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Chapter 4 Global strategic Alliances 1. 2 Strategic alliances The combination of capabilities between 2 or more companies for: Market entry Resources.

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Presentation on theme: "Chapter 4 Global strategic Alliances 1. 2 Strategic alliances The combination of capabilities between 2 or more companies for: Market entry Resources."— Presentation transcript:

1 Chapter 4 Global strategic Alliances 1

2 2 Strategic alliances The combination of capabilities between 2 or more companies for: Market entry Resources acquisitions Global competitiveness

3 3 Strategic alliances cont. Partners join together to a gain a mutual learning from each other and to co-develop new knowledge. E.g. Nummi Partners combine their respective unique capabilities that complement each other to create a business, to develop new products or technology or to reinforce their competitiveness through specialization. E.g. Renault-Nissan COSPECIALIZATION COALITION Partners group together to gain global access or to establish a common standard. Example: Airlines LEARNING

4 4 Scope of the alliance Purpose of the alliance Globally based Country based Market Resources Coalition Co-specialisation E.g. Airlines Renault-Nissan Consortia Learning E.g. GSM Joint venture for market entry Typical in emerging countries Joint venture for resource exploitation E.g. Mining, agriculture based, oil and gas International strategic alliances

5 5 Strategic value Defining the scope Strategic objectives Value creation potential Partners’ fit Strategic fit Capabilities fit Cultural fit Organizational fit Negotiation and design Operational scope Interface Governance Implementation Integration Co-operation Evolution What are the benefits of the alliance? What do we get from it? How workable is the relationship? How do we organize and manage? How do we work? Framework for strategic alliances

6 6 Defining the scope of the alliance Strategic scope What is the alliance striving at? Economic scope What each partners contribute and get Operational scope What the alliance is doing CoalitionCo-specialisationLearning Increasing reach to global market Complementing capabilities for new business or competitiveness Learning from and in the alliance Enlarged revenues Cost sharing Generally very limited to few elements of the value chain (e.g. code sharing) Specialisation leads to faster and cheaper development cost sharing The alliance provides the interface for co-ordination or assembly of partners’ contribution The alliance is a platform for transfer of knowledge and learning together Acquisition and/or transfer of know-how E.g. Star alliance; VisaE.g. Fuji Xerox; Renault-NissanE.g. Nummi ( GM-Toyota)

7 7 Value creation in strategic alliances Value of the parent A Value of parent B Royalties Dividends Management fees Transfer pricing Learning from A Cost saving due to combined operations Increased revenues due to joint marketing and complementary products Increased profitability from joint innovation DIRECT VALUE Value coming from the alliance SYNERGY VALUE Value coming from joint operations Learning from B Learning from A Learning from B

8 8 Partner analysis

9 9 How important and urgent is the business of the alliance for partners? - Restructuring - Competitiveness enhancing (cost, differentiation) - Global reach - New business development To what extent do partners need to achieve their objectives? (Degree of capabilities autonomy)? - Can partners achieve objectives alone - Timing pressure - Resources and competencies CRITICALITY DIFFERENCES IN EXPECTATIONS How different are the expectations? To what extent are any differences compatible? Determines the degree of commitment to the alliance Strategic fit

10 10 Criticality and commitment in alliances Commitment is a function of… Strategic importance of the project Need of a partner High Low High commitment Power battle Lack of support Low commitment AA = High commitment BB = No partnership CC = Low commitment DD = Very low commitment AB = Potential conflicts AC = Potential conflicts AD = High level of conflict AB CD

11 11 Differences in expectations Market development of existing products New business Product complements Cost reduction Learning Cost reduction Learning Product complements New business Market development of existing products If no territorial Overlap FitPossible fit Problematic fit A B

12 12 Capabilities fit Partner APartner B Products Resources Process Knowledge Assets Overlaps Gaps How to attribute? How to develop? What are the relative competitive strengths of partners ? To what extent does the assembling of partners create a robust business model? TECHNOLOGYSOURCINGPRODUCTIONMARKETING Who contributes to what ?

13 13 Cultural fit What to anticipate? How to deal with it? Views about business objectives: o Growth o Profitability o Risks o Long/short term o Shareholder value o Stakeholders Views about competitive approaches: o Customer orientation o Pricing o Importance of quality o Importance of technology o Ethics Ways to manage: o Leadership style o Trust/control o Motivating factors Communication: o Openness/secrecy o Formal/informal o Importance of personal relationships PARTNER APARTNER B

14 14 Organisational fit What to anticipate? How to deal with it? PARTNER APARTNER B Structural differences: o Centralisation/decentralization o Form of organisation Systems and processes: o Importance of formal systems o Sophistication of financial controls o Quality of IT o Importance of team work/ committees Performance: o Performance based rewards o Career mobility o Quality of Management

15 15 Organisational fit cont. BIGGER, MORE BUREAUCRATIC PARTNER (A) SMALLER, MORE ENTREPRENEURIAL PARTNER (B)  Formal, explicit decisions  Informal, tacit, shared decisions  Periodic, scheduled plans  Continuous, unscheduled planning  Low contextual embeddedness  High contextual embeddedness  Slow, sequential inputs to decisions  Fast, simultaneous inputs to decisions  Analytical choices  Intuitive judgments  Aggregation, consolidation of data  Real-time immersion in data BIGGER, MORE BUREAUCRATIC PARTNER AS SEEN BY THE SMALLER ENTREPRENEURIAL SMALLER, MORE ENTREPRENEAURIAL PARTNER AS SEEN BY THE LARGER FIRM  Ponderous, slow, and stupid  A bunch of cowboys  Preoccupied with reviewing everything to death  Shooting from the hip  Awash in mindless procedures  Disorganized, slippery  Risk averse, procrastinating  Going off in all directions, unfocused  Characterized by paralysis through analysis  Characterized by sloppy work  Divided, fragmented  Exclusive, clannish, hostile

16 16 Overall assessment

17 17

18 18 Design STRUCTURE  Role of the alliance structure: broker/operator INTERFACE  How value is distributed among partners  Degree of task integration  People appointment (alliance management) GOVERNANCE  Legal structure  Executive authority/ supervisory authority  Communication/information/reporting  Conflict resolution

19 19 Four structural designs in alliances

20 20 The alliance designed Project Management: the GE/SNECMA design

21 21 The alliance designed as a self-contained JV: the Fuji Xerox case

22 22 The alliance designed as a joint committee: the AlZA-Cibe Geigy case ALZA CIBA 53% shareholding 80% voting right Exclusive right to ADDS Right to produce Right to market Audit committee Joint research conference Joint research board Scientific liaison Scientific liaison Information 5 Board

23 23 The alliance designed as a transfer JV: the case of NUMMI GM TOYOTA FREEMONT PLANT 2500 GM unionized workers GM engineers (25) Management Lean manufacturing Know-how Joint venture 50%

24 24 How to solve valuation issues Clearly define alliance scope and trade terms between partners Create separate economic entity Seek external benchmarks Plan for renegotiation

25 25 Distribution of value Profit sharing vs revenue sharing Transfer pricing Tasks definition and costs allocation

26 26 Partner APartner B Cost sharing Alliance revenues 1000 Alliance direct costs (100) Net revenues Revenue sharing Partner A allocated costs Partner B allocated costs (Ca) (Cb) Net profit 900-Ca-Cb Partner APartner B (900-Ca-Cb)/2 Profit sharing vs revenue sharing Partner APartner B

27 27 Task integration Limited integration PLUG-IN E.g. GE/SNECMA High integration E.g.Fuji and Xerox Requires a lot of operational interactions Limited interactions

28 28 The 8 criteria for successful alliances (the 8 I’s) INDIVIDUAL EXCELLENCE IMPORTANCE INTERDEPENDENCE INVESTMENT INFORMATION INTEGRATION INSTITUTIONALIZATION INTEGRITY - Both partners are strong - Have something to contribute - Positive intent - Fits strategy of both partners - Long term view - Partners need each other - Complementing capabilities - Nobody can do it alone - Partner shows commitment - Investment/re-investment - Reasonable open communication - Sharing of operational information - Shared operating procedures - Numerous connections - Teachers/learners - Clear responsibilities - Clear decision processes - No abuse - Willingness to enhance trust

29 29 GE/SNECMA: the ingredients of success Strong mutual trust at the top Near perfect complementarity - little overlap (the possibility to isolate each partner’s contribution from other partner’s interference) Revenue sharing eliminates issues of transfer pricing Willingness of partners to learn and adapt - cooperation over time A small structure is in charge of the whole project (ownership) and manages the relationships between partners Mutual respect Successful products

30 30 Firm orders: 100+ passenger aircraft

31 31 A clear definition of responsibilities encompasses all management, manufacturing, marketing and support functions Environment-friendly technology Manufacturer position in the industry Committed, worldwide product support The two parent companies had a common goal and no competing products By limiting the agreement to two partners, the operational structure maintained a simplicity required for efficient decision making GE and Snecma participate equally in all operational activities Advantages of the CFM partnership


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