Chapter #7 Strategic Alliances

Opening Case HBO

Definitions Strategic alliance Whenever two or more independent organizations cooperate in the development, manufacture or sale of products or services. Non-equity alliance Cooperating firms agree to work together, but do not take equity positions in each or form an independent organization Examples Licensing agreements Supply agreements Distribution agreements

Equity alliance Cooperating firms hold equity positions in each other Example GM 34.2% of Izuzu’s Stock Joint Ventures Cooperating firms create a legally independent firm Example SBC and Bell South co-own Cingular

How do strategic alliances create economic value? Current operations Exploiting economies of scale Learning from competitors NUMI Different rates of learningNUMI More to learn Absorptive capacity Withhold Information Managing risk and sharing costs

How do strategic alliances create economic value? Creating a favorable competitive environment Facilitate development of technological standards Network industries Increasing returns to scale (one fax machine) Beta vs VHS IBM vs Apple (Cell Phones) HDTV Facilitate tacit collusion Firms coordinate their production and pricing decision

How do strategic alliances create economic value? Facilitating entry and exit Low-cost entry into new markets Local distribution networks can be costly Government restrictions/requirements Low-cost entry into new industries and new industry segments Dupont and Phillips Welch’s and Eskimo Pie Low-cost exit from industries and industry segments Corning and Ciba-Geigy (sneak preview) Managing uncertainty Option to buy (bet)

Alliance Threats: Incentives to Cheat on Strategic Alliances 1/3 of all strategic alliances do not meet the expectations of at least one alliance partner. Ways to cheat Adverse selection Moral Hazard Holdup

Adverse Selection: Potential partners misrepresent the value of the skills and abilities they bring to the alliance Difficult to assess the veracity of the claims of potential partners Less tangible resources and capabilities are the most difficult to assess

Moral Hazard: Partners provide to the alliance skills and abilities of lower quality than promised Pixar versus Disneyversus Pixar: Toy Story, A bug’s life, Toy Story 2, Monster’s, Inc, Finding Nemo Disney: Treasure Planet, The emperor’s New Groove, Lilo and Stich, Brother Bear

Holdup: Partners exploit the transaction specific made by others in the alliance

Strategic Alliances and Sustained Competitive Advantage The Rarity of Strategic Alliance GM and Toyota (lean manufacturing) Ford and Mazda (Designing new cars and joint manufacturing) Daimler-Chrysler and Mitsubishi (supplier) The Imitability of Strategic Alliances Direct duplication (socially complex)

Substitutes for Strategic Alliance Going it alone Alliances will be preferred over going it alone when The level of transaction specific investment required to complete an exchange is moderate When an exchange partner possess valuable, rare, and costly to imitate resources and capabilities When there is great uncertainty about the future value of an exchange

Substitutes for Strategic Alliance Alliances will be preferred to acquisitions when There are legal constrains on acquisitions Acquisitions limit a firm’s flexibility under conditions of uncertainty There is substantial unwanted organizational “baggage” in an acquired firm The value of a firm’s resources and capabilities depend on its independence

Organizing for Strategic Alliance: Trying to avoid Cheating Non Equity investments Explicit Contracts and Legal Sanctions

Organizing for Strategic Alliance: Trying to avoid Cheating Equity Investments

Organizing for Strategic Alliance: Trying to avoid Cheating Firm Reputation

Organizing for Strategic Alliance: Trying to avoid Cheating Joint Ventures

Organizing for Strategic Alliance: Trying to avoid Cheating Trust