CREATING VALUE THROUGH HORIZONTAL ALLIANCES CREATING VALUE THROUGH VERTICAL ALLIANCES. AGENDA. The Scope of Inter-corporate Linkages. Contractual Agreements Equity Arrangements Traditional NontraditionalNo New Firm Creation of EntityDissolution Contracts Contractsof Entity
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CREATING VALUE THROUGH HORIZONTAL ALLIANCES
CREATING VALUE THROUGH VERTICAL ALLIANCES
Contractual AgreementsEquity Arrangements
Traditional NontraditionalNo New Firm Creation of EntityDissolution
Contracts Contractsof Entity
Arm’s-length Joint Research Minority NonsubsidiaryJV Mergers and
Buy/Sell Equity JVsSubsidiaries Acquisitions
Contracts Investmentsof MNCs
Franchising Joint Product Equity Fifty-fifty
Development Swaps Joint Ventures
Licensing Long-term Unequal
Cross- Joint Manufacturing
Based on: Yoshino and Rangan, 1995
“Alliances are mere transitional devices and because of this they are destined to fail”
“Many so-called alliances between Western companies and their Asian rivals are little more than sophisticated outsourcing arrangements -- the traffic is almost entirely one way”
Hamel, Doz, and Prahalad
“Avoid alliances like the plague.”
Reich and Mankin
Alliances Growing as a Source of Revenue
Alliances as a Percentage of Revenue for
Top 1,000 U.S. Public Corporations
Source: Columbia University, European Trade Commission, Studies by BA&H,
AC.1983-1987, 1988-1993, 1994-1996, 1999
Total business conducted
Source: EIU Global Executive Survey
Andersen Consulting, Warren Company
Size or Uncertainty Associated with Project
Economies of Scale and/or Scope
Speed to Market
Access Complementary Skills
New market entry; synergy-sensitive skills
Acquire New Skills
Gain Market Knowledge and Experience
E.g., Oil Drilling JVs (spread risk and cost of drilling)
E.g.., McDonalds and Disney(share advertising costs)
Learning (Development & Innovation)
E.g.,; Autobody and Composites Consortiums (GM, Ford, Chrysler); Fuji-Xerox
Access Complementary Skills
E.g., Apple-Sony partnership to develop Powerbook;
E.g.,: Otis-Tianjin JV in China (Otis allowed to enter China)
Loss of Competitive Position
Leakage of Knowledge
Create a Potential Competitor
Loss of Bargaining Power with Others
Lower Market Valuation due to Loss of Control Premium
Leveraging each partner’s resources while protecting proprietary know-how; many horizontal alliances are inherently learning races.
Building trust with potential competitors; simultaneously cooperating and competing (Co-opetition)
Less ability to “control” partner decisions (relative to supplier alliances).
The partner’s strategic goals converge while their competitive goals diverge.
(e.g., Philips and Du Pont collaborate to mfg. compact disks; neither invades the other’s market)
The size, market power, and skills/resources of partners is modest compared with industry leaders; an attempt to catch up.
(e.g., Japanese chipmakers collaborate to develop chips; U.S. automakers collaborate on autobody and battery technology).
Each partner believes it can learn from the other and at the same time limit access to proprietary skills
(e.g., Xerox and Fuji alliance; Xerox gets access to Japanese market and technology in Japan; Fuji participates in copier business; Fuji believes it can protect film business while Xerox believes it can protect worldwide copier business)
Alliance objective is characterized by a high degree of uncertainty, such as R&D alliances (need incentives to bring best technology)
Desire to create a “new culture” (resources, processes, values) that fit the new opportunity.
Desire to limit liability of parent companies.
Superior way to measure alliance performance (separate P&L)
Identify Partners with:
Strategic Fit: Compatible resources, assets, and capabilities
Cultural Fit: Compatible cultures and work processes
Establish clear performance objectives & monitor performance
for the alliance and requirements for each partner; make technology transfer dependent on meeting performance requirements
Develop plan to learn from partners
Invest in absorbing key skills/technology from partners while protecting protect proprietary knowledge/skills as much as possible.
Use appropriate “governance” mechanisms
Build trust and align the incentives of partnering firms (e.g., joint stock ownership is superior to legal contracts for eliciting knowledge transfer).
Create a “Strategic Alliance” function in your firm
Assign responsibility to acquire and codify knowledge with regard to effective alliance management practices.
that it is the differences
between the organizations
that drive the formation
of the alliance
The Importance of Strategic and Cultural Fit