Global strategic alliances-payoffs and pitfalls.pdf

7/27/2019 Global strategic alliances-payoffs and pitfalls.pdf

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Companies form global strategic allianceslicensing arrangements, joint ventares,an d consorda to help them outflank com pedtors, but forthe unwa ry such partnerships may backfire.

G l o b a l S t r a t e g i c A l l i a n c e s :P a y o f f s a n d P i t f a l l s

DAVID LEIJO H N W. SLOCUM, JR.

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O ver the past ten years, we have wit-nessed a tremendous surge in thenumber and types of strategic alli-ances formed between multinational corpora-tions across many industries. Consider thefollowing examples of how firms use differ-ent types of strategic alliances to competeglobally: In the pharm aceutical industry,Merck, Eli Lilly, Fujisawa, and Bayer aggres-

sively cross-license their new est drugs to oneanother not only to suppo rt industrywide in-novation, but also to amortize the high fixedcosts of R&D and distribution. Corning Incorporated aggressivelyuses its 23 joint ventures with such foreignpartners as Siemens of West Germany, Sam-sung of South Korea, Asahi Chemical of Ja-pan, and CIBA-GEICY of Switzerland topenetrate and thrive in a growing number ofrelated high-technology markets.

Airbus Industrie, the European con-sortium backed by four governments to pro -duce commercial aircraft, is slowly bu t stead-ily gaining market share and experience incompeting in this highly lucrative but riskyindustry.This article focuses on three broad typesof strategic alliances that global competitorsmay adopt. All strategic alliances may bethought of a s transition mechanisms that p ro-

pel the partners' strategy forward in a turbu-lent environmentor, more important, in anenvironment that top management perceivesas highly uncertain. These are shown in Ex-hibit 1 as licensing arrangements, joint ven-tures, and consortia. (Consortia are broadlydefined to include large, interlocking rela-tionships between business entities of a cor-porate family, such as the keiretsu of Japanand the chaebol of South Korea.)Exhibit 1 highlights the managerial impli-


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cations for organization design and the as-sociated human resources manag;ement re-quirements in effectively implementing eachstrategic alliance. In separate sections for eachform of alliance, we will examine: The underlying strategic rationale forits fornfiation. The benefits and costs associated withthe strategy. The critical success factors requiredfor its implementation. The role of strategic human resources

management.

LICENSING ARRANGEMENTSLicensing arrangements have becomemore prominent worldwide, both in manu-facturing and in service/franchise industries.These represent the least sophisticated formof strateigic alliance because the companies in-volved do not take an equity position in oneanother^ Strategies for licensing in manufac-

turing differ from those for services and fran-chises. In manufacturing firms, licensing fre-quently creates a new competitor because itis tantam oun t to the firm's sale of its technol-ogy. In service firms, the items sold are distri-bution systems that aren't protected by pa-tents or other safeguards.

In Manufacturing FirmsIn most manufacturing industries, licens-

ing agreements represent a purchase of tech-nology in exchange for market entry into anew region or coujitry. Predisposing factorsfor consideration by companies interested inlicensing their technologies to other firms in-clude: Ah inability to capitalize on the tech-nology by itself. A desire to preempt the competitionby setting industrywide standards early in aproduct's life cycle.

A need to maintain industrywide dte-cipline and high levels of innovation in fast-changing, technology-driven environment^. The prospect of lucrative sales and ssjr-vice contracts that are (1) associated w ith pro-prietary production processes and/or (2) dje-signed to conform to government requiremenjtsfor technology transfers.In many cases, firms have entered infolicensing agreements with foreign firms bie-cause they are unable to develop their techno-logical innovations to the fullest extent. F(j)r

example. Sun Microsystems has decided iolicense its most powerful microprocessor de-signs to N.V. Philips. The Dutch giant has tljieproduction and distribution clout to marketSun's newest RISC (Reduced Instruction SetComputer) chips in ways unavailable to tlteU.S. firm. ;Sun Microsystems is hoping that tljeRISC chips, which are used primarily inwo rkstation and desktop computers, will firJdtheir way into other consumer electronicjrs

produ cts, such as televisions, telephones, anldautomobile engine controls (all of whichPhilips also manufactures). Equally impor-tant. Sun benefits from licensing the chips t^Philips because it gains a secure foothold i|nthe consolidating European market where Iq-cal production requirements are forecast ibbecome more restrictive in the future.Licensees can disseminate the technology^faster across the industry than could the pi-oneering firm alone. The desire to preemj^^t

competitors in setting industry standards is kpowerful inducement to license new and eveiiunproven technologies early on. Standardijj-ing a technology early in its life cycle cod4give the licensing firm considerable marke^breadth.Within the com puter industry, for examj-ple, many firms are racing to license theiftechnologies to potential users in an attemptto set an industrywide stan dard. M IPS Comlputer Systems licensed its newest micropror 45


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David Lei is an assistant professor of busi-ness policy at ttie Edwin L. Cox Schooi ofBusiness at Souttiern Methodist Univer-sity. He received his B.A. from Swarth-more College and his iVl.A. and Ph.D.from the Graduate School of Business atColumbia University. Before joiningS.M.U., he was a faculty member at theUniversity of Texas at Dallas. His teachingand research interests lie in giobaistrategy, strategic planning, and manufac-turing technologies. He is currently ex-amining the impact of diversification andglobal strategies on organizational com-petitiveness and performance.

cessor designs to Siemens of West Germanyin an at tempt to preempt the Sun Microsys-tems-Philips designs from penetrating the m ar-ket too quickly. In addition to its deal withSiemens, MIPS has signed licensing agree-ments with Digital Equipment Corporation,Texas Instruments, Cypress Semiconductor,and Bipolar Integrated Technology of theUnited States, and with Fujitsu, NEC, andKubota of Japan to produce i ts chips andmarket new computers that are based on i tsdesigns.

Cross-licensing agreements are oftenfound in industries in which R&D and otherfixed costs are exorbitant, but where aggres-sive competition is needed to maintain indus-trywide discipline and innovation. The phar-maceutical and chemical industries arereplete with cross-licensing agreements be-tween global firms. Firms willingly licensetheir newest technological breakthroughs toone another in order to amortize R&D costsand to promote specialization of differentresearch-based competencies.

Finally, consumer nondurables, indus-trial equipment, and defense firms often en-gage in licensing and cross-marketing agree-ments to ensure a steady supply of servicecontracts and equipment upgrades to thelicensee. Aerospace and defense contractorshave found licensing a necessity in sellingtheir equipment abroad. For McDonnell-Douglas and Genera] Dynamics, licensing ar-rangements with different Japanese and Euro-pean governments to produce jet fighters areroutine business.

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In Service and Franchise-Based FirmsService and franchise-based firms have

long engaged in licensing arrangements withforeign distributors. The products/servicesinvolved include beverages (Anheuser-Busch),fast-food restaurants (McDonald 's), car ren-tals (Avis, Inc.), and numerous hotel chains


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(e.g., Hilton and Hyatt) throughout the world.Mature,; domestic, service-based industriesconsider licensing particularly attractive be-cause it: Establishes a fast market presence withrelatively little direct investment.

Employs a fairly standardized market-ing approach to creating and controlling aglobal image.Anheuser-Busch and Coca-Cola have en-tered into licensing and franchise agreementswith foreign distributors because such agree-

ments afford a way of entering new marketsrelatively quickly with little capital outlay.Licensing to franchisees not only producesfees, royalties, and other compensation, butalso helps firms confront and outflank theirdomestic rivals.With its licensed distributors, Anheuser-Busch concentrates on developing the market-ing programs that fit each national market.Coca-Cola's licensing arrangements with itsnumerous partners worldwide give it a formi-

dable edge over archrival PepsiCo. In bothcases, these U.S. giants have been able to builda substantial global market presence by build-ing up a strong cadre of loyal licensees.Licensing and franchising are also usefulstrategies for firms that desire to standardizeand control global m arketing activities. Avis,Hilton Hotels, Holiday Inns, Kentucky FriedChicken, and McDonald's are some of themost prominent U.S. firms engaging in fran-chising abroad. Each of these firms has de-veloped a distinctive brand image an imagethat has been cultivated and standardizedover considerable time.Avis has franchises throughout theworld. Using the Avis logo and specificcompany-developed procedures, franchiseesget a total business system for renting cars inreturn for royalty fees. To ensure high levelsof performance. Avis maintains tight finan-cial and marketing control over franchisees'activities.

John W. Slocum, Jr. holds the O. PaulCorley Chair in management at the EdwinL. Cox School of Business at SouthernMethodist University. He teaches or-ganizational behavior, organization design,and management. He has written morethan 90 articles and five books on leader-ship motivation, career management, andthe way corporate strategy impacts humanresources practices in o rganizations. Slo-cum received his B.B.A. from WestminsterCollege, his M.B.A. from Kent StateUniversity, and his Ph.D. from the Univer-sity of Washington. Before joining thefaculty at S.M.U., he was a member of thefaculties at Ohio State and Penn State.He served as the 39th president of TheAcademy of Management, the editor ofThe Academy of Management Journal, an dassociate editor of The Academy ofManagement Executive. He is a fellow inThe Academy of Management and theDecision Science Institute, and he hasserved as a consultant to numerous or-ganizations in the area of human re-sources management.

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Exhibit 1G L O B A L S T R A T E G I C A L L I A N C E S

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StrategyLicensingManufacturingIndustr ies

LicensingServicing andFranchises

JointVenturesSpecializationAcross Partners

Joint VenturesShared Value-Adding

Consort ia ,Keiretsus,and Chaebols

OrganizationDesign

Technologies

Geography

Function

Product orline ofbusiness

Firm andindustry

Benefits Early standardi-

zation of design Abil i ty to

capitalizeon innovations

Access to newtechnologies

Abil i ty to controlpace of industryevolution

Fast marketen t ry

Low capita]cost

Learning apartner's skills

Economicsof scale

Quasi-vert icalintegration Faster learning

Strengths of bothpartners pooled

Faster learningalong value chain

Fast upgrading ofof technologicalskills

Shared risksand costs

Building a criticalmass in processtechnologies

Fast resourceflows andskill transfers

Costs New compet-

itors created Possible even-

tual exit fromindustry

Possible de-pendence onlicensee

Quali tycontrol

Trademarkprotection

Excessive de-pendence onpartner forskills

Deterrent tointernal in-investment

Highswitchingcosts

Inability tolimit partner'saccess toinformation

Skills andtechnologiesthat have noreal marketwor th

Bureaucracy Hierarchy

Critical SuccessFactors

Selection of licenseethat is unlikely tobecome competi tor

Enforcement of pa-tents and licensingagreements

Partners compatiblein philosophies/values

Tight performancestandards

Tight and specificperformance criteria

Entering a venture as"student" rather than"teacher" to learnskills from partner

Recognizing thatcollaboration isanother form ofcompeti t ion to learnnew skills

Decentralization andautonomy from cor-porate parents

Long "courtship"period

Harmonization ofmanagement styles

Governmentencouragement

Shared valuesamong managers

Personal relation-ships to ensure co-ordination andpriorities

Close monitoring ofmember -companyperformance

Strategic HumanResources Management Technical knowledge Training of local

managers on-site

Socialization offranchisees andlicensees withcore values

Management de-velopment andtraining

Negotiation skills Managerial rotat ion

Team-building Acculturat ion Flexible skills

for implicitcommunica t ion

"Clan" cultures Fraternal

relat ionships Extensive mentoring

to provide acommon vision andmission acrossmember companies


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Benefits and CostsIn manufacturing industries, some firmsuse licensing as a way to quickly disseminatetheir technologies worldwide and therebycontrol the pace of industry evolution. Japa-nese manufacturers have successfully cross-licensed VHS-formatted video recorders toone another as well as to foreign firms thatproduce them under license. Aggressivecross-licensing to both competitors and part-ners helped the VHS standard become domi-nant worldwide and displace the competingSony and Philips' versions.Licensing is a significant avenue for gain-ing access to new technologies that couldtransform the industry. IBM and Texas Instru-ments are moving toward greater use of cross-licensing agreements to help develop newgenerations of factory automation software.The benefits of licensing another firm's tech-nology become even more important whenone considers the na ture of technological evo-lution in that industry. When technologicalbreakthroughs occur discontinuously, ratherthan along a continuous path, licensing helpsfirms ayoid bearing the costs of plant andproduct obsolescence. Domestically, IBM islinking up with Motorola Communicationsand Electronics, Inc. to further advance thestate of X-ray lithography for making super-dense chips.The costs of liransing can be dispropor-tionate to their benefits for manufacturingfirms. As technology becomes a greater sourceof competitive adva ntage, licensing decisions

can often radic ally shift the firm's competitiveposture in that industry. RCA licensed itscolor television technologies to Japanese firmsduring the 1960s, only to face mounting pres-sure from licensees that w ere then able to util-ize and even leapfrog over RCA into newrelated technologies. W hen licensing involvestransferring the firm's core com petencies, thefirm's risk in that industry is even greater. Fu-ture com petitors have direct and cheap access

to new technologies that are often producedby the licensee rather than the licensor. Tliisis what happened to RCA.

In service-based businesses, the benefitsof licensing appear to outweigh the costs. Inconsumer nondurables and service businessesthat involve little capital investment andspecialized skills, licensing and franchisinghelp domestic firms rapidly build marketshare and global presence. The greatest bene-fit accrues to firms w hose pro ducts o r serviceshave reached maturity in domestic markets(e.g., the fast-food and beverage industries),but where the market potential abroad re-mains unexploited.Potential costs to licensing and franchis-ing abroad include the misuse of trademarksand lack of direct quality control over fran-chisees' ope rations. Licensing and franchisingare viable strategic alliances when local regu-lations or laws prevent direct investment inthe country by foreign firms such as McDon-ald's in Russia, for example.Although many U.S. firms have led tlieworld in building g lobal franchises in restaii-rants, hotels, car ren tals, and o ther service in-dustries, there are pitfalls associated withlicensing and franchises. Such pitfalls occurwhen the services involved require extensivetraining and high managerial skill levels. Insuch businesses as accounting, managementconsulting, banking, insurance, and otherfinancial services, the specialized professionaltraining required may preclude licensing andfranchising as viable alternatives.

Critical Success FactorsLicensing by manufacturing firms oftertturns out to be little more than a sale of tech-nology. There are few critical success factorsfor protecting one's own proprietary processes,but firms can take two steps to minimize therisks involved.First, firms should not enter into licensing 49


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arrangements with any firm that is likely tobecome a real competitor in the foreseeablefuture. For one thing, the terms of licensingagreements are often difficult to enforce inforeign courts, and many become meaning-less as the evolution of technology accelerates.For another, licensing arrangements inher-ently benefit the licensee, so stringent con-trols over technology are required: constant

agers must invest considerable amounts oftime and resources to ensure tha t prospectivelicensees/franchisees are likely to stay for thelong haul.

Once the selection process is complete,the next step is to socialize local managers andpersonnel to the franchising firm's values,method s, and mission. Because the licensor isgeographically distant from the individual

(^During [a two-week training session] Russianemployees learned both the McDonald philoso-phy and the McDonald way of addressing cus-tomers and maintaining quality standards."

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management, monitoring, and scrutiny, forexample.In service industries, critical success fac-tors include working with the licensee/fran-chisee to build the product's brand image inthat region. Licensing and franchising firmsalso need to ensure that they have trademarkprotection in regions where they operate. Ser-vices and franchises require coordination ofbuying and promotion practices within geo-graphical areas . Franchise agreements can be-come very complex. Defining compensationpractices and setting standards for perfor-mance and quality control early on are inte-gral to successful operations.Human Resources Management

Careful selection and evaluation of theprospective licensee/franchisee are vital to ef-fective operations. It's important to selectlicensees and franchisees w ho appe ar to sharethe same values, working styles, and philos-ophies as those of the licensing firm. Sincefranchisee loyalty is key to profitability, man-

licensee's operations, socialization is the onlyreal long-term mechanism for guiding inde-pendent action. Before opening its first res-taurant in Russia, McDonald's flew all keyemployees to its Hamburger University for atwo-week training session. During these ses-sions, Russian employees learned both theMcDonald philosophy and the McDonaldway of addressing customers and maintainingquality standards.

JOINT VENTURESThe number of joint ventures started in

the past few years heralds a recognition thatglobal strategic alliances are becoming anecessity for firms that want to compete inmany capital-intensive industries. Unlikelicensing agreements, joint ventures involvecreating a new entity in which the originatingpartners take active roles in formulatingstrategy and making decisions. Generally,joint ventures are either specialized ventixresor shared value-adding ventures.Although these kinds of ventures differ


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from each other in the way they are im-plemented and operated, both strategic alli-ances are formed because the partners needto : Share and lower the costs of high-risk,technology-intensive development projects. Gain economies of scale and scope invalue-adding activities that can be justifiedonly on a global basis.

risks inherent in many technology-intensiveprojects are making simultaneous partnersout of competitors.Building econom ies of scale is an im por-tant incentive to form joint ventures. Theneed to amortize large fixed-cost investmentsfor world-scale plants in relatively matu re in-dustries, such as steel, has spawned a flurryof joint-venture activity between U.S. and

CC[E]ven [former] rivals have joined forces. . . .Thus the escalating costs and risks inherent inmany technology-intensive projects are makingsimultaneous partners out of competitors."

Seek access to a partner's technology,accumulated learning, proprietary processes,or protected market position. Shape a basis for future competition inthe industry involved.Joint-venture activity is increasing insuch high-technology industries as aerospace,telecomrinunications, computers, and factoryautom ation. The costs and risks of develop-ing successive generations of new productsand procjesses have becom e too onerous for asingle firjm to bear. Moreover, the complexi-ties and ijisks of techno logy developmen t havegreatly faised the fixed costs of each newproject, iThe jcosts are so enormous that even firmswhich w|ere once fiercely competitive rivals,such as 'Jexas Instruments and Hitachi, havenow joir^ed forces in this case to design andproduce | the next-generation, 16-megabitchip. Sinjvilarly, IBM has recently teamed upwith SierKens to design an even more sophisti-cated 64-megabit chip that cannot bemanufactured with existing process designsand equipm ent. Thus the escalating costs and

Asian com panies. For example, the USXporation has invested $400 million in a 50-;;|0venture with Pohang Iron and Steel Companyof South Korea to upd ate and build a moderil,integrated facility to produce metal sheet^,coils, and rolled steel for the automotive,hardware, and appliance markets.In Europe, Philips and Siemens havjeteamed up in a venture to produce state-oi-the-art semiconductors and chips in a plaiitdesigned to meet the needs of both comp?^-nies. The sea^rch for maximum scale econd-mies has led Whirlpool and Philips to ptjttheir domestic appliances business intocombined venture that attempts toglobal-scale economies in the consolidatingappliance market.

Firms may also enter into joint ventures tJ)build economies of scope. For example, For(|Motor Company has linked up with Nissailiand Volkswagen to fill out its product linejFord believes that a global presence require!it to meet all levels of product varietaldemanded by many different markets. Simuljtaneously meeting the dem ands for high vari-i 5 1


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ety and low cost may be too much for m anycompanies to manage on their own. AT&T'srecent separate ventures with NEC and Mit-subishi of Japan a re designed to help it acquireproduction skills in manufacturing the cus-tom-designed computer chips that are neededto maintain global scale and breadth. In theconsumer nondurable industries, companiestypically enter into a series of cross-marketlicensing agreemen ts and small-scale ventures

Siemens, (3) color television tub es with Sam-sung and Asahi, and (4) ceramics for catalyticconvertors with NGK Insulators of Japan. Ineach of these ventures. Coming's underlyingmotive was to help shape the industry's evolu-tion in each of these growing sectors.Although all joint ventures are motivatedby some combination of these four reasons,the way the venture's organization is designedwill depend on the relative strength of the

Cf[M]any firms enter into Joint ventures . . . tolearn about another irm's technology andpro-prietary processes or to gain access to its dis-tribution channels.. . ."

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to fill out their respective product needs indifferent markets (e.g.. General Foods andNestle).A powerful motive leading many firms toenter into joint ventures is the desire to learnabout another firm's technology and proprie-tary processes or to gain access to its distribu-tion channels in a particular market. Manyforeign firms have entered into a wide seriesof joint ventures with the ir American com pet-itors to learn the marketing skills and tech-nologies U.S. firms use in developing newproducts and processes. In fact, man y of theseforeign firms enter into such ventures to gainaccess to proprietary technologies and inno-vations that would otherwise be inaccessibleto them.

Finally, many ventures occur because thepartnering firms want to shape the evolutionof competitive activity in the industry. Corn-ing Incorporated has numerous global ven-turesto produce (1) medical diagnostic equip-ment with CIBA-GEIGY, (2) fiber optics withCie. Financiere des Fibres Optiques and with

partners involved as w ell as the venture's mis-sion. As mentioned previously, there aregenerally two types of ventures: specializa-tion ventures and shared value-adding ven-tures. Let's look more closely at each.

Specialization VenturesSpecialization ventures are those towhich each partner brings and contributes adistinctive competency in a particular value-adding activity (e.g., one produces, the othermarkets). A combination in which one part-

ner excels in manufacturing while the othercontrols market access is likely to result in aventure characterized by specialization anddivision of labor. Consequently, these ven-tures are likely to be organized aroundfunctionsmanufacturing, marketing, etc.One specialization venture is composed ofThomson (of France) with JVC (of Japan).Thomson hopes to learn from the Japanesepartner skills vital to competing in the con-sumer electronics industryskills such as


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those central to manufacturing technologiesinvolved in producing optical and compactdisks, computers, and semiconductors. JVChopes tp learn from Thomson the specificmarketing skills needed to compete in suchfragmented markets as Europe.

Within the United S tates, the entire spec-trum of joint ventures between GM, Ford,and Chrysler with their Japanese counterpa rtsmay be considered specialization ventures.

ness. Joint ventures in which partners shajrein building added value include that of IBMwith Siemens. These two electronics giantswill jointly design, produce, and market n wgenerations of chips in Europe and NorthAmerica.

In the imaging and reprographics indus-try, Fuji-Xerox exemplifies the shared vahie-adding approach across the design, production,and marketing skills of both firms. Despite

CC Within the United States, the entire spectrumof joint ventures between GM, Ford, and Chrys-ler with their Japanese counterparts may beconsidered specialization ventures."

General Motors' recent introductions of newGeo and: other models exemplify the way Jap-anese production strengths are m atched w ithGM's access to the American market. InChrysler's Diamond-Star joint venture withMitsubishi Motors, the Japanese manufac-turer sujpplies low-cost engines, transmis-sions, ar^d accelerators; Chrysler provides thestyling and distribution base. Ford's reen-gineered I Escort line of cars was designed inconjunction with Mazda, which providedmany design and prod uction capabilities thatFord was able to learn.

Shared V^lue-Adding VenturesIn the shared value-adding ventures, part-ners participate and share in the value-addingactivities together (e.g., both design and pro-duce joinMy). Participative and sharing typesof ventures usually result when both partieshave strohg b ut related skills in the same val-ue-adding activity. These ventures are oftenorganized around products or lines of busi-

some initial difficulties, this ventu re leads tlieworld in designing and producing high-qual-ity optical and imaging products th at are useHin different photocopying and other applica-tions. Under a 50-50 arrangement, Fuji-Xerdxproduces all the copiers used in Japan, Asi,iand much of Europe.

Benefits and CostsAll joint ventures, regardless of type,bring w ith them a set of strategic benefits andcosts. Clearly the benefits for all involved in-clude an o pportun ity to share risks, to learnabout a partner's skills and proprietary processes, and to gain access to new d istributionchannels. The cost reduction and risk reduction tha t a re associated w ith high-technolog-^projects are the most frequently sought-aftebenefits.

Joint ventures carry risks as well. AEmentioned p reviously, some venture partner-deliberately enter into such arrangements tolearn about and/o r to gain access to another 53


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firm's research or proprietary technology.The single biggest cost may be one partner'sloss of skills and o ther sources of competitiveadvantage to a partner that then becomes amore direct and more potent competitor.This occurred when GE entered into aspecialized joint venture with Samsung toproduce microwave ovens. Now Samsumgcompetes with GE in its full line of householdappliances. Other costs include coordinationcosts within the venture that compromisetrust, the loss of flexibility resulting from a

poo r blending of corporate cultures, difficultyin transferring organizational learning fromthe entity to the parent, and assimilating theventure's value-adding activity with that ofthe parent.The particu lar benefit associated with thespecialization venture is that both partnersget a form of quasi-vertical integration with-out having to m ake a huge investment in fixedcosts. Specializing the value-adding activitieshelps increase learning and enhance econo-

mies of scale. Most ventures of this form aredesigned to compensate for an existing weak-ness through a partner's strength. Such a ven-ture helps the weaker partner learn withoutincurring the risks associated with high capi-tal intensity and large investments. Thomsonof France, for example, is gaining valuableproduction experience and expertise from itsnumerous joint ventures with JVC and Sie-mens in different app lications of microelec-tronics technology. Canon of Japan hasbenefited extensively from its link-up withEastman Kodak in learning about new imag-ing and optical technologies for use in differ-ent industries. Ford is improving its competi-tive position in the small-car market withMazda.

The main cost of the specialization ven-ture is that all too often a partne r is relegatedto a position of permanent weakness. Al-though U.S. auto manufacturers potentially54 have the oppo rtunity to learn about new

manufacturing and design skills from theirAsian counterparts, GM and Chrysler are be-coming highly dependent upon Daewoo,Hyundai, Mitsubishi, and Toyota for criticalcore competencies in engines, transmis-sions, and power systems, for example.Managers should note that a frequent re-sult of such joint ventures is that the dom esticpartner doesn't learn enough to become inde-pendent. Instead, it becomes a distributor forthe foreign partner.The two joint ventures that perhaps bestepitomize the risks of the "division of labor"venture are Fujitsu Fanuc's ventures withGeneral Motors and General Electric. TheGM-Fanuc venture was originally intended toco-design and co-produce robots and flexibleautomation systems used in the automobileindustry. But GM was unable to learn the crit-ical skills needed from its Japanese partner, soit now functions as little more than a distribu-tor of the robots.GE's venture with Fanuc produced a simi-

lar result. The original intent of the venturewas for GE to learn about au tomation and in-dustrial controls. Instead, the company hasdecided to abandon the entire factory auto-mation business because of pressure fromJapanese rivals, including Fanuc itself. In bothcases, American firms exited a promisingbusiness because they could not control thetransfer of skills that occurred within theventure.Shared value-adding ventures pose their

own set of benefits and risks. The primarybenefits for both pa rtners is that each can pro-vide the strength and skills needed to achieveeconomies of scale and faster lea rning. Corn-ing's extensive co lor-tube ventures w ith AsahiGlass and Samsung give both sides the oppor-tunity to constantly upgrade their technologyand market positions.The biggest costs and risks associatedwith the shared value-adding venture are thatpartne rs can lose their sources of competitive


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advantage to their partners very rapidly ifthey are not careful. Because managers andskilled personnel a re likely to be in da ily con-tact, limiting the spread of information andsetting boundaries for organizational learn-ing are impossible.

Moreover, "switching" costs in theseventures the costs involved in selecting an-other partnerare much higher than they arein specialization ventiu-es. It is difficult to

ing formed its venture with CIBA-GEIGY,On the other hand, rushing into a venturecan d estroy it, as AT&T and Olivetti of Italydiscovered when they formed a joint ventureto produce personal computers. The ven turewas eventually dissolved because of widedifferences in management styles, corporatecultures, and missions that the companiesfailed to explore before they created it. Coiji-panies with comparable size, budgets, mls-

CCSome of the most successful joint ventures arethose that have an extended courtship periodbefore the venture is created. It took over twoyears of planning before Com ing formed itsventure with CIBA-GEIGY."

switch partners because of the extensive ad-ministrative networks that have been estab-lished to make these joint ventu res successful.

Critical Success FactorsAltljiough each joint-venture form has itsown set pf critical success factors, some over-riding o^es affect both types of joint ventu re.The most important ones are to: Avoid an early rush into the venture. Uhderstand tha t collaboration is a dis-

tinct form of competition. Lejarn from partners (an essential ob-jective) Vvhile limiting unintended informa-tion floA^s. Establish specific rules and require-ments f^r venture performance early on.Son^e of the most successful joint ven-tures are those that have an extended court-ship period before the venture is created. Ittook ovejr two years of planning before C om -

sions, and o rganizational cultures often maltethe best partners.One of the most difficult things formanagers to remember is that joint venturesactually represent another form of competi-tion: Venture partners are simultaneouslj/^competitors and collaborators. Many Japa-nese firms enter in to joint v entures w ith paxt-ners they intend to compete fully w ith in othJrproducts and services.Competitors as partners must always biecognizant of the fact that ventures are some-

times designed as an indirect way of gradually"de-skilling" the other side or pushing it intoa position of permanent inferiority or weak-ness. Although many firms have used jointventures to improve their existing skills, G1^4and GE (among others) have found that theiirJapanese counterparts are a s intent as ever ciiicompeting with them in the same and relatedfields.Essential to the success of any joint veiij- 55


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ture is the ability to learn from another part-ner's strength while preserving one's ownsources of competitive advantage. This is par-ticularly difficult for American firms, sincemany of their weaknesses are based inmanufacturing activities. Learning aboutAsian or European core competencies in sys-tems, microelectronics, miniaturization, andother related fields requires constant moni-toring of the venture's progress.Unfortunately, many U.S.firms en ter intoventures in the mistaken belief that the other

partner is the student rather tha n the teacher.Many high-technology skills are increasinglypeople-embodied rather than machine-based.This is particularly true in such science-drivenindustries as biotechnology, chemicals, soft-ware, and com puters, where patent laws andphysical means of protecting the technologyare lacking.

Providing the necessary mechanisms forsuccessful organizational learning, retentionof personnel, and transfer of managementskills becomes essential to the ven ture. Com-panies must carefully design ventures to pre-vent them from becoming "windows" throughwhich the other partner can learn abo ut everyother technology or core competency withinthe firm. Rotating different managers throughthe venture may be one w ay to prevent a for-eign partner from gaining too much informa-tion from any one person.

It is critical to delineate specific perfor-mance requirements for ventures early on.For example. Motorola's transfer of micro-processor technology to Toshiba is contingenton how much market share Motorola gainsin Japan. Texas Instruments' deal with H itachidepends on specific skill transfers and demar-cates what will be jointly developed and ownedand what won't be.

For the shared value-adding venture, an-other critical success factor is sufficient au-tonomy. Decentralization of decision makingand sufficient autonomy from both corporate

parents gave Fuji-Xerox the leeway it neededfor establishing the kind of give-and-takerelationships that formal contracts cannotspecify. Among global shared value-addingventures, it is no accident that some of themost successful, such as Fuji-Xerox andNippon-Otis, also are the most autonomous.Most managers attribute Coming's nu-merous venture successes to a decentralizedstructure combined with the provision ofstrong, dedicated managers to staff the ven-tures. Staffing a venture with truly autono-mous m anagers from headquarters is likely tolimit excessive interference from corporateparents. Not only are these ventures strongcom petitors in their respective industries, butthey h^ve b^en instrumental in helping theircorporate parents understand and leam newtechnologies in embryonic industries.

Human Resources ManagementThese ventures are new entities that bring

together managers from two or more globalfirms. Thus extensive training and team build-ing are critical to their effective implementa-tion. The role of human resources manage-ment is vital to bo th forms of ventures inthree ways.First, it needs to develop and train man-agers in negotiation and conflict-resolutionskills. A foreign partner is likely to enter anynew venture with a trail of unexpected issuesand problems, so learning how to effectively

resolve these and turn them into win-win situ-ations is important. Such techniques as third-party consultation and integrative negotia-tions can be used to defuse conflict-ladensituations.Second, managers need to become accul-turated to working with a foreign partner.Particularly for American firms, managersneed to understand the role of "implicit com-munication," in which foreign managers arewell-versed. "Implicit comm unication" means


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conveying messages, intentions, and ideasthrough gestures, facial expressions, andother nonverbal messages. The context of themessage is quite often as important as itscontent.

Third, harmonization of managementstyles is essential. Ensuring that one's ownmanagers know and understand the otherside's corporate culture, systems, and man-agemerjt styles helps keep the venture success-

and Corning ventures is that a strong manage-ment team from both parents runs the venturein its own way. A management team forms itsown distinctive corporate culture that allowsit to simultaneously (1) meet the requiremei^itsof parent firms and (2) respond to problemsin its own industry.

As the team members become familicirwith each other, a basis for compromise andworking together becomes ingrained over

(CStaffing the joint venture with managers whoare flexible in terms of different managementstyles andphilosophies is probably the singlemost important task facing the humanresources function at this critical time."

ful. Th^ Japanese believe that "binding roots"is as iniportant as binding technologies andproducljs. Staffing the joint venture with man-agers wiho are flexible in terms of differentmanagement styles and philosophies is prob-ably th0 single most important task facing thehuman resources function at this critical time.

In specialization ventures, managers needconstant training to learn and refine the vitalskills that the venture makes available overtime, ^s technology-based skills becomemore people-embodied over time, trainingand developing managers for the venture arecritical ways to help them gain experiencewith ne^ technologies and production skills.Career-|)athing managers through the ven-ture may be one means by which managersand technical persormel can speed up thebenefits I of learning new skills.

In shared value-adding ventures, teambuilding is essential if they are to be effective.A key fdature in the success of the Fuji-Xerox

time. Because the venture creates both long-and short-term interdependence across mafi-agers, team structure must be flexible enoughto accommodate problems that constantlysurface in day-to-day operations.

CONSORTIA, KEIRETSUS,AND CHAEBOLS I

Although discussion has taken place inthe United States and Europe concerning tHeformation of consortia to meet challenges ipelectronics and computers, little has actual!^'materialized. American efforts to build cros$-industry consortia (e.g., MCC, SematecH)have largely sputtered because of the gre4tdifficulties involved in getting firms to poiltheir resources into an integrative organiza-tion design. The most recent U.S. attempt It0revitalize the nation's semiconductor indu>i-try, U.S. Memories, failed before it evenstarted. i 57


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In Europe, such p rogram s as EUREKA (aformal joint program formed by a numberof European countries to bring together scien-tists and engineers to engage in research proj-ects), ESPRIT (European Strategic Programfor Research and Development in Informa-tion Technologies), and JESSI (Junior Engi-neers' and Scientists' Summer Institute) arecontinentwide attempts to restore Europeancompetitiveness in semiconductors, microelec-

financing from group banks and are largelyrun by professional managers. South Koreanchaebols rely on the government for capitaland are managed by family members whohave been groomed for the job. Lucky Gold-star, Samsung, Daewoo, and Sunkyong aresome of the most prominent chaebols.Formed originally by merchant and in-dustrialist families, the company keeps itsstock in family hand s. Blood relationships of-

CCWith the exception ofAirbus Industrie of West-em Europe, endeavors to build long-term, via-ble consortia across different industries inEurope remain at an embryonic stage."

tronics, and miniaturization. With the excep-tion of Airbus Industrie of Western Europe,endeavors to build long-term, viable consor-tia across different industries in Europe re-main at an embryonic stage.In the Far East, on the other hand.Westerners are becoming familiar with thepreviously mentioned Japanese keiretsu andSouth Korean chaebol. The Japanese keiretsuis a combination of 25 to 50 different indus-trial companies centered around a large trad-ing company or bank. These companies areintegrated through interlocking directorates,

bank holdings of member company stockshares, and close personal ties between the se-nior managers. Group members of a keiretsutypically agree not to sell their holdings.Some familiar keiretsus are Sumitomo, Mit-subishi, Mitsui, and Sanwa,South Korean chaebols are similar ag-glomerations of large companies centeredaround either a bank or a holding companythat is usually dominated by founding fami-lies. Unlike Japanese keiretsus, which get their

ten dominate the pattern of wealth distribu-tion and management across the chaebol. Inboth the Japanese and the South Korean ex-amples, clusters of companies spearhead thesenations' efforts to modernize their industriesand to invest in new technologies for thefuture.Western consortia and their Far Easternequivalents are a more sophisticated form ofstrategic alliance than that of licensing or jointventures. Unlike the other two vehicles, thekeiretsu/chaebol structures are designed tomaximize all of the potential benefits of joint

ventures risk sharing, cost reduction, econ-omies of scale while allowing for indus tryspecialization, Keiretsu and chaebol organi-zations are specially designed for industry-wide coordination. Joint ventures coordinateactivities associated with function, productline, or business, but not industry.

Strategic RationaleResource scarcity and the need to share


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risks arid costs are the primary emphases inconsortia formation. In the United States, at-tempts by such compan ies as IBM, M otorola,and others to free themselves from being heldhostage to Japanese chip manufacturers hasled these firms to pool their resources. Theyhave begun to set up shared-research pro-grams and to harmonize product and processstandards.

The formation of Airbus Industrie and

of scale, and technological critical mass.Keiretsus and chaebols are uniquely pc si-tioned to share the risks of investing in hij^hfixed-cost projects that are needed to stay }nthe forefront of high-technology industries.Member companies' stock holdings are dis-tributed across group companies. There is lit-tle external financial pressure from stock-holders to adopt a short-term planninghorizon that could compromise projects that

of the most important benefits of thekeiretsu and chaebol organization designs arelong-term focus, economies of scale, and tech-nological critical mass."

other European con sortia resulted from West-ern European governments' awareness thatcompetitiveness in commercial aircraft, elec-tronics, and computers was vital to maintain-ing high living standards.

In japan, the government encouragedkeiretsu formation after World War II to di-rect scarpe resources into promising industrieswhile reducing risk through diversificationand go\^ernment backing. Korean chaebolsalso resiilted from government encouragementand lon^-term economic planning designedto direcj: scarce resources into fast-growthindustries.

Benefits and CostsSinc^ most U.S. and European consortiaare relatively new, little information is avail-able on their operations and performance.O ut fociis, therefore, will be on keiretsus andchaebols! Some of the most importantbenefits (j)f the keiretsu and chaebol organiza-tion designs are long-term focus, economies

combine high risk with long-term profitpotential. ;Because the group companies are i^i-volved in m any different industries, risk iisdiversified. Resources are directed in|ogrowth indu stries that are deemed v ital to f i|i-ture global competitiveness. This long-terjiirisk management approach encourages majs-sive investments in such volatile industries issatellites, biotechnology, microelectronicjs,and aerospace industries in w hich conveiji-tional financial analyses would generally dis-courage investment because of the risk. !

Strong buye r-supplier relationships witH-in the group help provide the necessary econ-omies of scale for building world-class plan isand quality. M any of Sum itomo's group coni-panies continue to use computers produced byNEC, a mem ber company w ithin the keiretsi^.Extensive resource sharing of com ponen ts arijiend products among the keiretsu or chaebqlfirms helps provide bo th minimum efficienjtscale as well as fast response to changes iiithe market. Since each group company com^ 59


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petes in its own particular designated indus-try, awareness of the external environmentprovided by each member is balanced w ith in-ternal resotirce flows and investments thatcan be shared by all.In comparison with other strategic alli-ances, keiretsus and chaebols encourage fasterlearning and retention of technological ex-pertise gained from competing in many dif-ferent industries. The organization design ofkeiretsus and chaebols provides for constantrefinement of manage rial skills and core com -petencies that are then translated into futureproduct opportunities. Technological com-petencies gained from competing in one in-dustry are often shared across group compa-nies that face similar constraints in theirparticular industry. This sharing reducesduplication of effort and increases specializa-tion. Horizontal integration and technicalcoordination with suppliers have led to newsources of competitive advantage.

The benefits of keiretsus and chaebols far

outweigh their costs to their respective or-ganizations. However, individual membercompanies within the group may be relegatedto secondary status if their industry appearsto be declining or lacking growth . Businessessuch as cement, shipbuilding, and basicchemicals receive an investment prioritylower than that of heavy machinery, elec-tronics, and other high-technology sectors.Clearly, a hierarchy of corporate m embershipis involved one based on considerations oflong-term economic promise and financialviability. A potential cost of this organ izationdesign is that captive supp lier-buyer relation-ships could foster inefficiency, though keiret-sus and chaebols have been know n to termi-nate noncompetitive suppliers.

Critical Success FactorsPerhaps the single most important criti-cal success factor in forming keiretsus andchaebols is government encouragement and

60 "Witherspoon, I'm afraid you've swallowed your last company."


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direction. Unlike governments in the UnitedStates and Europe, Japanese and particularlyKorean governments engage in a significantamount of "indicative" economic planning.Preferential interest rates and capital alloca-tion are given to promising sectors and with-held from less attractive ones. The formationof both keiretsus and chaebols depends onlow-cost capital that, over the long run, onlya m anaged econom y can deliver, A less tangi-ble but equally important factor lies in theclose personal relationships between seniormanagers of the member-group companies.Close ties and shared values lead to mutualunderstanding and sacrifices that open mar-kets cannot effectively duplicate. These per-sonal relationships, built up over many yearsof cooperation, lead to an implicit under-standing of prio rities that m ake for efficientinvestment in new industries.

Another critical factor is that of activepersonnel rotation and sharing. Middlemanagers and key technical personnel are en-couraged to learn new skills in different mem-ber companies. More imp ortant, these peoplebegin tp learn how each industry differs andwhere significant commonalities may lie forfuture cooperative efforts.Finally, subsidized internal capital forR&D an d o ther e>cpenditures is closely tied tomember companies' performance. Althoughthere ig no strict market in the kiissez-fairesense, keiretsus and chaebols assess the per-formance of their member companies both bymeasuring their financial results and by com-

paring them with the domestic competitors inother keiretsus/chaebols and with foreignglobal competitors, A company that hasfailed to produce competitive products islikely to be excluded in the next generation ofprojects, A significant control mechanism inkeiretsus and chaebols is the fear of "losingface" within the group. That fear stimulatesconstant effort and productivity even whenthere are few formal market mechanisms.

Human Resources ManagementThe single most impo rtant task facing hu-man resoiarces managers in keiretsus andchaebols is that of providing constant train-ing, development, and socialization of man-agers in the organization's values, mission,and philosophies. The essence of the h umanresources function lies in building a corporateculture that not only rewards (1) long-tennsubordinate-superior relationships and (2) ade-emphasis on purely financial, quantitative

results, but also encourages managerial inter-action and rotation. Because member compjt-nies are linked together through personal con-tracts and relationships, a corporate culturethat simultaneously displaj^ hierarchical prop-erties and horizontal coordination is essentialto effective implementation.Employees in keiretsus and chaebolsgenerally do not pursue specific jobs or tech-nically driven tasks. Instead, they are rotatedthroug h the companies to gain w ide exposvireto many different industries and processes.Prom otions, for which individuals are infar-mally reviewed by senior management, arebased on individual promise, dedication, andachievement and an understanding of themember company's m ission. Seniority and ti-tle are respected by employees through out theorganization.Bonuses are often tied to group or cor-poratewide results rather than individualresults. Fraternal relationships, mutual long-term commitment, pride in membership, andlong socialization processes are the hallmairkof human resources management in keiretsusand chaebols. The biggest tasks facing hum anresources management are management de-velopment and training designed to providea consistent set of shared values.It is perhaps the unique human resourcespractices of keiretsus and chaebols that maketheir adoption in the United States and Eu-rope most difficult. Unlike their Far Eastern 61


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counterparts, U.S. managers tend to beselected, trained, and rewarded to producefor individual satisfaction and results ratherthan for a larger, corporatewide purpose. Inaddition , though senior managers of differentcompeting companies tend to know eachother rather well, their relationships in manycases are viewed as adversa rial. This severelyconstrains the level of trust and commitmentneeded for building viable, long-term con-sortia.

ACKNOWLEDGMENTSupport for this research was given by (1)the Halliburton Foundation in cooperationwith the Center for Research, Cox School ofBusiness, Southern Methodist University(Dallas, Texas) and (2) the U. S. Army Re-search Institute for Behavioral and SocialSciences. The authors are indebted to RobinPinkley and Dileep Hurry for their helpfulsuggestions on earlier versions of this paper.

SELECTED BIBLIOGRAPHY

62

A complete discussion of the implications ofdifferent licensing arrangements is found in Frank-lin Root's Entry Strategies for Intemational Mar-kets (Lexington Books, 1987). Pitfalls of licensingagreeme nts are discussed in Michael Porter's Com-petitive Advantage (Free Press, 1 985). The licens-ing travails of RCA an d G eneral Electric in com pet-ing abroad may be found in the Harvard BusinessSchool case "General Electric: Consumer Elec-tronics Group" (#9-359-048).

Joint ventures have been the subject of exten-sive research. Th e more notable bo oks on the topicinclude Kathryn Harrigan's Strategies for JointVentures (Lexington Books, 1983); KenichiOhmae's Triad Power (Free Press, 1985); and SusanGoldenberg's Hands Across the Ocean (HarvardBusiness School Press, 1986), whic h details the spe-cific problems facing U.S. ventures with Asianpar tne rs. Some excellent articles on different formsof joint ventures include Ga ry H amel, Yves L. Doz,and C . K. Prahalad's "Collaborate with Your Com-pet i tors and Win," (Harvard Business Review,January-February 1959) and a series of articles inMichael Porter's Com petition in Global Industries(HBS Press, 1 986). The dange rs of losing core tech-

nologies and skills through joint ventures are ex-amined in Robert Reich and Eric Mankin's "JointVentures with Japan Give Away Our Future,"(Harvard Business Review, March-Apri l 1986) .

A look at ho w Japanese keiretsus wo rk is fea-tured in Charles H. Ferguson's excellent article"Computers and the Coming of the U.S. Keiretsu"(Harvard Business Review, July-August 1990),which examines just how the member companiesin a Japanese keiretsu are interlocked. For insightsinto the workings of chaebols in South Korea, seeSangjin Yoo and Sang M. Lee's "M anagem ent Styleand Practice of Korean Chaebols" (CaiifomiaManagement Review, Summer 1957) and RichardM. Steers, Yoo Keun Shin, and Gerardo R. Ung-son's The Chaebol: Koreas New Industrial Might(Harper Business, 1959).

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please refer to the special reprint serviceinstructions on page 80.


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