1. Chapter 8 International Strategic Alliances: Design and Management

2. Strategic Alliances Issues Popular strategy to develop new product and to expand into new markets However, strategic alliances are very risky and unstable Failure rate of 30% to 60% Popular strategy to develop new product and to expand into new markets However, strategic alliances are very risky and unstable Failure rate of 30% to 60%

3. Where to Link in the Value Chain Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks In operations alliances MNC combine manufacturing activities to reach economies of scale Operations/marketing alliances provide access to markets Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks In operations alliances MNC combine manufacturing activities to reach economies of scale Operations/marketing alliances provide access to markets

4. Choosing a Partner: The Most Important Choice? A key criteria is strategic complementarity Pick a partner with complementary skills that enhances but does not necessarily duplicate an alliance partner’s skills Seek out compatible management styles Seek a partner that will provide the “right” level of mutual dependency A key criteria is strategic complementarity Pick a partner with complementary skills that enhances but does not necessarily duplicate an alliance partner’s skills Seek out compatible management styles Seek a partner that will provide the “right” level of mutual dependency

5. Criteria for Choosing Partners Avoid the “anchor” partner – one that holds back the strategic alliance because it cannot or will not provide its share of the funding Be cautious of the “elephant-and-ant” complex that occurs when two companies are greatly unequal in size Assess operating-policy differences with potential partners Assess the difficulty of cross-cultural communication Avoid the “anchor” partner – one that holds back the strategic alliance because it cannot or will not provide its share of the funding Be cautious of the “elephant-and-ant” complex that occurs when two companies are greatly unequal in size Assess operating-policy differences with potential partners Assess the difficulty of cross-cultural communication

6. Choosing an Alliance Type Three main types of strategic alliances 1.Informal international cooperative alliances 2.Formal international cooperative alliances 3.International joint venture Three main types of strategic alliances 1.Informal international cooperative alliances 2.Formal international cooperative alliances 3.International joint venture

7. 1. Informal International Cooperative Alliance Non-legally binding agreements between companies from two or more countries Agreements of any kind Provide links anywhere on their value chains Limited involvement between companies Non-legally binding agreements between companies from two or more countries Agreements of any kind Provide links anywhere on their value chains Limited involvement between companies

8. 2. Formal Cooperative Alliances Higher degree of involvement than informal alliances Formal contract Popular in high tech industries because of high costs and risks Higher degree of involvement than informal alliances Formal contract Popular in high tech industries because of high costs and risks

9. 3. International Joint Ventures (IJV) Separate legal entity owned by two or more parent companies from different countries 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 No need for equal ownership Equity based on cash or other contributions Ex.: One partner brings technology while other partner brings financial contributions

10. Negotiating the Agreement The formal agreement is not as important as the ability of managers to get along IJV negotiation issues equity contributions management structure “prenuptial” agreements The formal agreement is not as important as the ability of managers to get along IJV negotiation issues equity contributions management structure “prenuptial” agreements

11. Organizational Design in Strategic Alliances Depends on the type of alliance chosen Informal ICAs often have no formal design issues Formal ICAs may require separate organization unit housed in one company IJV—Parent companies set up separate legal entity Depends on the type of alliance chosen Informal ICAs often have no formal design issues Formal ICAs may require separate organization unit housed in one company IJV—Parent companies set up separate legal entity

12. Decision-making Control Two areas need to be considered: Operational decisions (focus on day to day running) Strategic decisions (focus on long term survival) Majority ownership does not necessarily control In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management. Two areas need to be considered: Operational decisions (focus on day to day running) Strategic decisions (focus on long term survival) Majority ownership does not necessarily control In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management.

13. Management Structures Dominant parent: controls or dominates strategic and operating 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 Split control management control: partners usually share strategic decision making but split functional decision making Dominant parent: controls or dominates strategic and operating 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 Split control management control: partners usually share strategic decision making but split functional decision making

14. Management Structures (Cont.) Independent management structure: alliance managers act more like managers from a separate company IJVs often recruit managers from outside the parent companies Rotating management: key positions rotate among partners Popular in developing countries Serves to train management talent and transfer expertise to developing country Independent management structure: alliance managers act more like managers from a separate company IJVs often recruit managers from outside the parent companies Rotating management: key positions rotate among partners Popular in developing countries Serves to train management talent and transfer expertise to developing country

15. Choosing a Strategic Alliance Management Structure If one partner has dominant equity position then: Dominant management structure more likely If partners have similar technologies or know-how and contribute equally then: Shared management structure preferred If partners have different technologies but contribute equally then: Split management structure preferred If one partner has dominant equity position then: Dominant management structure more likely If partners have similar technologies or know-how and contribute equally then: Shared management structure preferred If partners have different technologies but contribute equally then: Split management structure preferred

16. Human Resource Management in Strategic Alliances HRM functions include recruiting and staffing for all alliance positions The HRM functions of an IJV are more complex Managers (and sometimes workers) come from two or more firms or from two or more cultures HRM functions include recruiting and staffing for all alliance positions The HRM functions of an IJV are more complex Managers (and sometimes workers) come from two or more firms or from two or more cultures

17. Critical HRM Problems and Issues HRM planning: Must communicate to all employees the strategic intent of alliance. Parent involvement: As alliances get older and larger, they tend to develop their own HRM practices. Staffing the alliance management and technical personnel: Crucial and risky decision. Must not unload unwanted managers to alliance. Staffing the alliance workforce: Assess local labor supply Performance assessment: Needed for retention, promotion and salary decisions. Avoid adopting the system of one partner. Loyalty: Managers may often feel dual loyalty to parent and to alliance Career development: Must provide clear information on how alliance assignments fit within careers. Career ladder must exist within the IJV Cultural differences Training HRM planning: Must communicate to all employees the strategic intent of alliance. Parent involvement: As alliances get older and larger, they tend to develop their own HRM practices. Staffing the alliance management and technical personnel: Crucial and risky decision. Must not unload unwanted managers to alliance. Staffing the alliance workforce: Assess local labor supply Performance assessment: Needed for retention, promotion and salary decisions. Avoid adopting the system of one partner. Loyalty: Managers may often feel dual loyalty to parent and to alliance Career development: Must provide clear information on how alliance assignments fit within careers. Career ladder must exist within the IJV Cultural differences Training

18. Commitment and Trust Commitment and trust go hand in hand Commitment: putting forth extra effort to make the venture work and taking care of each other Facets of commitment: Attitudinal commitment : willingness to dedicate resources and efforts and face risks to make the alliance work Calculative commitment : the practical side related to the alliance partner evaluations, expectations, and concerns regarding potential rewards from the relationship Commitment and trust go hand in hand Commitment: putting forth extra effort to make the venture work and taking care of each other Facets of commitment: Attitudinal commitment : willingness to dedicate resources and efforts and face risks to make the alliance work Calculative commitment : the practical side related to the alliance partner evaluations, expectations, and concerns regarding potential rewards from the relationship

19. Commitment and Trust Trust: The confidence that the partner will deliver on the expected contributions to the alliance Two types: Credibility trust : confidence that the partner has the intent and ability to meet promised obligations and contributions to the alliance Benevolent trust : confidence that the partner will behave with goodwill and with fair exchange Trust: The confidence that the partner will deliver on the expected contributions to the alliance Two types: Credibility trust : confidence that the partner has the intent and ability to meet promised obligations and contributions to the alliance Benevolent trust : confidence that the partner will behave with goodwill and with fair exchange

20. Why Is Trust Important? When there is no trust, partners hold back or take advantage of each other (Opportunistic Behavior). Formal contracts can never identify all issues that will arise Technology and knowledge also include tacit elements that can only be learned through trust. When there is no trust, partners hold back or take advantage of each other (Opportunistic Behavior). Formal contracts can never identify all issues that will arise Technology and knowledge also include tacit elements that can only be learned through trust.

21. Building and Sustaining Trust and Commitment Pick your partner carefully Know each side’s strategic goals Seek win-win situations. Maintain a balance in which side gains from the alliance Go slowly – problems will arise and take time to work out. 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. Maintain a balance in which side gains from the alliance Go slowly – problems will arise and take time to work out. Invest in cross-cultural training Invest in direct communication Find the right levels of trust and commitment

22. Assessing the Performance of an International Strategic Alliance If strategic intent is to produce immediate results, standard financial and efficiency measures can be used. (e.g., profit center) Some alliances provide indirect strategic benefits. IJV and ICA performance criteria: Often must include criteria other than financial, such as organizational learning. If strategic intent is to produce immediate results, standard financial and efficiency measures can be used. (e.g., profit center) Some alliances provide indirect strategic benefits. IJV and ICA performance criteria: Often must include criteria other than financial, such as organizational learning.

23. 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 financial and emotional investments. Plan end—“prenuptial agreements” Death not always failure. Some alliance are suppose to be 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 financial and emotional investments. Plan end—“prenuptial agreements” Death not always failure. Some alliance are suppose to be short term

24. CONCLUSION Alliances are important and will continue to grow Key is to pick the right partner Partners negotiate the structure that support their strategic intent There must be agreement to HRM practices Trust and commitment are basic foundations for successful alliances Alliance performance is difficult to determine Usually learning and market penetration can be used as performance measures Alliances are important and will continue to grow Key is to pick the right partner Partners negotiate the structure that support their strategic intent There must be agreement to HRM practices Trust and commitment are basic foundations for successful alliances Alliance performance is difficult to determine Usually learning and market penetration can be used as performance measures