STRATEGIC MANAGEMENT: Demonstrate and critique how strategic alliances, partnerships and networks is operationalised and applied in the business world using a recent news article as a case study/reference.

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Lecture 8 Partnerships, Alliances and Networks

Learning objectives

Explain the need for intercompany cooperation, partnerships and alliances in the new competitive landscape

Understand how strategic alliances can serve as tools for market entry and achievement of operational goals

Describe the advantages that companies can achieve through strategic alliances

Learning objectives

Describe different types of strategic alliances and how they can enable companies to create value

Discuss some of the reasons for success or failure of strategic alliances

Explain the role of formal governance mechanisms and relational governance in managing strategic alliances

Introduction

Many successful companies prefer to pursue innovations in a collaborations

Alliances allow companies to develop new capabilities and competencies

Alliances may involve formal agreements or they may be entirely informal — they may or may not involve ownership links

Strategic alliances are viewed as an alternative to diversification

Discuss cooperation as a way of gaining competitive advantage

Discuss how this is different from diversification

How two terms: strategic alliance and networks are used in literature without properly understanding their meaning and scope

Contemporary development in the field of strategy acknowledges that the resources residing outside the company’s boundary are also available for companies

To benefit from resources external to the organisation, it is crucial to establish, develop and maintain lasting business relationships with customers, suppliers and other important actors

Call for partnerships in the new competitive landscape

The current dynamic market environment requires companies to focus on their core competences while forming cooperative relationships with other companies to access and build internal resources.

Contemporary development in the field of strategy acknowledges that the resources residing outside the company’s boundary are also available for companies.

To benefit from resources external to the organisation, it is crucial to establish, develop and maintain lasting business relationships with customers, suppliers and other important actors.

Companies are no longer isolated and independent; rather they are required to be more flexible and cooperative

Strategic alliances as vehicles of strategy

Strategic alliances refer to inter-organisational cooperative activities to achieve one or more goals linked to their strategic objectives

The literature commonly uses the terms alliances and partnerships interchangeably

An alliance can mean any kind of cooperative activity between two or more independent organisations

Refer to page 295

Strategic alliances refer to interorganisational cooperative activities to achieve one or more goals linked to their strategic objectives.

The literature commonly uses the terms alliances and partnerships interchangeably; however, generally the term ‘partnership’ is broader and refers to collaborations based on formal agreements/contracts as well as to other types of informal collaborations.

Informal collaborations are those in which partners do not use a formal agreement or contract; whereas the term ‘alliances’ is generally used to describe cooperation based on agreements and contracts.

An alliance can mean any kind of cooperative activity between two or more independent organisations.

The activity may revolve around manufacturing or marketing or both. Alliances may involve sharing resources related to only key activity in the partners’ value chain, such as outbound logistics.

Why alliances?

Organizations enter into an alliance to get access to complementary resources that would enable each of the partners to increase economies of scale and gain greater market power

Alliance offer many advantages to participating organisations as demonstrated in subsequent slides

Refer to page 296 onwards

To discuss the main advantages attributed to alliance creation

Advantages achieved through alliances

Entry into new markets – quick market entry, access to the required resources and capabilities, speedy market penetration

Increased market power and economies of scale and scope –joint purchasing or joint offering of services

E.g. IGA

The acquisition and exchange of skills – partners learn from each other

Refer to pages 296 onwards

Entry to new markets

Alliances allow companies to enter new markets more quickly.

Most (if not all) companies lack the full set of resources and capabilities needed to reach their objectives.

Lack of all the required resources makes entry to a new market slower if companies undertake this entry on their own (as opposed to making alliances with partners who can contribute required resources to enter to a new market).

In the dynamic environment, the speed of market entry is an important source of a competitive advantage.

Scope

Alliances can increase market power by jointly offering service and products or by joint purchasing from suppliers above the existing competitive level.

For example, Independent Grocers of Australia (IGA) was formed by independently owned supermarkets serving its customers through over 1200 stores. The IGA group was able to increase market power of its Members through joint purchasing from the suppliers and common standards for freshness of their products.

Tacit collusion is an example of an implicit form of cooperation. Tacit collusion exists when several companies in an industry cooperate tacitly to reduce industry output below the potential competitive level, thereby increasing prices above the competitive level.

The acquisition and exchange of skills

It is common that in alliances partners learn from each other new knowledge and skills

The acquisition and exchange of skills

Learning from partners is paramount. Successful companies view each alliance as a window on their partners’ broad capabilities. They use the alliance to build skills in areas outside the formal agreement and systematically diffuse new knowledge throughout their organisations.

G Hamel, Y Doz and CK Prahalad, ‘Collaborate with your competitors — and win’, Harvard Business Review, January–February, vol. 67, 1989, 133–139.

Advantages achieved through alliances

Strategic renewal – ideas are coming from the outside, new capabilities from collaboration

Risk and investment sharing

Reductions in liabilities of foreignness – foreign subsidiaries f ace disadvantages or experience liabilities of foreignness relative to domestic companies due to various factors; local partner helps to overcome this disadvantage

Refer to page 296 onwards

Strategic renewal

Many companies bring in new ideas from the outside.

They develop these outside ideas and add value by advancing the external ideas within their own organisation.

This process stretches the company and allows it to develop new capabilities and competencies and, in some cases, it forces the company to re-invent itself.

Risk and investment sharing

Alliances can motivate companies to make investments by sharing risks.

For example, a supplier may not be prepared to make an investment outside an alliance agreement if it would link its company closely to a one buyer due to the risks involved in such a decision: the buyer might not be committed to buy a supplier’s products or force a supplier to reduce its price due to its dependence on a single buyer.

Reduction in liabilities of foreignness

Foreign direct investment research shows that foreign subsidiaries face disadvantages or experience liabilities of foreignness relative to domestic companies due to various factors.

To overcome the liability of foreignness and gain a better knowledge of a foreign market, the company planning to begin its operations in a new foreign market will be more successful by partnering with a local company or the other companies with an experience in this market. Dell and Hewlett Packard, for example, formed alliances with foreign computer manufacturers to reduce the liability of foreignness and improve their competitiveness in foreign markets.

Choice between alliances, internal development and acquisitions

Choice between the three options should consider factors including:

Knowledge of new investment risk

Availability of organisational resources to implement the desired activities

Resource portfolio of potential alliance partner and the cost

Refer to page 299

The choice between Alliances, Internal Development and Acquisitions, is a key decision faced by organisations. There is a need to approach this in a systematic and rational manner. In some cases, the value of a company is maximised when it is an independent entity. This value may be reduced when it is owned by another company. Since strategic alliances allow the company to retain its independent status, they may be preferred over acquisitions. One study on intercompany resource combination emphasises the importance of three factors that make an alliance a more attractive option than an acquisition: (1) the resource similarity and complementarity between the two companies, (2) the combined relational capabilities of the two companies, and (3) the partner-specific knowledge between the two companies. See more in L Wang and E Zajac, ‘Alliance or acquisition? A dyadic perspective on interfirm resource combinations’, Strategic Management Journal, vol. 28, no. 13, 1291–1317.

The types and structure of alliances

Table 9.1

Refer to page 299

Provide an overview of the three main types of strategic alliances:

joint venture

equity strategic alliance

non-equity strategic alliance

Joint venture

Joint venture refers to strategic alliance in which two or more cooperating companies (the ‘parents’) create a legally independent company in which they invest and from which they share any profits created

Joint ventures allow companies to establish long-term relationships and transfer tacit knowledge

Refer to page 300

Joint ventures allow companies to establish long-term relationships and transfer tacit knowledge.

Many joint ventures have 50–50 ownership and control; however, there is no need for an equal partnership.

More important that the partners specify certain aspects of the alliance that are most interested in, and the issue of the respective ownership becomes less critical.

By investing in a separate equity, both companies — parents (or alliance partners) — have a financial interest in the joint venture.

If one cheats the other, the joint venture suffers.

Losses incurred by the joint venture affects the financial results of both companies.

Joint ventures are the preferred mode of alliances when the possibility of cheating is high.

In 2001 telecommunications leader Ericsson and consumer electronics powerhouse Sony Corporation created a joint venture (called Sony Ericsson Mobile Communications) to combine powerful technology with innovative applications for mobile imaging, music, communications and entertainment. The company is owned equally by Ericsson and Sony. Its products — mobile multimedia devices — have universal appeal and are different in the key areas of imaging, music, design and applications. Sony Ericsson is an enticing brand that creates business opportunities for providers of mobile communication and desirable, fun products for end users. Sony, www.sonyericsson.com.

Equity alliance

An equity alliance is an alliance in which one or more partners assume a greater ownership interest in either the alliance or another partner

For example, early in 2009, Italian car maker Fiat acquired a 35 per cent stake in Chrysler, a then financially troubled American company

2009 Equity Alliance

between Fiat and

Chrysler

Refer to page 300

Is an alliance in which one or more partners assume a greater ownership interest in either the alliance or another partner.

For example, early in 2009, Italian car maker Fiat acquired a 35 per cent stake in Chrysler, a then financially troubled American company.

Under the agreement, Chrysler gains access to Fiat vehicle technologies platforms and manufacturing facilities, except those reserved for its Ferrari.

In return, Chrysler will help Fiat bring its brands to the US market.

Equity investments increase the stake for companies involved in the alliance.

Because one partner has invested in the equity of another as part of the alliance, this company is not likely to cheat on the joint-venture partner.

If it does, then its equity in the joint venture partner loses value.

Equity arrangements are very common among Japanese companies.

These cross holdings (the network is called a keiretsu) reduce the chances for one company to cheat the other for short-term gains

For example, early in 2009, Italian car maker Fiat acquired a 35 per cent stake in Chrysler, a then financially troubled American company. Under the agreement, Chrysler gained access to Fiat vehicle technologies platforms and manufacturing facilities, except those reserved for its Ferrari division. In return, Chrysler helped Fiat take its brands to the US market.

Non-equity alliances

Non-equity alliances refer to agreements under which companies collaborate in order to supply, produce, market or distribute products of the joint- venture partner over an extended period of time but without substantial ownership investment in the alliance

Arrangements such as licensing, franchising, supply contracts are examples of non-equity alliances

Refer to page 301

The most common form of strategic alliances is associated neither with a separate entity nor equity interests.

Arrangements such as licensing, franchising, supply contracts are examples of non-equity alliances.

For example, two car manufacturers Chrysler and Nissan have production deals involving two small cars and a pick-up truck. Dell Computer has a partnership agreement with Federal Express to ensure the just-in-time delivery of its made-to-order computers to customers.

Consortia

It is common these days that alliances involve multiple partners

Consortia involves companies and possibly governments that collaborate for a shared strategic purpose

Consortia is particularly common where there is competition to establish either technical or industry standards

Alliances of multiple players are particularly common in environments in which there is a competition to establish the technical/industry standard, where companies are increasingly focused and where speed of exploiting capability across industries is possible. The global media is an example of such an environment. For example, in setting standards for digital TV, wireless internet or mobile phones, only one or two standards can be accepted due to the need of having usable and connectable products everywhere in the world. Thus, industry leaders — individual companies or networks, such as the Wi-Fi Alliance — set the standards and others have to adapt or they will be forced out of the industry. The understanding of how technology standards are set leads to the recognition that it is the networks that are competing, not just single companies. For example, see R Garud and A Kumaraswamy, ‘Changing competitive dynamics in network industries: an exploration of Sun Microsystems’ open strategy’, Strategic Management Journal, vol. 14, 1993, 351–369.

Success and failure of alliances

Alliances present a major paradox for organisations

This aspect has been researched in considerable details

Many interesting findings are worth consideration

Refer to page 302

Provide an overview of the extent to research in addressing the success and failure of alliances

Refer to some of the prominent researchers in this field

Why do alliances fail?

cultural clashes between partners

Partnering for the wrong reason (e.g. adopting an ‘everyone else is doing it’ herd mentality)

Companies may demonstrate the opportunistic behaviour in their alliance formation, ignoring responsibilities and free-riding (expecting that the partners will do the job), distorting information or having hidden agendas (partners in an alliance also compete with each other and have very different characteristics)

Staff may display their loyalty to their respective companies rather than to the alliance.

Partners may be entering into an alliance with an objective to test the market before the launch of a wholly-owned subsidiary

Refer to page 303

Many reasons contribute to alliance failure including:

Some alliances fail due to the cultural clashes between partners, particularly when Western companies try to partner with Asian companies. These companies often have different objectives.

Partnering for the wrong reason (e.g. adopting an ‘everyone else is doing it’ herd mentality) also might lead to alliance failure.

Staff may display their loyalty to their respective companies rather than to the alliance.

Partners may be entering into an alliance with an objective to test the market before the launch of a wholly-owned subsidiary

What makes alliances successful?

The success of any single alliance is determined by some key factors that are relevant at each stage of alliance evolution including:

the phase of formation: companies select of a partner or partners

the phase of design: the alliance governance mechanism is being established

the post formation phase: the company manages the alliance on an ongoing basis and creates value

Refer to page 303

Discuss the factors that have the potential to make an alliance successful

The success of any single alliance is determined by some key factors that are relevant at each stage of alliance evolution.

These key factors include:

the phase of formation: companies select of a partner or partners

the phase of design: the alliance governance mechanism is being established

the post formation phase: the company manages the alliance on an ongoing basis and creates value

Trust in alliances

Partners have to develop trust in their alliance relationships

The development of trust between partners leads outcomes such as:

limits transaction costs

facilitates long-term relationships

stimulates collaboration

simplifies knowledge transfer

long-term competitive advantage

Refer to page 304

The partner relationships in an alliance are always evolving and, thus, not everything can be predicted and presented in a formal contractual agreement.

This leads to an understanding that partners have to develop trust in their relationships.

Trust depends on reputation effects or on multilayered relations between the parties to a transaction that can create low-cost enforcement opportunities.

The development of trust between partners:

limits transaction costs, in particularly in organisational situations whenever there is a high level of uncertainty

facilitates long-term relationships, reducing conflicts that are non-functional to the partnership goals

stimulates collaboration among companies, increasing the likelihood of the success of alliances

simplifies knowledge transfer and joint learning

enables the company to obtain a sustainable long-term competitive advantage

The factors of success and failure of alliances

Table 9.3

Refer to page 305

The table above provides an overview and summary of the factors that affect the success and failure of an allaince

Governance of alliances

Successful alliances must accomplish two goals: coordination of the optimal combination of productive resources across parties and mitigation of the risks of opportunistic behaviour

Governance mechanisms are concrete managerial and control activities that describe in detail how the required behaviour of the partner will become motivated, influenced, and established, or in which ways the desirable or predetermined gains are to be fulfilled

Refer to page 305

Successful alliances must accomplish two goals: coordination of the optimal combination of productive resources across parties and mitigation of the risks of opportunistic behaviour.

The literature on managing alliances provides a wide range of studies in which two main approaches seem to be dominating.

One is drawn on transaction cost economics, which argues that successful exchange can be achieved by reinforcing formal governance mechanisms.

Another stream of research emphasises the role of more relational governance mechanisms that are based on building of trust and social identification such as forming teams, frequent direct managerial contact, shared decision making and joint problem solving

How to make alliances successful

Companies with greater alliance success are presumed to possess superior alliance capability — the ability of companies to effectively manage intercompany alliances and create value through them

Alliance capability refers to the ability of companies to effectively manage intercompany alliance and create value through them

Refer to page 306

Companies with greater alliance success are presumed to possess superior alliance capability — the ability of companies to effectively manage intercompany alliances and create value through them.

Research has shown that some companies are much more successful at managing alliances, or creating value through them, than other companies.

For example, mining companies Rio Tinto and BHP Billiton, grocery retailers Coles and Woolworths, and retailer David Jones are examples of companies that belong to the former category of companies that manage their alliances successfully and create value through those alliances

Role of alliance function

Alliance function refer to a structural mechanism in the form of a separate organisational unit or team of managers, who are responsible for managing and coordinating a company’s alliance activities

Researchers have argued that a dedicated alliance function, which is responsible for supervising and managing a company’s overall alliance activity, positively contributes to greater alliance success

Refer to page 306

Dyer, Kale and Singh argue that a dedicated alliance function, which is responsible for supervising and managing a company’s overall alliance activity, positively contributes to greater alliance success.

Other research and case-based studies have also demonstrated that companies with a dedicated alliance function achieve greater alliance success.

Having a dedicated alliance function is a more effective tool for building alliance management know-how in large companies than in small companies.

Recent studies show that companies can develop alliance capability by learning and accumulating alliance management skills and best practices by articulation, codification, sharing and internationalisation of relevant alliance know-how

How to collaborate and win?

(a) Collaboration is competition in a different form

Successful companies never forget that their new partners may be out to disarm them. They enter alliances with clear objectives, and also understand how their partners’ objectives will affect their success.

(b) Harmony is not the most important measure of success

Indeed, occasional conflict may be the best evidence of mutually beneficial collaboration. Few alliances remain a win–win undertaking forever. A partner may be content even as it unknowingly surrenders core skills.

Companies must defend against competitive compromise. A strategic alliance is a constantly evolving bargain whose real terms go beyond the legal agreement or the aims of top management. What information gets traded is determined day by day, often by engineers and operating managers. Successful companies inform employees at all levels about skills and technologies are off-limits to the partner and monitor what the partner requests and receives.

(d) Learning from partners is paramount

Successful companies view each alliance as a window on their partners’ broad capabilities. They use the alliance to build skills in areas outside the formal agreement and systematically diffuse new knowledge throughout their organisation.

Refer to page 307

How to collaborate with competitors and win

Companies who benefit most from competitive collaboration adhere to a set of simple but powerful principles:

(a) Collaboration is competition in a different form

(b) Harmony is not the most important measure of success

(d) Learning from partners is paramount

THE ROLE OF A STRATEGIC CENTRE

Strategic outsourcing. Outsource and share with more partners than the normal broker and traditional firm. Require partners to be more than does, expect them to be problem solvers and initiators.

• Capability. Develop the core skills and competencies of partners to make them more effective and competitive. Force members of the network to share their expertise with others in the network, and with the central firm.

• Technology. Borrow ideas from others which are developed and explained as a means of creating and mastering new technologies.

• Competition. Explain to partners that the principle dimension of competition is between value chains and networks. The network is only as strong as its weakest link. Encourage rivalry between companies inside the network, in a positive manner.

Refer to page 308

Lorenzoni and Baden-Fuller emphasise the importance of companies to act as a strategic centre for its partners. They explore vertical relationships of companies in which companies cooperate and compete simultaneously. These scholars argue that it is necessary for a network of companies to have a strategic centre that can function as builder and coordinator. This role’s main features include:

• Strategic outsourcing. Outsource and share with more partners than the normal broker and traditional firm. Require partners to be more than does, expect them to be problem solvers and initiators.

• Technology. Borrow ideas from others which are developed and explained as a means of creating and mastering new technologies.

Exit from alliances

Exit strategies should be a part of any alliance agreement

Lacking an exit strategy is viewed as a common mistake that partners have when starting an alliance.

Exit strategies should meet the test of fairness while protecting key resources of joint-venture partners

Refer to page 308

Lacking an exit strategy is viewed as a common mistake that partners have when starting an alliance.

Exit strategies should be a part of any alliance agreement.

Exit strategies should meet the test of fairness while protecting key resources of joint-venture partners.

Exiting an alliance should be performed the same way the company enters it — in a spirit of cooperation, openness, trust, mutual benefit and assistance, and in accordance with the original guiding principle.

The alliance does not dissolve automatically into non-existence.

Partners may help each other to find alternative suppliers, customers or partners.

The best approach to exit is when partners agree up front what the ‘rules of disengagement’ are for an alliance.

These rules set out each partner’s responsibilities and obligations when the relationship is to be terminated or is to be downsized to a less critical or strategic position

Summary

This session has covered the following issues:

Strategic alliances

Types of alliances

Success and failure of alliances

Exit strategy is just as key as entry

Provide an overview of the key issues discussed in this session including:

The new competitive landscape with dynamic markets make companies interdependent and interconnected: companies have to focus on their core competences while forming cooperative relationships with other companies to access and build internal resources.

Partnerships and alliances with customers, suppliers and competitors enable companies to access the required resources outside the company’s boundaries in order to learn and develop new capabilities and respond to the rapidly changing business environment.

Strategic alliances are viewed as vehicles of the company’s strategies. The main advantages that can be achieved through alliances are entry into new markets, increased market power and economies of scale and scope, the acquisition and exchange of skills, the company’s strategic renewal, risk and investment sharing, reductions in liabilities of foreignness, government or trade barriers and the acquisition of institutional legitimacy.

The main types of alliances are joint ventures, equity and non-equity alliances. There are also multiple members’ alliances or constellations.

Although the number of strategic alliances is increasing, many of them fail: they do not achieve the objectives of their parent companies nor deliver on the expected operational or strategic benefits.

Alliances fail due to being formed for the wrong reason, different objectives of the companies — parents, choosing the wrong partner, opportunistic behaviour and cheating of partners.

Alliances success factors include partner complementarity and compatibility, effective governance mechanism and development of trust between partners.

Lacking an exit strategy is viewed as a common mistake that partners make when starting an alliance. Exit strategies should be a part of any alliance agreement. Exit strategies should meet the test of fairness while protecting key resources of joint-venture partners