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Strategic Alliances Chapter 7 April 5, 2006 Dr. Ellen A. Drost. Objectives. Why Strategic Alliances Defining strategic alliances and networks A comprehensive model of strategic alliances and networks Debates and extensions. Basic foreign expansion entry decisions.

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Strategic alliances chapter 7 april 5 2006 dr ellen a drost
Strategic AlliancesChapter 7April 5, 2006Dr. Ellen A. Drost


Objectives
Objectives

  • Why Strategic Alliances

  • Defining strategic alliances and networks

  • A comprehensive model of strategic alliances and networks

  • Debates and extensions


Basic foreign expansion entry decisions
Basic foreign expansion entry decisions

  • A firm contemplating foreign expansion must make three decisions:

    • Which markets to enter

    • When to enter these markets

    • What is the scale of entry


Strategic alliances
Strategic Alliances

  • WHY STRATEGIC ALLIANCES?

  • A. Spread and reduce costs

  • B. Specialization

  • C. Competition

  • D. Vertical integration

  • E. Horizontal integration

  • F. Knowledge


Alliances are popular
Alliances are popular

  • WHAT ARE THE ALTERNATIVES TO ALLIANCES?

  • Develop capability internally

  • Buy inputs/technology

  • Merger or acquisition


International alliances
International Alliances

  • WHY INTERNATIONAL ALLIANCES?

  • A. Gain location specific assets

  • B. Overcome Government restrictions

  • C. Diversification

  • D. Minimize exposure to risk


Structuring the alliance to reduce opportunism
Structuring the alliance to reduce opportunism

WHAT FORM SHOULD THE ALLIANCE TAKE?

Contracts ----------------------------------------------------------------------Equity

Marketing Consortium Wholly Owned R&D Joint Venture

Turnkey

License

Franchise

Short-term -----------------------------------------------------------------------Long-term

 ---------------------difficult to control

difficult to monitor

difficult to enforce

difficult to negotiate


Alliances versus joint ventures
Alliances versus Joint Ventures

  • Not all strategic alliances are joint ventures.

    • A joint venture (JV) is a new organization—a “corporate child” created by two or more parent firms which hold partial equity ownership in the new venture.

      • Sony Ericsson

    • A non-JV alliance is two (or more) firms working together—“getting married” but not having “children.”

      • Renault is a strategic investor in alliance with Nissan. Both operate independently and they have not created a new firm.


Strategic networks
Strategic Networks

  • Overall, strategic alliances and networks are cooperative interfirm relationships

  • Strategic alliances formed by multiple firms to compete against other such groups and against traditional single firms

  • Also known as constellations

    • Star Alliance: United, Lufthansa, Air Canada, SAS, etc.

    • Sky Team: Delta, Air France, Korean Air, etc.

    • One World: American, British, Cathay Pacific, Qantas, etc.


Type of alliances
Type of alliances

  • Contracts

  • Turnkey Projects

    • Contractor agrees to handle every detail of project for foreign client

  • Licensing

    • Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties

  • Franchising

    • Franchiser sells intangible property and insists on rules for operating the business

  • Joint Ventures

    • Equity participation

  • Wholly Owned Subsidiaries

    • Greenfield versus acquisition


A three stage decision model of strategic alliance and network formation
A Three-Stage Decision Model of Strategic Alliance and Network Formation

Source: Adapted from S. Tallman & O. Shenkar, 1994, A managerial decision model of international cooperative venture formation (p. 101), Journal of International Business Studies, 25 (1): 91–113.


Managing the alliance
Managing the alliance Network Formation

  • WHAT ABOUT PARTNER SELECTION?

    • Differences can create value

    • Similarities minimize cost


Debate 1 learning race versus cooperative specialization
Debate 1: Network FormationLearning Race versus Cooperative Specialization

  • Learning race view: Very influential

    • Assumption 1: Acquiring partner “know-how” is cost effective

    • Assumption 2: Other partners are passively being exploited

  • Cooperative specialization view: More realistic?

    • Learning races do exist, but they represent more of the pathologies rather than the norms

    • Mutual hostage taking can reduce such pathologies

    • Preventing spillovers can also reduce problems


Debate 2 majority jvs as control mechanisms vs minority jvs as real options
Debate 2: Network FormationMajority JVs as Control Mechanisms vs. Minority JVs as Real Options

  • The “high control versus low control” debate in Chapter 6: Unresolved

  • One additional benefit of minority JVs: Real options

    • The more uncertain the conditions, the higher the value of real options

    • Minority JVs have great real options value, especially in uncertain, emerging economies

    • SIA 7.4: Anheuser-Busch’s minority JVs in emerging economies (e.g., Brazil, China, Mexico, Philippines)


Debate 3 alliances versus acquisitions
Debate 3: Network FormationAlliances versus Acquisitions

  • Problems with M&As (see Chapter 9)

    • Too final: hard to undo

    • Too expensive

    • Extensive problems with post-merger integration

  • Many large MNEs have an M&A function (department), which focus exclusively on M&As

    • A combined “mergers, acquisitions, and alliances” function may be advisable – Table 7.5


Acquisition and green field pros cons

Pro: Network Formation

Quick to execute

Preempt competitors

Possibly less risky

Con:

Disappointing results

Overpay for firm

Optimism about value creation

Culture clash.

Problems with propose synergies

Pro:

Can build subsidiary it wants

Easy to establish operating routines

Con:

Slow to establish

Risky

Preemption by aggressive competitors

Acquisition and Green-field- pros & cons

Greenfield

Acquisition


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