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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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AGENDA

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Agenda

CREATING VALUE THROUGH HORIZONTAL ALLIANCES

CREATING VALUE THROUGH VERTICAL ALLIANCES

AGENDA


The scope of inter corporate linkages

The Scope of Inter-corporate Linkages

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

Sourcing Equity

Agreements Joint

Ventures

Cross- Joint Manufacturing

licensing

Joint Marketing

Shared

Distribution/

Service

Standard Setting/

Research Consortia

Strategic Alliances

Based on: Yoshino and Rangan, 1995


Alliances how far have we come

“Alliances are mere transitional devices and because of this they are destined to fail”

Michael Porter

“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-How far have we come?


Agenda

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


Agenda

Total business conducted

through alliances

50%

40%

40%

30%

30%

20%

20%

10%

3-5%

0%

2000

2005

2010

1990

Source: EIU Global Executive Survey

Andersen Consulting, Warren Company


Why seek a partner

Reduce Risks

Size or Uncertainty Associated with Project

Preempt Competitors

Flexibility/Option Value

Gain Efficiency

Economies of Scale and/or Scope

Speed to Market

Access Complementary Skills

New market entry; synergy-sensitive skills

Learning

Acquire New Skills

Gain Market Knowledge and Experience

Monitor Competition

Politics

Sensitive Industries

Regulations

Market Access

Why Seek a Partner?


Objectives of horizontal alliances

Reduce Risks

E.g., Oil Drilling JVs (spread risk and cost of drilling)

Gain Efficiency

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;

Politics

E.g.,: Otis-Tianjin JV in China (Otis allowed to enter China)

Objectives of Horizontal Alliances


But there are costs in collaboration

Coordination Costs

Management Time

Redundant Structures

Communication Programs

Control Systems

Loss of Competitive Position

Leakage of Knowledge

Reduced Flexibility

Create a Potential Competitor

Exposure

Loss of Bargaining Power with Others

Lower Market Valuation due to Loss of Control Premium

But There are Costs in Collaboration


Challenges for horizontal alliances

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).

Challenges for Horizontal Alliances


Favorable conditions for horizontal 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)

Favorable Conditions for Horizontal Alliances


The logic for joint ventures

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)

The Logic for Joint Ventures


Keys to horizontal alliance success

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.

Keys to Horizontal Alliance Success


Agenda

Optimal

Strategic

Alliance

Solution

HOWEVER,

Remember

that it is the differences

between the organizations

Compatibility

No

that drive the formation

but few

Redeeming

of the alliance

Synergies

Value

The Importance of Strategic and Cultural Fit

Good Commercial

Compatibility but

High

Organizational

Integration

Difficult

Strategic Fit

Low

Low

High

Organization/Cultural Fit


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