Strategic  Alliances  and  JV  Session  6  and  7:  SA  and  JV  

Ra1onale  for  Collabora1on  

•  Sales  expansion  •  Market  expansion  •  Resource  expansion  •  Risk  minimiza1on  

Mo1ves  for  Collabora1on  

•  Reduce  costs  •  Spread  risks  •  Specialize  in  competencies  •  Deal  with  compe11on  – Loca1on  specific  advantages  – Learning  curve  advantage  

•  Secure  ver1cal  and  horizontal  links  •  Overcome  legal  constraints  

Collabora1ve  Arrangements  

•  FDI  •  Joint  Venture  •  Licensing  •  Management  Contracts  •  Strategic  Alliance  

Ques1on    

•  What  could  be  some  of  the  problems  associated  with  various  arrangements  and  what  are  your  recommenda1ons  to  resolve  them?  

Elements  of  SA  

•  Design  of  an  Alliance  •  Management  of  an  Alliance  •  Alliance  Constella1on  •  Alliance  Capability  

Collabora1ve  Arrangements:        Basic  Considera1ons  

Dependencia  theory:    the  out-­‐of-­‐vogue  idea  that  emerging  economies  essen1ally  have  no  power  as  host  countries  when  dealing  with  large  MNEs  

Bargaining  school  theory:    the  idea  that  the  nego1ated  terms  of  foreign  investments  depend  upon  investors’    and  host  countries’  needs  for  one  another’s  assets  

                     

–  When  a  firm  is  highly  diversified  and/or  its  opera1ons  are  limited,  exis1ng  foreign  facili1es  and  opera1ons  may  not  complement  its  planned  expansion.  

–  The  more  a  firm  depends  upon  collabora1ve  arrangements,  the  greater  the  likelihood  that  it  will  lose  control  over  decisions  regarding  quality,  flexibility,  revenues,  compe11on,  expansion,  and  informa1on-­‐sharing.          

Collabora1ve  Arrangements:        Basic  Types  

Licensing:    a  licensor  grants  a  licensee  rights  to  intangible  property  to  use  in  a  specified  area  for  a  specified  period  of  1me  in  exchange  for  a  fee  –  Intangible  property  may  be  classified  as:  

•  patents,  inven1ons,  formulas,  processes,  designs,  or  paYerns  •  copyrights  for  literary,  musical,  or  ar1s1c  composi1ons  •  trademarks,  trade  names,  or  brand  names  •  franchises,  licenses,  or  contracts  •  methods  programs,  procedures,  or  systems  

•  Cross-­‐licensing:    firms  in  various  countries  exchange  technology,  rather  than  compete  with  each  other  with  every  product  in  every  market    –  Many  licenses  are  given  to  firms  owned  in  whole  or  in  part  by  the          licensor  as  a  means  

of  legally  transferring  technology  to  a  subsidiary  

Collabora1ve  Arrangements:        Basic  Types  

Franchising:    a  specialized  form  of  licensing  in  which  the  franchisor  grants  an  independent  franchisee  the  use  of  essen1al  intangible  property  and  opera1onally  assists  the  business  on  a  con1nuing  basis  –  Franchise  success  is  derived  from  three  factors:      

•  product  standardiza1on  •  effec1ve  cost  control  •  high  recogni1on  

•  The  two  partners  act  like  a  ver1cally  integrated  firm  because  (i)  they  are  interdependent  and  (ii)  each  produces  a  part  of  the  product  that  ul1mately  reaches  the  customer.  –  A  franchisor  may  deal  directly  with  its  foreign  or  set  up  a  master  franchise  with  

the  right  to  open  and/or  develop  sub-­‐franchises  on  its  own.  

Collabora1ve  Arrangements:        Basic  Types  

Management  contract:    an  arrangement  in  which  a  contractor  provides  management  personnel  to  perform  general  or  specialized  func1ons  to  a  client  for    a  fee  –  On  the  one  hand,  host  countries  and  clients  get  needed  assistance  

without  foreign  ownership  or  control  of  opera1ons;  on  the  other,  the  management  firm  is  able  to  generate  revenues  without  making  a  capital  investment.  

                   

Turnkey  operaFon:    an  arrangement  in  which  one  firm  contracts  with  another  to  build  complete,  ready-­‐to-­‐operate  facili1es  –  Usually,  suppliers  of  turnkey  facili1es  and  opera1ons  are  industrial-­‐

equipment  manufacturers  and  construc1on  companies;  projects  may  cost  billions  of  dollars;  customers  are  most  o`en  governments  or  large  MNEs.  

Basic  Collabora1ve  Arrangements:  Joint  venture:    a  direct  investment  in  which  two  or  more  partners  share  

ownership  –  Forms  of  joint  ventures  include:  

•  consorFums,  i.e.,  the  joining  together  of  several  en11es  to  combine  resources  and  perhaps  pursue  a  major  undertaking  

•  two  firms  from  the  same  country  joining  together  in  a  foreign  market  •  firms  from  two  or  more  countries  establishing  an  opera1on  in  a  third  country  •  a  private  firm  and  a  local  government  •  a  private  firm  joining  a  government-­‐owned  firm  in  a  third  country  

Equity  alliance:    an  arrangement  in  which  at  least  one  of  the  collabora1ng  partners  takes  an  ownership  posi1on  (usually  a  minority)  in  the  other(s)      –  The  purpose  of  an  equity  alliance  is  to  solidify  a  collabora1on,  thus  making  it  

more  difficult  to  break  a  contract.  –  The  more  partners  in  a  joint  venture  or  an  equity  alliance,                                                the  

more  complex  the  management  of  the  arrangement.      

What  are  Alliances?  

•  Alliance  – A  union  or  associa1on  formed  for  mutual  benefit,  especially  between  countries  or  organiza1ons  

•  Strategic  Alliance    – An  agreement  between  two  or  more  par1es  to  pursue  a  set  of  agreed  upon  objec1ves  needed  while  remaining  independent  organiza1ons  

– This  form  of  coopera1on  lies  between  mergers  and  acquisi1ons  and  organic  growth  

Alliances  

•  Joint  Venture  is  an  equity  based  alliance  •  Strategic  Alliance  is  a  non-­‐equity  based  alliance  

Strategic  Alliances  

•  Approximately  30%  of  global  corporate  revenue  in  2005  were  a  direct  result  of  alliances  – 2%  in  1980  

•  In  2005  total  number  of  new  deals  surpassed  that  in  2004  by  about  15%  

Strategic  Alliances  

•  Extremely  useful  in    – situa1ons  of  great  uncertainty  and    –  in  markets  with  opportuni1es  that    – a  company  either  cannot  or  does  not  want  to  pursue  on  its  own  

•  Advantages  of  shared  risk  are  o`en  offset  by    – unclear  governance  and    –  lack  of  genuine  commitment  

What  is  meant  by  Strategic  Alliance?    

Defini3on  1:    An  agreement  between  two  or  more  individuals  or  en33es    sta3ng  that  the  involved  par3es  will  act  in  a  certain  way  in  order  to  achieve  a  common  goal.    Strategic  alliance  usually    make  sense  when  the  par3es  involved  have  Complementary  strengths.    Defini3on  2:    Strategic  alliances  are  innova3ve  and  interes3ng  forms  of    rela3onships  between  organiza3ons.  Organiza3ons  create  alliances  in  their  quest  to  compete  against  fast  &  nimble    compe3tors.    

What  is  Meant  by  Strategic  Alliance?  cont’d    

Defini1on  3:    Strategic  alliances  are  agreements    between  companies  (partners)  to  reach    objec3ves  of  a  common  interest.  Alliances  are  among  the  various  op3ons  which    companies  can  use  to  achieve  their  goals.      They  are  based  on  coopera3on  between  companies.    

Purposes  of  Strategic  Alliances    •  Compe33on  is  shiLing  from  a  "firm  versus  firm  perspec3ve"  

to  a  "supply  chain  versus  supply  chain  perspec3ve."  Therefore,    firms  seeking  compe33ve  advantage  are  par3cipa3ng  in  coopera3ve  supply  chain  arrangements,  such  as  strategic  alliances,  which  combine  their  individual  strengths  &  unique  resources.    

 •  Enabling  a  firm  to  focus  resources  on  its  core  skills  &  

competencies  while  acquiring  other  components  or  capabili3es  it  lacks  from  the  marketplace.  

•  Alliances  can  oLen  improve  market  power  of  a  firm  because  either  the  alliance  partner  is  a  customer  for  the  product  or  because  the  distribu3on  channels  &  buying  power  of  the  partners  can  be  combined  

Purposes  of  Strategic  Alliances  cont’d    

•  Alliances  enable  buying  &  supplying  firms  to  combine  their  individual  strengths  &  work  together  to  reduce  non-­‐value-­‐adding  ac3vi3es  &  facilitate  improved  performance.    

 •  In  order  for  both  par3es  to  remain  commiRed  to  this  form  of  

rela3onship,  mutual  benefit  must  exist  (i.e.  a  "win-­‐win"  rela3onship)      

Types  of  Strategic  Alliances  

 •  Joint  Venture:    

–  an  agreement  by  two  or  more  par3es  to  form  a  single  en3ty  to  undertake  a  certain  project.  Each  of  the  businesses  has  an  equity  stake  in  the  individual  business  and  share  revenues,  expenses  &  profits.  

 •  Outsourcing  

•  Global  Strategic  Alliances:    –  working  partnerships  between  companies  (oLen  more  than  2)  across  

na3onal  boundaries  &  increasingly  across  industries.  Some3mes  formed  between  company  &  a  foreign  government,  or  among  companies  &  governments    

 

Types  of  Strategic  Alliances  cont’d    

•  Equity  strategic  alliance:    –  an  alliance  in  which  2  or  more  firms  own  different  percentages  of  the  company  they  have  formed  by  combining  some  of  their  resources  &  capabili1es  to  create  a  compe11ve  advantage.    

 •  Non-­‐  equity  strategic  alliance:    

–  an  alliance  in  which  2  or  more  firms  develop  a  contractual-­‐rela1onship  to  share  some  of  their  unique  resources  &  capabili1es  to  create  a  compe11ve  advantage.    

Alterna1ve  Opera1ng  Modes  for  Foreign  Market  Expansion  

Examples  of  Alliances  •  Nokia  and  MicrosoL  in  alliance  to  make  Zune  phone      •  Star  Alliance  –  Airlines  alliances.  

•  Philips  and  Sony  jointly  launched  the  mini-­‐CD.  

•  Nestlé  and  Fonterra  Sign  Agreement  on  Dairy  Alliance  for  the  America    

•  McDonald’s  with  Disney,  Coca-­‐Cola  &  Walmart      •  Online  grocer  Webvan  Group  forms  alliances  with  

foodmakers:  Kellogg,  Nestle,  Pillsbury,  Quaker    

Examples  of  Alliances  cont’d    •  Motorola-­‐Toshiba:  In  1987-­‐  Toshiba  to  produce  microprocessors  &  

contribute  access  to  the  distribu3on  network.    •  Boeing,  General  Dynamics  &  Lockeed  in  the  early  90’s,  these  companies  

united  to  win  a  bid  put  forth  by  the  Pentagon  for  the  construc3on  of  a  tac3cal  combat  destroyer.  

 •  Alcatel  –Fujistsu  made  a  joint  venture  to  develop  the  equipment  for  the  

third  genera3on  of  cellular  telephone    •  Samsung  &  Sun  Microsystems  cooperated  in  solu3on  business  and  next  

genera3on  business  compu3ng  system.  

Strategic  Alliances  

•  3  dis1nct  stages  – Forma1on,  Execu1on,  Change  or  Discon1nua1on  

•  Throughout  these  stages  – Processes  of  sense-­‐making  – Mutual  understanding  – Commitment  takes  place  

Ra1onale  behind  Strat  Alliance  High

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Strategic importance of the Process

Consider cost comparison: If internalization is more costly, then buy from market, otherwise perform in house

Consider cost comparison: If internalization is more costly, then enter into strategic alliance, otherwise perform in house

Buy from market Enter into a

Strategic Alliance

Copyright 2008 IGI Global

Success  Factors    •  Selec3on:    

–  Strategically  evaluate  which  upstream  &  downstream  members  should  be  included  in  the  supply  chain  to  create  a  highly  compe33ve  &  efficient  supply  network.  

–  Selec3ng  strategic  partner  should  be  based  on  company’s  goals,  objec3ves  &  values  system.  

–  Select  partners  who  have  competencies  in  collabora3on  &  those  who  already  have  a  proven  ability  to  work  in  a  collabora3ve  environment.  

•  Inten3on:    

 Both  partners  should  acknowledge  their  mutual  dependence  &  their  willingness  to  work  for  the  survival  &  prosperity  of  the  rela3onship.  

 

Success  Factors  cont’d  •  Trust:      

–  Existence  of  trust  in  a  rela3onship  reduces  percep3on  of  risk  associated  with  opportunis3c  behavior  as  this  generates  greater  profits  &  serve  customers  beRer  

•  Communica3on:      

–  Communica3on  is  cri3cal  for  building  successful  rela3onships  to  achieve  the  benefits  of  collabora3on  as  it  allows  partners  to  understand  alliance  goals,  roles,  responsibili3es  &  helps  with  the  sharing  &  dissemina3on  of  individual  experiences  

•  Conflict  Resolu3on:      

–  Firms  should  be  mo3vated  to  engage  in  joint  problem  solving  as  they  are,  by  defini3on,  linked  together  to  manage  an  environment  that  was  more  uncertain  &  turbulent  than  each  one  could  control.  

Success  Factors  cont’d    

•  Developing  a  focused  winning  strategy  for  the  alliance:  

–  Based  on  dis3nc3ve  competencies  and  compe33ve  advantages  of  the  partners  in  the  selected  target  market  (s).  

–  To  ensure  there  will  not  be  a  goal  divergence  or  conflict  between  alliance  partners.  

–  To  be  able  to  manage  the  company  cultural  challenges  that  may  arise  between  the  alliance  partners.  

•  Partners  should  be  in  vulnerable  strategic  posi3ons:    

–  (i.e.,  in  need  of  resources)  or  when  they  are  in  strong  social  posi3ons  (i.e.,  possess  valuable  resources  to  share).  seeking  complementary  or  similar  resources  for  transferring  or  pooling.  

•  Progressive  learning  &  value  capturing:      

–  Learning  involves  significant  transfer  of  tacit,  specialized  &  complex  knowledge.    Learning  requires  close  collabora3on  of  both  firms  to  overcome  transfer  challenges  as  knowledge,  values,  culture  and  organiza3onal  forms.  

 

Success  Factors  cont’d    

•  Respect  and  protect  the  brand  of  each  partner.    •  Determine  and  align  decision  rights:    

–  To  define  what  decisions  are  important  to  the  alliance,  which  partner  should  make  them  and  how  the  decisions  will  be  made  and  monitored.  

 •  Exit  Strategy:    

–  Agree  upon  an  exit  strategy  for  the  alliance.  It  Is  important  to  have  agreement  in  advance  on  how  the  alliance  will  be  concluded  if  and  when  it  may  fail  and/or  when  it  has  fulfilled  its  mission  and  achieved  its  goals  and  objec3ves    

Mistakes  Leading  to  Failure  

 •  Alliance  business  is  viewed  internally  by  one  partner.  

•  One  of  the  partners  is  too  dependant  on  the  other’s  capabili3es.  

•  Problems  and  dilemmas  of  mistrust.  •  Cultural  &  language  barriers.      •  Collabora3on  in  compe33vely  sensi3ve  areas  can  be  difficult.  

•  A  clash  of  egos  might  occur.  

End  of  Easy  Growth  –  BCG  arFcle  •  Between  2002  and  2010  in  China  –  FDI  grew  by  43%  – M&A  grew  by  30%  

•  Sales  of  these  companies  grew  by  20%  as  compared  to  7%  for  their  global  peers  –  Scale  of  local  market  has  been  key,  keeping  emphasis  on  export  

–  Favorable  tech-­‐transfer  –  Indigenous  innova1on  policies  allowed  quick  absorp1on  

•  5  strategic  ini1a1ves  that  helped  –  Taking  advantage  of  megatrends  –  Strengthening  M&A  capabili1es  –  Establishing  capabili1es  beyond  cost  leadership  improving  produc1vity  

– Developing  global  organiza1on,  management  and  govt  policies  

End  of  Easy  Growth  –  BCG  arFcle  

•  Megatrends  – Rise  of  middle  class  in  emerging  markets  – Building  of  ‘new  world’  through  massive  infrastructure  projects  

–  Increasing  scarcity  of  natural  resources  – Growth  of  new  trade  routes  through  emerging  markets  

Strategic  Perspec1ve  

•  Why  should  we  collaborate?  – Specify  func1on  and  value  of  collabora1on  – Where  does  it  fit  into  the  Org’s  overall  strategy  – How  does  it  contribute  to  the  accomplishment  of  its  mission  

•  What  type  of  collabora1on  should  we  undertake?  – Must  understand  implica1ons  of  different  modes    – Select  the  op1mum  one  for  specific  circumstance  

Strategic  Perspec1ve  

•  With  whom  should  we  collaborate?  – Select  ‘right’  partner  –  who  is  right  and  how  is  right  defined  

– Fit  between  missions,  values,  needs,  competencies  

•  When  should  we  collaborate?  – Timing    – When  to  embark,  when  to  change  nature  and  when  to  exit  

•  How  should  we  collaborate?  – Specific  design  and  management  of  alliance  –  Itera1ve  process  that  evolves  or  fixed  approach  

Alliance  Crea1on  &  Dev  

•  Understanding  strategic  collabora1on  – Collabora1on  con1nuum  

•  Making  the  connec1on  •  Ensuring  strategic  fit  •  Genera1ng  value  •  Managing  the  rela1onship  

7  Cs:  Ques1ons  for  Partners  

•  Connec1on  •  Clarity  •  Congruency  •  Crea1on    •  Communica1on  •  Con1nuous  learning  •  Commitment  

Connec1on    

•  To  what  extent  individuals  are  personally  and  emo1onally  connected  to  the  social  purpose  of  collabora1on?  

•  Have  individuals  been  able  to  touch,  feel  and  see  the  social  value?  

•  What  level  and  what  quality  of  interac1on  exist  among  senior  leaders?  

•  To  what  extent  personal  connec1ons  and  interac1ons  occur  at  others  levels  across  the  partnering  organiza1ons?  

•  How  strong  are  interpersonal  bonds?  

Clarity    

•  What  is  the  purpose?  •  Where  does  the  rela1onship  fall  on  the  collabora1on  con1nuum?  

•  Do  both  partners  have  wriYen  purpose  statements?  

•  Has  each  partner  determined  rela1ve  importance  of  collabora1on  porqolio?  

Congruency    

•  How  well  the  partners  understand  each  other’s  business?  – Mission,  values,  strategies  

•  What  are  current  as  well  as  poten1al  areas  of  overlap?  

•  How  can  each  partner  help  the  other  accomplish  its  mission?  

•  To  what  extent  the  collabora1on  is  a  strategic  tool  for  each  partner?  

•  Have  the  partners  engaged  in  shared  visioning  about  future  fit?  

Crea1on    

•  What  resources  of  each  partner  are  of  value  to  the  other?  

•  What  specific  benefits  will  accrue  to  each?  •  Do  benefits  outweigh  costs  and  risks?  •  What  social  value  could  be  generated  by  the  alliance?  •  What  new  resources,  capabili1es  and  benefits  could  be  created  by  the  collabora1on?  

•  Are  resource  and  capability  transfer  two-­‐way?  •  Are  benefits  equitably  balanced  between  the  partners?  •  Has  the  value  exchange  and  crea1on  depreciated  and  to  what  extent?  

•  Can  the  value  construct  be  renewed  and  enhanced?  •  When  is  it  1me  to  end  the  collabora1on?  

Communica1on    

•  What  level  of  respect  and  trust  exists?  •  How  is  communica1on  managed?  •  What  channels  and  vehicles  are  used  for  internal  communica1on?  

•  Is  it  under  publicised  or  overhyped?  

Con1nuous  learning  

•  What  will  each  partner  learn  and  how  will  they  work  with  this  to  create  greater  value  to  the  partnership?  

•  Has  the  learning  been  incorporated?  •  Is  there  a  process  for  rou1nely  assessing  learning?  

•  Is  complacency  s1fling  innova1on?  

Commitment    

•  What  is  the  level  of  organiza1onal  commitment  to  partnership  –  how  is  this  measured  and  demonstrated?  

•  What  is  the  trend  in  investments  –  personal,  financial,  ins1tu1onal?  

•  Are  mutual  expecta1ons  high  or  reasonable?  What  determines  this  and  how?  

•  What  is  the  composi1on  of  each  partner’s  collabora1on  porqolio,  and  where  does  this  alliance  fit  within  those  porqolios?  

•  Are  the  porqolios  consistent  with  the  partners’  collabora1on  capaci1es?  

Collabora1on  Con1nuum  Rela1onship  stage   One  Philanthropic  

Two  Transac1onal  

Three  Integra1ve  

Level of engagement

Low High

Imp to mission Peripheral Strategic

Magnitude of resources

Small Big

Scope of activities

Narrow Broad

Interaction level

Infrequent Intensive

Managerial complexity

Simple Complex

Strategic value Modest Major

Collabora1on  Con1nuum  

•  Progression  along  the  con1nuum  is  not  automa1c  – Result  of  conscious  acts  and  efforts  

•  Regression  also  possible  – Conscious  decisions,  or  – Uninten1onal  slippages  

•  It  could  be  at  any  point  on  this  con1nuum  – 3  stages  are  not  discrete  loca1ons  but  con1nuous  points  in  between  stages  

•  Evolu1onary  in  nature  and  con1nuously  moving  both  ways  

•  Important  to  approach  it  in  a  sophis1cated  and  systema1c  manner  

Collabora1on  Con1nuum  

•  Research  and  present  characteris1cs  of  each  stage  on  the  con1nuum  – Must  be  submiYed  before  the  next  class  – All  such  tasks  could  be  part  of  your  assessment  

Collabora1on  Con1nuum  Philanthropic   Transac1onal     integra1ve  

Collabora1on  Mindset  

Gratefulness, Min collaboration in defining activities

Partnering mindset, Increased understanding and trust

‘WE’ mentality in place of us vs them

Strategic  Alignment  

Min fit reqd beyond a shared interest in a particular issue area

Overlap in mission and values, Shared u/s at top of the org

Broad scope of activities of strategic significance, Reln as strat tool, High mission mesh, Shared values

Collabora1on  value  

Generic resource transfer, unequal exchange of resources

Core competency exchange, more equal exch of resources, Projects of limited scope and risk

Projects developed at all levels, Joint benefit creation, Need for value renewal, Shared equity investment for mutual return

Rela1onship  management  

Corp contact not personal, Proj progress via written reports, Min performance expectations

Expanded personal reln, strong pers connect at leadership level, explicit expectations, informal learning

Expanded opportunities, Deep pers reln across orgn, Org integration in execution, Incentive sys to encourage partnership, Active learning

Partner  Selec1on  Process  

•  Verify  the  facts  – What  we  know,  what  we  may  know,  what  we  don’t  know,  what  we  may  never  know  

•  Iden1fy  stakeholders  – Who  cares  about  this  decision,  how  much  and  how  large  is  his  stake  

•  Clarify  issues  – Dis1nguish  between  legal,  financial,  management,  moral  

– Document  each  in  a  few  lines  •  Evaluate  op1ons  •  Resolve  to  take  ac1ons  – Always  take  the  op1on  that  is  just  and  fair  not  easiest  or  cheapest  

Alliance  Paradox  

•  Alliances  help  firms  improve  compe11ve  posi1on  by  enhancing    – Enhancing  market  posi1on  –  Increasing  efficiencies  – Accessing  new  or  cri1cal  resources  or  capabili1es  – Entering  new  markets  

•  By  turn  of  this  century,  world’s  largest  companies  had  1ed  up….  – Over  20%  of  their  assets  and  – 30%  of  annual  research  expenditures  

•  Between  30%  -­‐  70%  of  alliances  fail  –  2004  •  Over  50%  alliances  are  terminated  -­‐  2008  

Ques1on    

•  What  could  be  some  of  the  problems  associated  with  various  arrangements  and  what  are  your  recommenda1ons  to  resolve  them?  

•  Please  discuss  in  small  groups  and  enlist  your  response  in  rela1on  to  the  two  cases  requested  earlier  –  – McDonald  and  Vikram  Bakshi  case  – Micromax  and  Ericsson  case  – Nokia-­‐Siemens  alliance  – Airtel  –  Ericsson  alliance  

Ques1ons  

•  Factors  that  explain  success  of  a  given  alliance  

•  How  can  it  develop  a  firm-­‐level  “alliance  capability”  so  as  to  enjoy  greater  and  repeatable  success  across  all  its  alliances