Ireland Alliances

Chapter 9

Creating and Maintaining Alliances

This chapter meshes well with Chapter 8 “Competing across Borders.” Strategic alliances are not limited to domestic firms. Alliances among firms of all nations are thriving, with developed nations and developing nations (such as China) each initiating the relationships. The chapter introduces the various kinds of alliances. In the case studies, it highlights that effective strategic management is needed for alliance success. Although some alliances have long term success, others collapse after initial success, and others are never successful. Nevertheless, the emergence of the world marketplace requires that companies establish networks of alliances in order to compete successfully.

Focusing on Strategy: All Roads Lead to Joint Ventures in China, the Mother of Emerging Markets

This case gives an overview of the high level of alliances being formed between Chinese and non-Chinese firms. Moreover, the Chinese are initiating many of these deals. China is expected to become the world’s largest market in 20 to 30 years.

Students in this class who are in their late teens and early 20s will face a radically different world marketplace over their careers than students who graduated 10 or 20 years ago. These students’ employers will be facing increasing direct competition from Chinese (and other foreign) firms. Moreover, the students will also be competing with Chinese (and other foreign) professionals on an individual basis as more and more professional jobs are outsourced overseas. Consequently, both firms and individuals need world-class competitive skills in order to succeed in the coming decades.

· Strategic alliance: a relationship between firms in which the partners agree to cooperate in ways that provide benefits to each firm

· Cooperative strategy: an action plan to form cooperative relationships with other firms

· Purpose of cooperative strategy is to develop a competitive advantage.

· Types of strategic alliances:

· Equity alliance: each partner owns a percentage of the equity in a venture that the firms have jointly formed

· Joint venture: a separate business formed by an equity alliance

· Nonequity alliance: a contractual relationship between two or more firms in which each partner agrees to share some of its resources or capabilities

REASONS FOR DEVELOPING STRATEGIC ALLIANCES

· Reasons for entering strategic alliances

· Entering restricted markets

· overcome trade barriers

· avoid major tariffs

· Facilitating new product development

· R&D cost-sharing

· integration of resources

· sharing risks of new product development

· Sharing uncertainty of entering new international markets

· market demand

· government actions

· competitor reactions

· Gaining access to complementary resources: resources that each partner brings to the partnership that when combined allow for new resources or capabilities

· Gaining market power

· Meeting competitive challenges

· Learning from partners

· gaining access to partner’s valuable knowledge to

· explore new areas

· learn how to better use current capabilities

· Outsourcing an important function or activity ( outsourcing: acquiring a capability from an external supplier that contributes to creating value for customers)

· reduce costs

· gain access to special skills

BUSINESS-LEVEL STRATEGIC ALLIANCES

VERTICAL STRATEGIC ALLIANCES

· Vertical strategic alliance: an alliance that involves cooperative partnerships across the value chain

· Example: alliances between buyers and suppliers

· Contracts typical

· Most effective when partners trust each other

· Trust allows

· less time and effort in ensuring contract is fulfilled

· helps partners learn from one another

· facilitates the transfer of technological knowledge

HORIZONTAL STRATEGIC ALLIANCES

· Horizontal strategic alliance: an alliance that involves cooperative partnerships in which firms at the same stage of the value chain share resources and capabilities

· Reasons

· to enhance competitiveness in markets

· to share risks due to uncertainty in dynamic and highly competitive markets

· Collusion is a danger in horizontal strategic alliances

· explicit collusion: illegal

· tacit collusion: firms signal intentions to one another through their actions

· Vertical alliances have the highest probability of producing positive returns.

· Most likely to be successful

· when partners have complementary capabilities

· relationship is strong

· Horizontal alliances are the most difficult to manage and sustain.

· potential for opportunistic actions by partners

· high potential for conflict

Learning from Failure, Understanding Strategy: Ending Formerly Good Relationships That Have Gone Bad

This case describes the breakdown of two previously-successful alliances, that between Amazon.com and Toys “R” Us and that between Pixar and Disney.

CORPORATE-LEVEL STRATEGIC ALLIANCES

· Usually focus on product line to enhance firm’s growth

· Same purpose as acquisitions, but less costly

DIVERSIFICATION BY ALLIANCE

· R&D alliances

· integrate unique knowledge stocks to create products that serve new markets and customers

· most valuable if the new products are related to the current products in some way so that synergy is created

· Refocusing firm and reducing its diversification

· consolidating and spinning off unprofitable diversified businesses

SYNERGY BY ALLIANCE

· Synergy is created when partners share resources or integrate complementary capabilities to build economies of scope.

· Similar to complementary business-level alliance

FRANCHISING

· Franchising: the licensing of a good or service and business model to partners for specified fees

· allows firm to expand without taking large financial risks

· allows franchisor to maintain control of its product and business model

· allows franchisor to gain first-mover advantage without some of the risks

· For success

· partners must cooperate closely

· franchisor must develop and transfer successful programs and means of managing the operation

· franchisee must have knowledge and capabilities to compete in the local market

· franchisee must provide feedback to franchisor

· franchisee must inform franchisor about important characteristics of competitors and market conditions

INTERNATIONAL STRATEGIC ALLIANCES

This section applies to Knowledge Objective 5.

· Most prominent method of entering foreign markets

· Some countries require joint ventures with local firms to enter market

· Foreign firms need knowledge and perhaps other resources to understand and compete effectively in the newly entered market.

· Outsourcing for lower labor costs

· Risks and costs

· differing cultures

· lack of trust can hinder transfer of knowledge or sharing of resources

· different distribution channels

MANAGING RISKS IN STRATEGIC ALLIANCES

This section applies to Knowledge Objective 6.

· Alliance failure rates estimates range from 50-70 percent

· Reasons

· lack of trust

· partners less likely to share valuable resources

· more time and energy invested in guarding against opportunistic behaviors

· differences in corporate and national cultures

· different values

· communication problems

· inability to understand the other’s intentions with the alliance

· discovery that partner’s competencies are not as strong or as complementary as assumed

· unwillingness to share important resources

It is important to realize that most alliances fail, just as many mergers and acquisitions fail. These relationships absorb a great deal of organizational time and resources, so they should be entered into only after very careful analysis. As the Pixar/Disney case points out, even personality clashes can doom otherwise logical alliances. Alliances are fragile and require constant attention, as covered in the section on managing alliances.

· Managing alliances to reduce risks

· detailed contracts

· develop a trusting relationship

MANAGING STRATEGIC ALLIANCES

This section applies to Knowledge Objective 7.

· Steps in managing alliances

· selection of compatible partner

· context in which partner operates

· competitive landscape

· institutional forces

· each partner most access the resources desired and learn the knowledge needed

· partners must be willing to help the other partner to learn

· build social capital through trust

· Measure of alliance success

· extent to which knowledge is transferred between partners and integrated into the alliance operations

· produces synergy and innovation

· High failure rate in alliances where foreign investors have a low equity investment

· high equity gives foreign partner incentive for alliance success

· high equity encourages foreign firm to use more of its expertise to make alliance successful

· Success rate is higher if alliance is managed to identify and take advantage of opportunities rather than to minimize costs.

· Detailed formal contracts and extensive monitoring are less likely to succeed than trust.

NOTE: The point is that an alliance which can operate only on the basis of close monitoring is probably lacking the trust and smooth interpersonal relationships needed to succeed. Even the most detailed contract cannot force good relations (e.g., some union and management relationships). Also, a non-antagonistic atmosphere is essential for innovation and good citizenship behavior in an organization.

· Guidelines for managing strategic alliances

· A manager or sponsor should be named for each alliance and a similar person be named for the partner.

· Analyze the alliance’s priority within its resource allocations and ensure the commitment needed.

· A clear plan for implementing the alliance should be created and activated.

· The means for analyzing the performance of the alliance and the distribution of performance outcomes to partners (while considering stakeholders’ interests) should be established.

· The partner’s partners in other alliances should be considered. This indirect network may be of value.