Unit 4 Week 4 Discussion 2 MBA695

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Strategic Management

Jeff Dyer

Third Edition

Chapter 8

Strategic Alliances

Professor’s Goals for this Lecture

There are many types of problems that can be solved for a company by doing a cost analysis. A cost analysis can be used to solve problems as diverse as marketing (e.g., how much to spend to acquire additional customers) or HR (how much labor costs go down per unit with increases in volume). The principle tools to be learned in this chapter are designed to help the student examine the relationship between a company’s size (measured in volumes produced or market share) and cost per unit. This is primarily reinforced by teaching students how to create a scale/experience curve (both done in the same way with “cost per unit” on the “Y” axis but the scale curve uses volume for a given year on the “X” axis whereas the experience curve uses cumulative volume on the “X” axis. The students will have the opportunity to examine the relationship between scale/experience in the following assignments:

- the homework assignment involving calculating an experience curve in semiconductors

- Fry’s Credit Card Mini-case (in lecture); considers the relationship between total number of subscribers (X axis) and cost per subscriber (Y axis)

- the Southwest Case (after lecture); considers the relationship between total passengers flown (or market share) and performance (profitability) in the industry

What is a Strategic Alliance?

Strategic Alliance- A cooperative arrangement in which two or more firms combine their resources and capabilities to create new value, sometimes referred to as a

partnership.

Buy

Ally

Make

HISTORICAL VISION PARTNERSHIP VISION

INTERNAL FOCUS

MY ECONOMICS

One of the things we’ve seen is we’ve seen a dramatic increase in alliances over the last twenty-five years. More and more revenues are coming through alliances because companies are realizing, I’m better off if we team up, two heads are better than one in order to attack the particular market. How do you identify strategic partners?

Creating Value By Focusing On The System

VALUE

CUSTOMER

VALUE

CUSTOMER

VALUE TO SUPPLIER

TRADITIONAL

RELATIONSHIP

STRATEGIC

PARTNERSHIP

The key is creating value by expanding the pile. You think about a typical supplier buyer relationship. You negotiate a contract. Every dollar I can get it up, the price up, is a dollar in my pocket and then not a dollar in your pocket. It’s a zero sum game. Like a fixed pie and you have certain value to the customer and you split this some way. Very much it’s really all about bargaining and seeing who gets the most of the pie. The partnership approach is designed to actually say, let’s not focus on the fixed pie, let’s think about how can we expand the pie together so that we’re both better off. You can get into these arguments about whether AT&T was better off or whether Apple was better off but at the end of the day, it may be that they were both better off than if they had gone alone. It’s just sometimes that one partner ends up better off than another partner because of the way they negotiated the agreement or the bargaining power they had coming in to the agreement.

Strategic Inputs

Inputs that can differentiate your product in the minds of customers.

Inputs that influence your brand or reputation.

High value inputs or activities that make up a high percentage of your total costs.

Inputs or activities that require significant coordination in order to achieve the desired fit, quality, or performance.

Interdependence between partners is low (e.g., pooled)

It is easy to measure the contributions of each partner and write it in a contract.

Contractual Alliance

Cooperation between firms is managed directly through contracts

Equity Alliance

Cooperative contracts are supplemented by equity investments by one or both partners into the other partner.

Joint Venture

Cooperating firms combine resources to form an independent firm in which they invest.

Preferred when:

Interdependence between firms is moderate (e.g., sequential).

Firms bring knowledge or difficult to measure contributions but each can perform their roles separately.

Interdependence between firms is very high (e.g., reciprocal).

Firms bring knowledge or difficult-to-measure contributions that must be combined into a single organization to coordinate effectively.

Figure 8.1

Types of Strategic Alliances

In the chapter it talked about three different types of strategic alliances. This is related to, how do you make sure that the parties collaborate, and, cooperate? On the one hand, it could just be contracts. You write a contract. This is where you’ve got the least amount of interdependence, pooled interdependence. In golf it is a sports team competing using pooled interdependence. Golf teams, each player goes out and shoots their round. You add up the scores, that’s the total. You can have the best score of anybody on any of the teams but your team could lose because it’s pooled together. When you move to a higher degree of interdependence and [the chart goes from LR Low  High Interdependence] you could have equity alliances with any of these types of interdependents but the next is sequential interdependence.

What kind of type of sports team is described as having sequential interdependence? Baseball. Relay throws. I follow another batter. If he gets on than that changes the way I will bat. Sometimes you’re going to hit and run, sometimes you may bunt. You’re going to do things differently because it depends on what the player had done before you, more so in baseball.

And then finally, as you move toward reciprocal interdependence, this is more basketball. The players are constantly moving and what I do depends on what you do and so there’s this, over time what we find in basketball is, teams usually don’t get good basketball until they’ve played together for a while. I think it was interesting that you had the U.S. team with all of these fabulous individual players who, I remember it was such a shock we actually lost the world championships and we lost it twice. Everybody was saying, what is going on? We’re losing to Argentina? How is that possible? Then they started to select a team more based upon chemistry and requiring at least a three year commitment so the players could get better at learning to play together because they realized this is a team sport with a lot of reciprocal interdependence.

You write contracts for the more simple alliances and you create equity for more complex ones where there may be shared equity and create a completely separate company joint venture for those where you have the most complex interdependencies.

Vertical and Horizontal Alliances

Vertical Alliance- An alliance between firms who are positioned at different stages along the value chain, such as a supplier and a buyer.

Horizontal Alliance- An alliance between two firms that do not have a supplier-buyer relationship and are typically positioned at a common stage of the value chain.

Pool Similar Resources

Ways To Create Value In Alliances

Combine Unique Resources

Create New Alliance-specific Resources

Lower Transaction Costs (Build Trust)

On the one hand you have sort of traditional contracts. Arm’s length, buy-sell agreements, licensing, cross-licensing. Very, very straightforward. So for many companies, if they’re buying office supplies. You’re buying pencils and paper, you don’t need to have a partnership. You probably don’t need a partnership with your supplier. It’s not like they’re unique to you. You just have a simple buy-sell agreement. And then, you’re going to have more non-traditional contracts where you’re doing maybe more joint research or franchising, product development loan term sourcing agreements. These things you’re going to use more nontraditional contracts that are longer term in nature like the apple AT&T agreement was a fairly complex contract that they had to write.

You might do equity swaps, minority equity investments so you own a small piece of it. You could own a small piece of Tokyo Disneyland or equity swaps or you could create a separate joint venture but it’s not a subsidiary of the corporation. You actually can have wholly own subsidiaries. Think back to Coke and Pepsi and their bottlers. There was a time at which they were actually subsidiaries of Coke and Pepsi and they owned the majority of them. Then they eventually they actually spun them out and so now they are not a joint venture but they are not a subsidiary, they have an equity arrangement. And then of course you can also have mergers and acquisitions where you actually acquire the group so one way is to do an alliance to access the resources the other is acquisitions.

Combine Unique Resources

Pixar Animation Studios

Walt Disney Pictures

Disney+ Streaming Service

The first way that firms create value through an alliance is by combining unique resources to

create an even more powerful offering. This is what Pixar and Disney did to dominate computer-

animated films. As described in Chapter 3, Pixar contributed computer-generated

animation (CGA) and story-writing skills that brought to life unique stories in films such as

Toy Story, Finding Nemo, Cars, and The Incredibles. Disney contributed worldwide film distribution

to the partnership and sold products involving Pixar’s movie characters—such as

Woody and Buzz Lightyear—at its Disney stores and theme parks. No other film distributor

could bring to Pixar stores or theme parks like Disney’s that could be used to make money

off of memorable movie characters. By combining their unique resources, Pixar and Disney

created synergy that increased profits for both firms. In fact, Disney eventually acquired

Pixar in order to gain full control over Pixar’s unique resources. Now Disney has combined their decades of content to create Disney+ to compete in the streaming service industry. Discussion?

Pool Similar Resources

Ways To Create Value In Alliances

Combine Unique Resources

Create New Alliance-specific Resources

Lower Transaction Costs (Build Trust)

Pool Similar Resources

Disney

OLC Group

Tokyo Disneyland

Taken from pg. 151 in text: One might reasonably ask why Disney didn’t just build

Tokyo Disneyland on its own. Disney obviously knew how

to run a theme park. It owned and operated two theme parks

in the United States without the involvement of a partner.

Disney could have captured the $690 million that went to the

Oriental Land Company in a recent year, as well as the $300

million it did get. Why share the profits with a partner?

The first question that Disney certainly must have asked

with regard to Tokyo Disneyland was whether it could “make”

another park: Do we have the resources and capabilities

to build Tokyo Disneyland on our own? The answer to that

question was not entirely straightforward. Building a theme

park in a new, foreign environment came with a host of risks.

Tokyo is not a warm-weather “vacation destination,” like

California or Florida. Disney had absolutely no experience in

hiring, training, and managing a Japanese workforce. Would

Oriental Land Company have sold Disney the 115 acres of

land required for the park? If so, at what price? Did Disney

have the $2.0 billion investment required to buy the land and

build the park? If it chose to make the investment in Japan,

what other opportunities would it have to forgo? Finally, and

maybe most importantly, how confident was Disney that

Tokyo Disneyland would succeed?

When companies face an opportunity that comes with

risks, they may look to a partner to share or mitigate the

risks. In this particular case, Disney solved most of its problems by partnering with OL. OL provided high-value

resources; it owned the land and took virtually all of the

investment risk. Disney didn’t have to risk much capital

investment and was able to deploy its capital elsewhere. OL

runs the park, so Disney didn’t have to learn how to manage

a Japanese workforce. Disney gets 10 percent return on gate

receipts regardless of the profitability of the park. The two

companies are able to share ideas on how to best localize

the Disneyland park within the Japanese environment.

In the end, the park proved successful, and both OL and

Disney received value from the partnership. It is possible

that Disney might have been just as successful if it had

built and run the park on its own. But it’s also possible

that, without OL as a partner, Disney might have made

different decisions about how to build or run the park

that would have hurt performance. Indeed, when Disney

built EuroDisney, located outside of Paris, it experienced

a host of problems and the park struggled for years.13 In

particular, Disney didn’t take into account important local

preferences like serving wine with meals in the park,

and the marketing was described as “too Americanized”

and not tailored to the needs of customers in individual

European countries.14 The alliance with OL clearly

mitigated many of the risks associated with the venture,

and OL’s resources and capabilities likely increased the

probability of success.

Disney-Oriental Land Co. Alliance

Disney Resources & Capabilities

Disney brand

Disney theme park rides and designs

Park management processes

Ongoing stream of Disney characters from movies

Disney consumer products to sell at the park

OLC Resources & Capabilities

Land for the park near Tokyo

Financial resources to build the park

Relationships with construction firms to build the park

Knowledge of Japanese culture and how to manage Japanese workers

In a sense, to the extent that Disney had some equity in the piece, in that, it would be an equity alliance. They didn’t create a separate company but they owned a piece of equity, and then they also got licensing fees which really would be more in contract. What would the AT&T Apple alliance, where would that fit? Contractual. It was a contractual alliance. It was pretty clear what each party was supposed to do, right? It’s not like they had to work jointly to develop the phone. It wasn’t like this joint development of the phone. This is different that IM Flash. IM Flash is a joint venture where intel and micron bring all of their knowledge together, R&D resources, and their cash to create a separate company that’s going to make memory, and that’s what they’re going to be good at so that way intel can stay focused on microprocessors and it allows each of the parent companies to stay focused on different markets and then they create a separate company that they both jointly own. That’s the joint venture.

Pool Similar Resources

Ways To Create Value In Alliances

Combine Unique Resources

Create New Alliance-specific Resources

Lower Transaction Costs (Build Trust)

Toyota’s Supplier - Customer Interface

Surface Contact vs. Multiple-Point Contact

Customer

Supplier

Point Contact

Top

Execu-

tives

R & D

Manufacturing

Top

Execu-

tives

Quality Assurance

Quality Control

Purchasing

R & D

Manufacturing

Quality Assurance

Quality Control

Sales

Even if you have competitors. Let’s say you have two competitors. Toyota and BMW, they decide to team up on battery technology. Let’s not think of this as a zero sum game. How can we expand the pie so that we’re both better at battery technology and we take share against Mercedes and Ford? This is the notion that even competitors can collaborate to expand the pie for them relative to their competitors. So, I’m not going to spend really much time on this. We know, you know already about the different ways that you create value in an alliance from the chapter. Just want you to be aware of the different ways that you create value and let me just sort of conclude by ensuring that there is this important notion around trust and strategic alliances because a lot of people say, alliances, because of the interdependence, you need a certain amount of trust. You can build that in different ways.

Types of Alliance-Specific Resources (dedicated assets) that create value

Dedicated Site Investments (locating plants in close proximity to economize on inventory, transportation, coordination costs).

Dedicated Physical/Process Investments (making relation-specific capital investments in machinery, tools, processes)

Dedicated Human Investments (dedicating personnel to develop relation-specific know-how and improve communication/ coordination)

More details on this starting on page 161 in the text

Example : Toyota Plant Configuration In Japan*

30 miles

6 miles

Motamachi, TC

Tahara, Nagoya

Affiliated Supplier Plants

Avg. distance of 30 miles vs 427 GM

43.5 weekly deliveries vs 7.5 GM

10,635 man days of face-to-face contact (1,107 GM)

12.5 guest engineers vs .17 GM

Independent Supplier Plants

Avg. distance of 87 miles

40.5 weekly deliveries

3,764 man-days of face-to- face contact

2.6 guest engineers

Tsutsumi, TC

3 miles

28 miles

1 mile

3 miles

Takaoka, TC

Honsha, TC

Headquarters & Technical Center

* Excludes more recently build Kyushu plant making small cars for export to Asia.

This and the next chart are a visual representation of what we’ve been talking about regarding Alliances. These two charts can create some great in class discussions.

Comparing Affiliated Suppliers at Toyota to External Suppliers at GM.

Compare the simplicity of the Toyota plant to the complexity of the GM plant shown

Example : GM Plant Configuration in the United States

200 miles

Lansing, MI

External Supplier Plants

Avg. distance of 427 miles

7.5 Weekly deliveries

1,107 man days of face-to-face contact

.17 guest engineers

Flint, MI

Hamtramck, MI

Ypsilanti, MI

Internal Supplier Plants

Avg. distance of 350 miles

North Tarrytown, NY

Linden, NJ

Wilmington, DE

Lordstown, OH

Bowling Green, KY

Spring Hill, TN

Arlington, TX

Wentzville, MO

Kansas City, KS

Van Nuys, CA

Fremont, CA

(Nummi)

650 miles

900 miles

455 miles

1400 miles

387 miles

2400 miles

51 miles

55 miles

85 miles

(The purpose of these two slides is to show the huge difference in configurations between a Toyota Plant and a GM Plant)

Interesting discussions to have here are?

What are some internal causes that have led to the huge difference in plant configurations between Toyota and GM?

Are there inherent cultural differences between the two companies that leads to this?

Reinforces the last two slides

ALLIANCE LIFECYCLE

Partner

Assessment &

Selection

Alliance

Negotiation &

Governance

Assessment

Termination

* Needs Analysis

Checklist

*Make vs. buy vs.

ally analysis

*List of possible alliance partners

with resources to meet needs.

* Partner

Screening Form

* Technology and

patent domain

maps

* Cultural Fit

Evaluation

Form

* Due Diligence

Team

* Negotiations

guidelines

* Needs v/s

wants checklist

* Alliance

Contract

Template

* Alliance Structure

Guidelines

* Alliance Metrics

Framework

* Decision

making

template

* Trust-building

worksheet

* Work planning

worksheet

* Alliance

Communication

Infrastructure

* Relationship

Evaluation

Form

* Yearly Status

Report

* Termination

Checklist

* Termination

Planning

Worksheet

Alliance

Business

Case

Alliance

Management

Figure 8.2: Building Alliance Capabilities:

Tools to Use Across the Alliance Lifecycle

A dedicated function acts as a focal point for learning, helping the company leverage lessons

and feedback from prior and ongoing alliances. It systematically establishes a series of routine

processes to articulate, document, codify, and share know-how about the key phases

of the alliance lifecycle. Many companies with dedicated alliance functions have codified

explicit alliance-management knowledge by creating guidelines and manuals to help them

manage specific aspects of the alliance lifecycle, such as partner selection and alliance negotiation

and contracting. For example, Hewlett-Packard has developed 60 different tools and

templates, included in a 300-page manual that can be used to guide decision making in

specific alliance situations. The manual includes such tools as a template for making the

business case for an alliance, a partner evaluation form, a negotiations template outlining

the roles and responsibilities of different departments, a list of ways to measure alliance

performance, and an alliance termination checklist. This figure lists more of the guidelines

and tools companies have developed.

Oracle: Oracle has an “Alliance Online”

website that actually puts the partnering process online. Oracle describes the terms and

conditions of different “tiers” of partnership on its website, allowing potential partners to

choose which level fits them best. Alliance Online has emerged as Oracle’s primary vehicle

for recruiting and developing partnerships, with more than 7,000 tier I partners. It has

also conserved human resources, allowing Oracle’s strategic alliance function to focus the

majority of its human resources on its 12 higher-profile and more strategically important

tier III partners.

Pool Similar Resources

Ways To Create Value In Alliances

Combine Unique Resources

Create New Alliance-specific Resources

Lower Transaction Costs (Build Trust)

The Paradox of Trust

Alliances are fraught with risk even though they look good on paper

Things often don’t work out because of the issue of trust and equity

There is a paradox of trust. The paradox of trust is that when you make yourself vulnerable and you trust another party that is actually when they can take advantage of you. Alliances are fraught with risk even though they look really good on paper because two heads are better than one, you just have to realize that a lot of times, things don’t work out as planned because of the issue of the trust and the equity.

BUILDING TRUST

Formal Contractual Mechanisms

long term contracts (position as an “expectations” document),

stock ownership (align incentives),

collateral bonds (signal credible long-term commitment).

Processes and Information

Trust is often built on company processes and information, not people. A partner is trustworthy if its interorganizational processes are understandable, predictable and stable and information flows freely.

Informal Mechanisms (Affect) such as:

Reputation (give gifts as a signal of benevolence),

Personal trust

Least trusting to most trusting. Contracts act as a surrogate for personal trust as discussed in text starting at page 158

THE VALUE OF TRUST

Increases learning (greater information sharing)

Increases customized investments (willingness to risk tailored investments)

Increases speed to quickly respond to market changes

Lowers transaction costs

One study of Toyota and General Motors found that Toyota’s procurement and legal costs

were half those of General Motors. The study concluded that General Motors and its suppliers

had higher transaction costs because they didn’t trust each other; so they spent a lot

of time negotiating agreements and writing legal contracts. In contrast, Toyota had developed

relationships with its supplier partners that were based on mutual trust. One thing

that Toyota did to build trusting relationships with some suppliers was to purchase a minority

stock ownership stake in the supplier. Because Toyota owned part of the suppliers’ stock,

suppliers felt that Toyota would behave in a trustworthy manner.

Figure showing this on next slide

Example: THE COST OF MISTRUST

Percent of face-

to-face contact

time with suppliers

Negotiating price/contract

Assigning blame for problems

47%

28%

21%