication, together with clash of culture, generated bad blood and mistrust.

26 Why alliances are more common now? Strategic alliances have evolved during the course of the years The drive to create alliances has evolved quickly over the last few decades

27 Evolution of factors leading to alliances

28 The future of Strategic alliances «It is easy to predict that various factors will contribute to the diffusion of alliances in the coming years as well» (Anna Claudia Pellicelli - Professor of Strategic Marketing – University of Torino ) Acceleration of the rhythms of technological innovation and shortening of product life cycles. The convergence of technologies and the “permeability” of borders between sectors and between markets. Progress in telecommunications. Strong improvements in R&D costs, new product launches, tools and systems. The collapse of many barriers to competition, on account of deregulation, privatization and globalization. The interest of governments in attracting foreign capital and technologies without ceding control of local companies to foreigners

29 The trends «More than corporate alliances have been formed worldwide over the past two years and the number of alliances in the USA has grown by 25% each year since 1987». (Farris, 1999).

30 R&D Partnerships in Pharmaceutical Biotechnology ( )

31 R&D Partnerships in Pharmaceutical Biotechnology ( )

32 R&D Partnerships in Pharmaceutical Biotechnology ( )

33 R&D Partnerships in Pharmaceutical Biotechnology ( )

34 R&D Partnerships in Pharmaceutical Biotechnology ( )

35 The Italian case Antonio Majocchi is an Associate Professor of International Business and Management at the Faculty of Economics, University of Pavia.

36 International agreements developed by Italian firms in the period. Database of 1068 agreements joint ventures 491 – other agreements

37 Foreign firms participated by Italian firms. Production sector

38 Types of alliances The joint venture covers approximately 58% of our sample; Italian companies with over 500 employees cover 79% of the sample; Medium-sized enterprises account for 18%; Small businesses - fewer than 50 employees - only reach the 3% of the case analyzed.

39 Development of alliances during the period analyzed

40 Geographical distribution

41 Why? The location is a factor which impacts on the choices of the mode of entry. China: external constraints preference USA: absence of constraints preference

42 Sectoral distribution

43 Other Services UNCTAD, s 40% FDI UNCTAD, 2010 Today 60% FDI

44 The aims

45 Alliances aimed at achieving the objectives of reduction of risk; Alliances designed to achieve economies of scale through the sharing of resources and activities ; Alliances to promote the exchange of knowledge in general and the technological knowledge in particular; "Strategic " alliances to improve the competitive position in the market; Alliances aimed at overcoming the government barriers to trade by partnering with local businesses; Alliances to promote the international expansion of firms with poor or limited international experience ; Alliances such as " almost vertical integration " and characterized by complementarity of pooled resources.

46 Conclusions Joint venture and other agreements are largely used by italian firms BUT Are analyzed big firms

47 Conclusions The High-research intensity sectors cover JUST the 1%.

48 Thank you for attention Martorana Giuseppe Lentini Giusy Erika Reale Simone Luca

49 Sources: rategic%20alliances.pdf /1-2010_wp_majocchi.pdf EADI Workshop “Clusters and global value chains in the north and the third world” Facoltà di Economia Strategic Alliances Anna Claudia Pellicelli


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