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9. International Strategic Alliances: Design and Management. Learning Objectives. Know the steps for implementation of successful international strategic alliances Understand how to link value chains in international strategic alliances

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International Strategic Alliances: Design and Management

Learning objectives
Learning Objectives

  • Know the steps for implementation of successful international strategic alliances

  • Understand how to link value chains in international strategic alliances

  • Understand the importance of choosing the right partners for alliances

  • Know the important characteristics to look for in potential alliance partners

Learning objectives1
Learning Objectives

  • Know the differences between equity-based international joint ventures and other types of international cooperative alliances

  • Know the basic components of an international strategic alliance contract

  • Understand the control systems and management structures used in alliance organization

Learning objectives2
Learning Objectives

  • Appreciate the unique problems in human resource management

  • Realize the importance of interfirm commitment and trust

  • Understand how companies assess the performance of their international strategic alliances

  • Know when companies should continue or dissolve their international strategic alliances

Strategic alliances issues
Strategic Alliances Issues

  • Increasingly popular strategy to develop new product and to expand into new markets

  • Offer fast and flexible ways to gain complementary resources

  • However, strategic alliances are inherently 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

  • Benefits of strategic alliances

    • Gain access to local partner’s knowledge of market, meet government requirements, share risks, share technology, economies of scale, access lower cost raw materials or labor.

  • Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks

  • Depends on the objective that the firm seeks to achieve

Choosing a partner the most important choice
Choosing a Partner: The Most Important Choice?

  • Key criteria for picking an appropriate alliance partner

    - Seek strategic complementarity

    • Understand objectives and seek complementarity

      - Pick a partner with complementary skills

    • One that enhances but does not necessarily duplicate an alliance partner’s skills

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 Multinational Companies

  • 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 Multinational Companies

  • Non-legally binding agreements between companies from two or more countries to cooperate on any value chain activity

    - Agreements of any kind

    - Provide links anywhere on their value chains

    • Limited scope of involvement with other company

    • May resist revealing proprietary information

Formal cooperative alliances
Formal Cooperative Alliances Multinational Companies

  • Non equity alliance with formal contracts specifying what each company must contribute to the relationship

  • Calls for high degree of involvement among partners

  • Formal contract specifying contribution of each

  • Sharing of proprietary information

  • Backing out of this alliance more difficult

  • Popular in high tech industries because of high costs and risks

International joint ventures ijv
International Joint Ventures (IJV) Multinational Companies

  • Separate legal entity owned by two or more parent companies from different countries

  • Self standing legal entity

  • Require formal agreements

  • No need for equal ownership

  • Equity based on cash or other contributions

    • Ex.: One partner brings technology while other partner brings financial contributions

Exhibit 9 5 types of alliances
Exhibit 9.5: Types of Alliances Multinational Companies

Negotiating the agreement
Negotiating the Agreement Multinational Companies

  • IJV negotiation issues

    - equity contributions

    - management structure

    - “prenuptial” agreements regarding dissolution

Organizational design in strategic alliances
Organizational Design in Strategic Alliances Agreement

  • Design depends on the type of alliance chosen

  • Informal ICAs often do not require formal design

  • Formal ICAs may require separate organization unit housed in one company, with employees from both

  • IJVs are separate legal entities, and require separate organization to carry out the alliances objectives

Decision making control
Decision-making Control Agreement

  • Two areas of decision making

    - Operational decisions (daily running of organization)

    • Strategic decisions (for long term survival)

  • Majority owners do not necessarily control both

  • In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management.

  • In non equity ICAs, strategic decisions remain with parent companies

Management structures
Management Structures Agreement

  • Dominant parent: controls or dominates strategic and operational 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 Agreement

  • 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 Agreement

  • 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 Agreement

  • If partners have similar technologies/ 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, or is more important to one partner

    - Dominant management structure more likely

Choosing a strategic alliance management structure1
Choosing a Strategic Alliance Management Structure Agreement

  • For joint ventures

    • Mature joint ventures move to independent structures as the joint venture’s management team gains more expertise

    • Joint ventures in countries with a high degree of government intervention produce IJVs with local partner dominance

    • Independent management structures are more likely when the market is expanding, the venture does not require much capital, or the venture dose not require much R&D input from its parents

Commitment and trust soft side of alliance management
Commitment and Trust: Soft Side of Alliance Management Agreement

  • Commitment: taking care of each other and 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 the principles of fair exchange.

    Fair Exchange- Occurs when partners believe that they receive benefits from the relationship equal to their contributions

Calculative commitment
Calculative Commitment Agreement

  • 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

Trust Agreement

  • 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? Agreement

  • 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 shared when there is trust.

Building and sustaining trust and commitment
Building and Sustaining Trust and Commitment Agreement

  • 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, and may never generate profits.

  • IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning, and subjective measures like satisfaction and harmony

If the alliance does not work
If the Alliance Does Not Work Alliance

  • 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 past financial and emotional investments.

  • Plan end at the beginning —“prenuptial agreements”

  • Death not always failure, many alliances are short term

Dedicated strategic alliance units
Dedicated Strategic Alliance Units Alliance

  • Specialized units to manage alliance

  • Provide processes and procedures that help managers

    • identify the need for an alliance

    • Evaluate partners

    • Negotiate agreements

    • Structure the alliance organizations

    • Develop specific performance indicators

Key lessons from cross border alliances
Key Lessons from Cross-Border Alliances Alliance

  • Understand and appreciate business and cultural differences

  • Keep strong executive support

  • Communicate

  • Negotiate logic before control

  • Commitment, trust and dedication

  • Have “checkpoint” as the alliance is being implemented

  • Review alliance’s viability

Conclusion Alliance

  • Use of international strategic alliances continues to grow in international business

  • Chapter provides solid understanding of the basics and how to manage strategic alliances

  • Strategic alliances are prone to failure and great effort must be taken to make them successful