Strategic Management Chapter 9: Strategic Alliances

Motivation for Alliances: Gains from Trade

- By trading, Canada can get 6 bu. Wheat and 6 lbs. Bananas. - A 1/2 hour gain from trade! - By trading, Mexico can get: 5 bu. Wheat and 5 lbs. Bananas. - A 4 hour gain from trade!

Improving Current Operations:

- Exploiting economies of scale: a partner brings increased market share and/or manufacturing capacity. - Learning from partners: a partner brings technology and/or market knowledge. - Risk and cost sharing: a partner bears a portion of the risk and/or cost of the alliance.

Shaping the Competitive Environment:

- Facilitating technology standards: partners may agree on a standard and avoid a market battle for the standard. - Facilitating tacit collusion: partners may communicate within an alliance in subtle, legal ways whereas the same communication between competitors outside an alliance would be illegal.

The sources of value creation within alliances may be rare.

- Firms may form a combination of complementary resources within an alliance that is rare. - The stock of such complementary resources may be limited so that first movers have a rare combination.

Three Forms of Misappropriating Value:

- Holdup: exploiting the transaction- specific investment of partners. - Moral Hazard: providing inputs of lesser value than promised. - Adverse Selection: misrepresenting the value of inputs.

How Strategic Alliances Create Value

- Improve Current Operations. - Shaping the Competitive Environment. - Facilitating Entry and Exit.

Facilitating Entry and Exit:

- Low-cost entry into new industries: a partner provides instant access and legitimacy. - Low-cost exit from industries: a partner is an informed buyer. - Managing uncertainty: alliances may serve as "real options". - Low-cost entry into new geographic markets: partners provide local market knowledge, access and legitimacy with governments and customers.

Three Types of Alliances

- Nonequity Alliance: Contracts; licensing, supply and distribution agreements. - Equity Alliance: Cross Equity Holding; partners own stakes in eachother. - Join Venture: Joint Equity Holdings; independent firm is created.

Motivation of Alliances Create economic value by:

- accessing complementary resources and capabilities. - leveraging existing resources and capabilities.

Governance Responses to the Challenges of Value Creation and Allocation (Cont.):

Informal: - Trust: may allow partners to exploit opportunities that would be infeasible with other mechanisms. - Firm Reputations: the shadow of the future constraints cheating.

Substitutes for Strategic Alliances

Internal Development: If: - no partner is available. -transaction-specific investment is high. -low uncertainty about the investment.

Substitutes for Strategic Alliances (Cont.):

Mergers & Acquisitions: If: -there are no anti-trust issues. low uncertainty about the investment firms can be integrated easily. value of combined firms is not tied to independence.

The resources combinations that create value in alliances may be very costly, if not impossible to imitate if:

The value creating combination depends on social complexity (trust), casual ambiguity, and/or historical uniqueness.

Governance Responses to the Challenges of Value Creation and Allocation:

These responses are not mutually exclusive: - Contracts may be used with equity investments and joint ventures along with firm reputation and trust. - Reputation and trust come into play in every type of alliance. Reputation and trust may be sources of competitive advantage because they are costly to imitate.

Governance Responses to the Challenges of Value Creation and Allocation:

Formal/Codified: - Explicit Contracts & Legal Sanctions: created mutual understanding, imposes costs for cheating, conflict resolution. - Joint Ventures: aligns interests of partners through ownership of independent firm, direct effect. - Equity Investments: aligns interests of partners through ownership in each other, indirect effect.

An alliance is an organizational form of exchange that:

should produce a gain from trade due to some comparative or absolute advantage.

Incentives to Misappropriate Value (Cheat):

An alliance is an exchange context in which: - partner inputs may be difficult to monitor. - actual value creation may be difficult to monitor. - value appropriation (allocating the value) may be: - difficult to monitor - subject to power dynamics.

Strategic Alliance

Any cooperative effort between two or more independent organizations to develop manufacture, or sell products or services.

Are strategic alliances rare?

As a form of organizing economic exchange, NO!

Are strategic alliances costly to imitate?

As a form of organizing economic exchange, NO! - The organizational form per se is easily duplicated.