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Chapter 9 Understanding Alliances and Cooperative Strategies.

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Presentation on theme: "Chapter 9 Understanding Alliances and Cooperative Strategies."— Presentation transcript:

1 Chapter 9 Understanding Alliances and Cooperative Strategies

2 1 OBJECTIVES Describe why strategic alliances are important strategy vehicles 1 Describe the motivations behind alliances and show how they’ve changed over time 2 Explain the various forms and structures of strategic alliances 3 Explain alliances as both business ‑ level and corporate ‑ level strategy vehicles 4 Understand the characteristics of alliances in stable and dynamic competitive contexts 5 Summarize the criteria for successful alliances 6

3 2 AN ALLIANCE THAT FITS LIKE A GLOVE gloves Magla Mr. Clean Expand into European markets Differentiate its product P&G Extend the brand

4 CHARACTERISTICS OF STRATEGIC ALLIANCES 3 Alliances have a beginning and an end Alliances enable participants to share investments and rewards while reducing the risk or uncertainty each firm would otherwise face on its own Shared activities enable each organization to focus on its strengths; collectively firms combine resources and capabilities to create mutual competitive advantage Alliances foster economies of scale and scope between partners Benefits include: growth opportunities, more rapid time to market, opportunities to extend reach more cost effectively

5 4 BENEFITS OF STRATEGIC ALLIANCES Share investments and rewards Reduce risk Reduce uncertainty Focus resources on what each partner does best Foster economics of scale and scope Companies which participate most actively in alliances outperform the least active firms by 5 to 7 percent Why?

6 5 ALLIANCES ARE NOT STRATEGIES IN THEMSELVES An alliance is one vehicle for realizing a strategy Arenas Differentiators Economic Logic Staging Vehicles

7 6 THE USE OF ALLIANCES AS STRATEGIC VEHICLE HAS BALLOONED 19801995 2% 16% Alliances as percent of revenues As of 2007, large MNCs have over 20% of their total assets tied up in alliances

8 7 ALLIANCES OFFER MULTIPLE BENEFITS Joint Investment Increase returns by encouraging firms to make investments that they’d be otherwise unwilling to make (e.g., Wal-Mart supplier becomes willing to invest in new equipment) Complementary Resources Opportunity to create a stock of resources that is unavailable to competitors. This may create a shared advantage (e.g., Nestlé and Coke combined resources to offer canned tea and coffee products) Knowledge sharing Consistent information- sharing routines enhances learning (e.g., John Deere exchanges key employees with alliance partner Hitachi) Informal management Alliances may make it more cost effective to manage an activity than arm’s-length transactions or acquisitions

9 8 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

10 9 MOTIVATION FOR ALLIANCES HAS CHANGED OVER TIME Source: Adapted from J. Harbison and P. Pekar, Smart Alliances: A Practical Guide to Repeatable Success (San Francisco: Jossey- Bass, 1998) Product performance focus 1970s Produce with latest technology Market beyond national borders Sell product stressing performance Position focus 1980s Build industry stature Consolidate position Gain economies of scale and scope Learning and capabilities focus Post 2000 Ensure constant stream of new prospects with advancing technology Proactively maximize delivered value Optimize total cost by pro- duct/customer segment Gain advantage in res- ponse to changing condi- tions and responsibilities

11 10 THE WAL-MART – CIFRA ALLIANCE Cifra Knowledge of Wal-Mart’s business model Knowledge of the market in Mexico Wal-Mart

12 11 ALLIANCES CAN TAKE MANY FORMS Examples of cooperative arrangements in the continuum of organizational forms Permanent Keiretsu in Japan or Chaebols in South Korea Caltrex, which was jointly owned by Chevron and Texaco prior to their merger. Long-term OutsourcingMany technology standards consortia Examples include technology collaborations like the PowerPC chip between Motorola, IBM, and Apple Anheuser-Busch’s cross ownership with Kirin in Japan and Modelo in Mexico Stand-alone joint ventures like Dow- Corning. Transactional Purchase agreements that are renewable annually or every several years Agreements to distribute products or services Cross-licensing like that between Disney and Pixar or R&D partnerships like Millennium Pharma- ceuticals and some of its smaller partners Simple purchase order for commodities, some-times called a spot transaction Short-term agreements on functions like advertising or manufacturing to achieve efficiencies – for example, contract brewing of Miller Beer by Anheuser Busch Level of Commitment (Time) No Linkages Beyond Transaction Information Sharing Asset, Resource, and Capability Sharing Cross-Equity (partners take ownership in one party or each other) Shared Equity Source:Adapted from J. Harbison and P. Pekar, Smart Alliances: A Practical Guide to Repeatable Success (San Francisco: Jossey- Bass, 1998 Non-Equity Alliances Equity Alliances Financial Commitment

13 12 MULTI-PARTY ALLIANCES 2 party alliancesMultiparty alliances Example: SEMATECH, a consortium of semiconductor manufacturers

14 13 WHO MIGHT BECOME AN ALLIANCE PARTNER? New entrants Suppliers Rivals Customers Substitutes Any other organization could become an alliance partner Firms Complementors

15 14 2 TYPES OF BUSINESS STRATEGY ALLIANCES Examples Timkin and suppliers Mondavi and top foreign wine producers Vertical Partner with one or more suppliers or customers. Typically done to create more value for the end customer and to lower total production costs along the value chain 1 Partner with a rival or potential competitor to gain access to multiple segments of the industry and reduce risk, improve efficiency, or foster learning Horizontal2

16 15 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- tomers to think of them as more than simply a bearings supplier by employing sophisticated bundling processes to combine basic bearings with additional components in order to provide companies with exactly what they need. As a result, their bundled products are a source of reliability and cost reduction for their customers like Caterpillar. Also, Timken’s acquisitions don’t create value simply due to added product lines, but instead due to the greater value added by a more complex and tailored bundle Your Company Suppliers Most often ignored source of value creation Only recently are firms recognizing that working with suppliers is as important as listening to the customer….

17 16 RISKS ARISING FROM ALLIANCES Poor contract management Failure to make complementary resources available Misrepresentation of resources and capabilities Being held hostage through specific investments Misappropriation of resources and capabilities Misunderstanding a partner’s strategic intent

18 17 FIVE LEVERS FOR INCREASING THE PROBABILITY OF ALLIANCE SUCCESS Understand the determinants of trustBe able to manage knowledge and learningUnderstand alliance evolutionKnow how to measure alliance performanceCreate a dedicated alliance function

19 18 BENEFITS OF TRUST Knowledge Sharing Routines Dedicated Asset Investments Interfirm Trust TRUST is one party’s 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 Search costs Contracting costs Monitoring costs Enforcement costs AND Increases knowledge sharing Increases investments in dedicated assets Trust and Competitive Advantage

20 19 FOUR KEY FACTORS OF RELATIONAL QUALITY AFFECT TRUST Initial conditions Negotiation process Reciprocal experiences Outside behavior Trust What is the reputation of the partner outside the alliance? Do partners share information and disclose potential problems? What are the attitudes of partners prior to negotiation? How will relationships formed during negotiations impact the outcome?

21 CHALLENGES IN MEASURING ALLIANCE PERFORMANCE Alliances experience high failure rates – some lack a strong business case, or the fit between partners is inappropriate Lack of an effective measurement system also contributes to failures: People rely on intuition – problems which surface are more difficult to correct Input from corporate parents may be difficult to track and account for Partner firms have different information and reporting systems The value of outputs can be difficult to measure 20

22 21 COMPONENTS OF A DEDICATED ALLIANCE FUNCTION Alliance business case Partner assessment and selection Alliance negotiation and governance Alliance management Assessment and termination Value-chain analysis form Needs-analysis checklist Manufacturing- vs.-partnering analysis Partner screening form Technology and patent-domain maps Cultural-fit evaluation form Due-diligence team Negotiations matrix Needs-vs.-wants checklist Alliance-contract template Alliance-structure guidelines Alliance-metrics framework Problem-tracking template Trust-building work sheet Alliance-contact list Alliance- communication infrastructure Relationship- evaluation form Yearly status report Termination checklist Termination- planning work sheet

23 22 Strategic fit? Resource fit? Cultural fit Structural fit? Other questions? Why? WHEN DO PARTNERS FIT? Firms must address a number of issues to determine fit …

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