Chapter 9
Risks Arising from Alliances
1. Poor Contract Development Hardest part is negotiating rights, specifically those pertaining to termination prior to intended maturity date. 2. Misrepresentation of Resources and Capabilities When a partner misrepresents, intentionally or not, the quality or quantity of a resource or capability that a partner deems critical to the success of the venture. 3. Misappropriation of Resources and Capabilities Occurs when one partner takes something of value, whether to the partner, the alliance, or both. 4. Failure to Make Complementary Resources Available A partner may fail to make available a promised complementary resource, 5. Being Held Hostage Through Specific Investments When a firm is so dependent on the alliance that is is virtually held hostage based on the resources that they get from the alliance. 6. Misunderstanding a Partner's Strategic Intent Crucial to understand whether a larger partner is more interested in co-opetition strategy or a winner-take-all strategy.
Post 2000 Alliance
Learning and Capabilities Focus -ensure constant stream of new prospects with advancing technology -Proactively maximize delivered value -optimize total cost by product/consumer segment -gain advantage in response to changing conditions and opportunities
Knowledge Sharing
Learning from partners. This does requires partners to cooperate in transferring knowledge. Two factors help facilitate transfer knowledge: 1. mutual trust and familiarity between partners 2. Consistent information-sharing routines, such as that obtained through higher-level executive contact, integrated information systems, and employee swapping and cross-company career paths.
Value Net Model
Map of firm's existing and potential exchange relationships. A way to think about all of the platers identified in the industry structure model in a manner that highlight possible alliance possibilities.
1980s Alliance
Position Focus -Build industry stature -Consolidate position -Gain economies of scale and scope
Managing Knowledge and Learning
The ability to learn increases the collective benefits derived by every partner in the alliance. Learning is enhances if a firm develops specific processes for managing knowledge exchange.
Form and Structure of Alliances
Two primary dimensions are the nature of : 1. time commitment (timeframe, resources) 2. investment commitment (time, people, technology) Whether or not deemed strategic is based on the degree to which one or both parties's survival or competitive advantage depends on the alliance.
Understanding the Determinants of Trust
Use long-term contracts, stock ownership, and collateral bonds to signal credible long-term commitments to alliance partners. Trust is key to helping alliances perform better use relationship quality principle
Alliances and Corporate Strategy
Vehicles for exploring and implementing diversification options. Used to create value across a portfolio of individual businesses
Effective Management
Way to judge the effectiveness and appropriateness of an alliance is through comparing its costs with the alternatives of an arm's length transaction or formal internal integration. Another way is to judge whether an alliance is effective is if it helps build a competitive advantage. Evaluation process is referred to as buy or make decisions, with alliance lying somewhere in between the two extremes.
Complementary Resources
When resources and capabilities are combined, may be able to create a stock of resources that are unavailable to other competitors in the industry. If stock is made up of complementary resources and capabilities, then the alliance may be able to generate a shared advantage. if combination is valuable and rare, may be able to generate greater profits than the sum of the partners' individual profits.
Equity Alliances
Alliance in which one or more partners assumes a greater ownership interest in either the alliance or another partner. Financial commitment that is long-term. Occurs when one partner owns a greater percentage of the alliance's equity than another partner, when a separate legal entity is not established and one partner stakes partial ownership of the other partners, or when contracts are used to govern the sharing and respective rights regarding contributed assets, resources or capabilities.
Joint Ventures
Alliance in which two firms make equity investments in a third legal entity. Financial commitment that is long-term. Typically are 50/50 splits in ownership and control, but they need not be equal partnerships.
Vertical Alliances (Business-strategy Alliances)
Alliance involving a local firm and a supplier or customer. Purpose is to leverage partners' resources and capabilities in order to meet two goals: 1. To create more value for the end customer 2. To lower total production costs along the value chain Improve value to customer by making it possible for alliance partners to increase speed to market, improve quality, introduce newer technologies and features, and respond more quickly to market changes. Create lean value chains by reducing total supply chain costs in four areas: 1. Transaction costs 2. Quality-related costs 3. Product-development costs 4. Logistics costs Facilitates product or service diversification within an existing market
Horizontal Alliances (Business-strategy Alliances)
Alliance involving a local firm and another firm in the same industry Enable competitors, or potential competitors, to gain a presence in multiple segments of an industry. Helps: 1. reduce risk 2. partners achieve greater efficiency 4. foster learning in the development and innovation of new products Facilitates entry and competition in another geographic market
Nonequity Alliances
Alliance that involves neither the assumption of equity interest nor the creation of separate organizations. Examples: sole-sourcing, just-in-time supply agreements, licensing, cobranding, and franchising. Done because there are no linkages beyond transaction, for information sharing, or for asset, resource and capability sharing
Alliance Networks
Alliances are taking on characteristics of networks. Two implications: 1. A alliances become a larger component of a firm's strategy, the strategy discussion will shift from particular alliances as a vehicle to networks of alliances as a vehicle. 2. As networks take on characteristics of organizations, competition among networks should arise both within and across industries. Fortunes of the many small firms in the network dependent on the success of the larger group (network).
Failure Rates
Estimated failure rate of about 50% Can be deemed a failure when one or more of the partners did not achieve its objectives and/or when one partner benefited and the other was left worse off Success depends on the willingness of partners to subordinate their own interests to those of the alliance. Hard to determine when one is a failure since it can be failure to one partner and not to the other.
Measuring Alliance Performance
Few firms have effective systems for monitoring alliance performance. Three barriers: 1. Different information and reporting systems 2. Inputs that alliance receives from its corporate partners can be difficult to track and account for 3. Difficult to precisely value alliance outputs.
Alliances and Competitive Advantage
Give firms access to knowledge, resources and capabilities that the firm might otherwise lack. Achieve these in four ways: 1. Joint investment 2. Knowledge sharing 3. Complementary resources 4. Effective management
Joint Investment
Help increase returns by motivating firms to make investments that they would be unwilling to make outside a forma alliance relationship.
What Makes an Alliance Successful?
10 features that make them successful - p. 314 1. Alliance has clear strategic purpose 2. good partner fit 3. Specialized partner roles 4. Create incentives for cooperation 5. Minimize conflicts between partners 6. Share information 7. Exchange personnel 8. Operate with long time horizons 9. Develop multiple joint projects 10. Be flexible Five areas for success: 1. understanding the determinants of trust 2. being able to manage knowledge and learning 3. understanding alliance coevolution 4. knowing how to measure alliance performance 5. creating a dedicated alliance function (usually only pertains to larger firms)
When do Partners Fit?
Alliances won't be productive if: 1. there isn't a strong business case for the alliance as a vehicle 2. When assessment fails and there simply isn't a good fit between partners. Good intentions do not make alliances work. When do they fit? 1. Strategic fit Are the partners' objectives compatible? For how long? 2. Resource and financial fit Are the partners willing and able to contribute the resources and capabilities? 3. Cultural fit Can the partners understand each other? Do they share the same business logic and commitment? 4. Structure, systems, and processes fit Can the decision making and control mechanisms be aligned? 5. Additional fit criteria What other key questions should be asked- situation specific factors (timing, other alliances, alliance alternatives, environmental context, competitive pressures, etc.) Partnerships among complementary equals tend to be the strongest and longest lasting.
Dedicated Alliance Function
Can simply be one manager who is responsible for setting up, tracking and dissolving the firm's alliances. Can also be a team of people. Responsibilities: 1. Alliance business case Value chain analysis, needs analysis, manufacturing vs partnering vs acquisition analysis 2. Partner assessment and selection Partner screening, technology and intellectual property mapping, cultural fit, due diligence, alliance scenario analysis 3. Alliance negotiation and governance identification of wants and needs, alliance and ownership structure, performance objectives and metrics, contract negotiations 4. Alliance mismanagement Problem tracking, trust-building activities, alliance-contact list, ongoing communication 5. Assessment and termination agree on relationship evaluation, yearly status reports, termination planning, exit strategy.
Multiparty Alliances
Consortia: association of several companies and/or governments for some definite strategic purpose. Usually done just for information sharing, but there may be some costs sharing as well.
Alliance Characteristics
Enable participants to share investments and rewards Reduces risk and uncertainty that each firm would otherwise face on its own., Enable each firm to focus its resources on what it does best. Foster economies of scale and scope, within the partner firms and between partners and the alliance vehicle, that companies wouldn't otherwise be able to achieve.
Understanding Alliance Evolution
Equity joint ventures can end up in the sale of one partner to another. An unplanned sale may erode shareholder value. If it is well managed and planned it can be an advantage.
Relational Quality
Principle identifying four key elements (initial conditions, negotiation process, reciprocal experiences, outside behavior) in establishing and maintaining interorganizational trust Initial Conditions: mutual attitudes of the parties before negotiations be2gin. The Negotiation Process: Social interactions during negotiations will determine whether any promise in the negotiations is eventually realized. These can be greatly affected by prior negotiation processes. Reciprocal Experiences: Stock and flow reflect the partners' reciprocal experiences. Outside Behavior: The way in which a partner company interacts with other organizations can be a red flag.
1970s Alliance
Product-Performance Focus: -Produce with latest technology -Market beyond national borders -Sell product, stressing performance
Strategic Alliance
Relationship in which two or more firms combine resources and capabilities in order to enhance the competitive advantage of all parties. Not a strategy, it is a VEHICLE for realizing a strategy. Must be consistent with the economic logic of the strategy. Firm must have the managerial capabilities to create economic value through cooperative arrangements. May involve sharing resources related to only one key activity in the partners' value chain or coordination across many value chain activities. Can be strategic to one firm and only tactical or operational to the other.
Alliances in Stable and Complex Contexts
Relative dynamism of an industry may affect an alliance in two ways: 1. From a practical standpoint, relatively stable environments are much more forgiving of mistakes. 2. Because they make maintenance and management easier, stable environments allow firms to participate in more alliances. In dynamic contexts, competitive stakes are much higher and distractions can have serious consequences. (especially when dynamism is coupled with technological intensity). Relative environmental stability = page 313
Alliances and Business Strategy
Rivals: Are there opportunities to partner with rivals? New entrants: Incumbents can ally with new entrants to diversify or to co-opt a future potential rival Suppliers: Developing alliances with key suppliers (sole-sourcing or just-in-time arrangements) Customers: Usually for business-to-business relationships Substitutes: create a joint venture to minimize threats of substitutes Complementors: create alliance with companies that produce complementors
Co-Opetition
Situation in which firms are simultaneously competitors in one market and collaborators in another. Purpose is to find ways of increasing the total value created by parties in the value net, not just determining how to compete for industry profits. Helps managers find potential partners.
Alliances and International Strategy
Sometimes a firm can only do business in another country through an alliance. Harder to make decisions about internal and external vehicles through which to execute a firm's strategy.
