Chapter 6:Engaging in Cross- Border CollaborationManaging across Corporate Boundaries and Reading 6-1: The Design and Management of International Joint Ventures
What is a Strategic Alliance? • A formal and mutually agreed commercial collaboration between companies • The partners pool, exchange or integrate specific business resources • Yet they remain separate businesses, making alliances distinct from mergers and acquisitions
Strategic Alliances • One of innumerable forms of commercial interaction • One of four forms/modes of investment
Range of Strategic Alliances Joint Venture (Equity Participation) High Co-production/ Buyback R & D Consortia Cross Licensing Level of Interaction Franchising Strategic Alliances Patent Licensing Cooperation Agreement Low Competition Cooperation Type of Arrangement
In the 1960s and 1970s Alliances were Primarily used in Peripheral Markets and Technologies Markets Critical Peripheral Critical Alliance Alliance Frontier Technologies Alliance Alliance Peripheral
In the 1980s the Alliance Frontier Moved toEncompass More Important Markets and Technologies Alliance Alliance Alliance Markets Critical Peripheral Critical Alliance Frontier Technologies • Examples • Ford - Mazda • Philips - Siemens • Rolls Royce + • Japanese Peripheral
In the 1990s New Alliance Frontiers were Crossed DurationofAgreement Short Long or Unspecified Non Equity Alliance Alliance Frontier Ownership Alliance Equity Alliance
And Now We Are In The Age ofInternational + Alliance Capitalism… Equity JV Strategic Alliance Emphasis TIME Non-Equity Do It Yourself Domestic International Regional Geographic Scope
…Where Alliances are Occurring Between Entrepreneurial Start-ups and Large Firms,and Speed of Establishment is Increasing Months Years Time-Frame Large Firms Linkages Between AllianceFrontier Entrepreneurial Firms
Popular View Says JVs are: • A transitional organization form. • Less profitable. • Impossible to manage. • A sure way to lose one’s technology. • Only undertaken as a last resort.
Why Strategic Alliances • Technology Exchange • Global Competition • Industry Convergence • Economies of Scale • Reduction of Risk • Alliances as an Alternative to Mergers
Objective Reality • Average age of international JVs nearly 10 years (similar to greenfield startups; longer than acquisitions). • Profitability identical with other organizational alternatives. • Managing has become easier, so usage up. 40% of all investments in Asia Pacific are JVs.
Objective Reality (cont’d) • Some companies which possess strong technology often prefer to use JVs. (i.e., Japanese firms with a Kyousei - group coordination - philosophy) • The days of government regulation forcing the use of JVs are behind us.
Effect of Foreign Equity Holdingon Subsidiary Mortality Risk? Stability Similar to Wholly-owned Subsidiaries Except with Small Equity Holdings 4:1 3:1 Mortality Risk 2:1 1:1 0 0 20 40 60 80 100 Foreign equity in the subsidiary (%) 1:1 = equivalent to wholly owned subsidiary Source: Dhanaraj, Charles and Paul W. Beamish, 2004. “Effect of Equity Ownership on the Survival of International Joint Ventures”, Strategic Management Journal, 25(3): 295-305.
Strategic Alliance Advantages and Disadvantages • On the PLUS side…. • Reduce costs & risks • Gain access to complimentary assets and new markets • Opportunities to learn from partner • Possibilities to use alliances and networks as an operational (real) option rather than a financial option. • On the DOWN side… • Risk of choosing the wrong partner • Costs of negotiation, coordination • Partner opportunism • Learning race (tacit vs. explicit knowledge)
Selection: Resource Based Considerations VALUE: The creation of value means generating economies of scale for cost reduction, or complimentary skills for tapping new opportunities. Alliances might reduce costs, risks and uncertainties. Alliances allow partners to tap into complimentary assets. Alliances facilitate opportunities to learn. RARITY: Good alliances represent unique situations. Capability rarity. Partner rarity & First Mover Advantage IMITIBILITY: The alliance’s benefits to the partners should be hard for others to imitate. At the firm level (ex. McDonalds in Moscow). At the alliance level. ORGANIZATION: Do the alliance partners provide resources to manage the partnership?
Joint Venture Checklist • Test the strategic logic. • Do you really need a partner? For how long? Does your partner? • How big is the payoff for both parties? How likely is success? • Is a joint venture the best option? • Ensure congruent performance measures exist.
Joint Venture Checklist (cont’d) • Partnership and fit. • Does the partner share your objectives for the venture? • Does the partner have the necessary skills and resources? Will you get access to them? • Will you be compatible? • Can you arrange an “engagement period”? • Is there a comfort versus competence trade-off?
Partner Selection:Comfort vs. Competence Higher Partner Comfort Lower Lower Higher Partner Competence
Joint Venture Checklist (cont’d) • Shape and design. • Define the venture’s scope of activity and its strategic freedom vis-à-vis its parents. • Lay out each parent’s duties and payoffs to create a win-win situation. Ensure that there are comparable contributions over time. • Establish the managerial role of each partner.
Control in Joint Ventures Two types: • One parent dominates the venture’s decision making (…but is this a “joint” venture?) • Parents are both involved in decision making • shared • split
Shared Control Parent A Parent B JV Board of Directors AB R&D OPS FIN MKT
Split Control Parent A Parent B JV Board of Directors AB R&D OPS FIN MKT
Limiting Opportunism:Contracts Vs. Trust • Contractual controls limit opportunism by specifying the exact role and performance criteria of the strategic partners. GOOD FOR SITUATIONS REQUIRING ECONOMIES OF SCALE. • Trust takes longer, relationships and informal interdependence. GOOD FOR SITUATIONS REQUIRING FLEXIBILITY AND TAKING ADVANTAGE OF UNFOLDING OPPORTUNITIES.
Joint Venture Checklist (cont’d) • Doing the deal. • How much paperwork is enough? Trust versus legal considerations? • Agree on an endgame.
Joint Venture Checklist (cont’d) • Making the venture work. • Give the venture continuing top management attention. • Manage cultural differences. • Watch out for inequities. • Be flexible.