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International Strategic Alliances: Design and Management

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8. International Strategic Alliances: Design and Management. Strategic Alliances Issues. Increasingly popular strategy to develop new product and to expand into new markets However, strategic alliances are very risky and unstable Failure rate of 30% to 60%

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International Strategic Alliances: Design and Management

strategic alliances issues
Strategic Alliances Issues
  • Increasingly popular strategy to develop new product and to expand into new markets
  • However, strategic alliances are very risky and unstable
  • Failure rate of 30% to 60%
  • Even profitable alliances can be torn by conflict
where to link in the value chain
Where to Link in the Value Chain
  • Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks
  • Upstream/downstream alliances serve the objective of low-cost supply/manufacturing
  • Operations/marketing alliances provide access to markets
  • Depends on the objective that the firm seeks to achieve
criteria for choosing partners
Criteria for Choosing Partners
  • Seek out companies with compatible management styles
  • Seek a partner that will provide the “right” level of mutual dependency
  • Avoid the “anchor” partner
      • Anchor partner: a partner that holds back the strategic alliance because it cannot or will not provide its share of the funding
criteria for choosing partners cont
Criteria for Choosing Partners (cont.)
  • Be cautious of the “elephant-and-ant” complex
    • Occurs when two companies are greatly unequal in size
  • Assess operating-policy differences with potential partners
  • Assess the difficulty of cross-cultural communication with a likely partner
choosing an alliance type
Choosing an Alliance Type
  • Three main types of strategic alliances
    • Informal international cooperative alliances
    • Formal international cooperative alliances
    • International joint venture
informal international cooperative alliance
Informal International Cooperative Alliance
  • Non-legally binding agreements between companies from two or more countries
    • Agreements of any kind
    • Provide links anywhere on their value chains
    • Limited involvement between companies
formal cooperative alliances
Formal Cooperative Alliances
  • Higher degree of involvement than informal alliances
  • Formal contract
  • Popular in high tech industries because of high costs and risks
international joint ventures ijv
International Joint Ventures (IJV)
  • Separate legal entity owned by two or more parent companies from different countries
  • No need for equal ownership
  • Equity based on cash or other contributions
    • Ex.: One partner brings technology while other partner brings financial contributions
negotiating the agreement
Negotiating the Agreement
  • IJV negotiation issues
    • equity contributions
    • management structure
    • “prenuptial” agreements
organizational design in strategic alliances
Organizational Design in Strategic Alliances
  • Depends on the type of alliance chosen
  • Informal ICAs often have no formal design issues
  • Formal ICAs may require separate organization unit housed in one company
  • IJV—Parent companies set up separate legal entity
decision making control
Decision-making Control
  • Majority ownership does not necessarily control
    • Operational decisions
    • Strategic decisions
  • In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management.
management structures
Management Structures
  • Dominant parent: controls or dominates strategic decision making
      • Often has majority ownership
      • Treats the IJV as wholly owned subsidiary
  • Shared management: both parent companies contribute approximately the same number of managers to the alliance organization
management structures1
Management Structures
  • Split control management control: partners usually share strategic decision making and split functional decision making
  • Independent management structure: alliance managers act more like managers from a separate company
    • IJVs often recruit managers from outside the parent companies
management structures2
Management Structures
  • Rotating management: key positions rotate among partners
    • Popular in developing countries
    • Trains management talent and transfers expertise
choosing a strategic alliance management structure
Choosing a Strategic Alliance Management Structure
  • If partners have similar technologies or know-how and contribute equally
    • Shared management structure preferred
  • If partners have different technologies but contribute equally
    • Split management structure preferred
  • If one partner has dominant equity position
    • Dominant management structure more likely
human resource management in strategic alliances
Human Resource Management in Strategic Alliances
  • HRM functions include recruiting and staffing for alliance positions
  • The HRM functions of an IJV are more complex
    • Managers (and sometimes workers) come from two or more firms or from two or more cultures
critical hrm problems and issues
Critical HRM Problems and Issues
  • HRM planning: Employees need to know strategic intent of alliance.
  • Parent involvement: As alliances get older and larger, they tend to develop their own HRM practices.
  • Staffing the alliance management and technical personnel—crucial and risky decision
  • Staffing the alliance workforce
  • Assigning managers strategic or operations tasks
critical hrm problems and issues1
Critical HRM Problems and Issues
  • Performance assessment—needed for retention, promotion and salary decisions
  • Loyalty—managers may often feel dual loyalty
    • To parent and to alliance
  • Career development—must provide clear information on how alliance assignments fit within careers
  • Cultural differences
  • Training
commitment and trust
Commitment and Trust
  • Commitment: putting forth extra effort to make the venture work
    • Attitudinal commitment: willingness to dedicate resources and efforts and face risks to make the alliance work
  • If partners demonstrate these aspects of commitment, alliance will develop based on fair exchange.
    • Occurs when partners believe that they receive benefits from the relationship equal to their contributions
calculative commitment
Calculative Commitment
  • Commitment also has a practical side: calculative commitment
    • Alliance partner evaluations, expectations, and concerns regarding potential rewards from the relationship
  • Businesses require tangible outcomes for a relationship to continue
  • Commitment and trust go hand in hand
  • Credibility trust: confidence that the partner has the intent and ability to meet promised obligations and commitments
  • Benevolent trust: confidence that the partner will behave with goodwill and with fair exchange
why is trust important
Why Is Trust Important?
  • When there is no trust, partners hold back or take advantage of each other.
  • Formal contracts can never identify all issues that will arise
  • Technology and knowledge also include tacit elements that can only be learned through trust.
building and sustaining trust and commitment
Building and Sustaining Trust and Commitment
  • Pick your partner carefully
  • Know each side’s strategic goals
  • Seek win-win situations
  • Go slowly
  • Invest in cross-cultural training
  • Invest in direct communication
  • Find the right levels of trust and commitment
assessing the performance of an international strategic alliance
Assessing the Performance of an International Strategic Alliance
  • If strategic intent is to produce immediate results, standard financial and efficiency measures can be used.
  • Other strategic alliance provide indirect strategic benefits.
  • IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning.
if the alliance does not work
If the Alliance Does Not Work
  • Negotiate an end or improve implementation
  • Know when to quit/invest more
  • Avoid “escalation of commitment”
    • Companies continue in an alliance longer than necessary because of financial and emotional investments.
  • Plan end—“prenuptial agreements”
  • Death not always failure