STRATEGIC ALLIANCING. CRITICAL SUCCESS FACTORS. CE 726 Term Assignment Prepared by (in alphabetical order) : Gianni Kubin – Levend Kalaç – Ovic Mbi Mabiala. OUTLINE. 1. What is strategic alliance ? 2 . Characteristics o f Strategic Alliance
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STRATEGIC ALLIANCING CRITICAL SUCCESS FACTORS CE 726 Term Assignment Prepared by(in alphabetical order): Gianni Kubin – Levend Kalaç – Ovic Mbi Mabiala
OUTLINE 1. What is strategic alliance? 2. Characteristics of Strategic Alliance 3. Why StrategicAlliances are Formed? 4. Types of StrategicAlliances 5. Stages of AllianceFormation 6. Advantages and Disadvantages 7. The Critical Success Factors
1. What is strategic alliance? • A strategic alliance is an agreement between two companies which join their resources and activities in the expectation of higher benefit than if they were operating alone. • Companies who enter strategic alliances remain independent organizations
Definition • A strategic alliance involves at least two partner firms that: • (1) remain legally independent after the alliance is formed; • (2) share benefits and managerial control over the performance of assigned tasks; and • (3) make continuing contributions in one or more strategic areas, such as technology or products
2. Characteristics of Strategic Alliances • Duration longer than the project That characteristic is the one that makes the distinction between project alliance and strategic alliance.
Characteristics of Strategic Alliances 2. Heterogenic partners Even though two companies can never be identical it is important that companies find partners which are strategically as well as culturally fit for themselves
Characteristics of Strategic Alliances • Sharing rewards and risks When the risks are shared, the cost of the losses resulting from the actions of one of the partners will be shared equally with all the other partners.
Characteristics of Strategic Alliances 4. Interdependence
Characteristics of Strategic Alliances • Management plan The management plan should address the followings • Responsibilities • Decision-making • Technology • Processes • Control • Dispute resolutiın
Characteristics of Strategic Alliances • Leadership and Trust The partners within the alliance should be considered as equals and none of them should feel in a lower level in the hierarchy or undermined in its possibility to take initiatives. Leadership by key individuals among the partners is essential in order to find common values and satisfaction in the work performed by the alliance.
Characteristics of Strategic Alliances • Roles and responsibilities Roles and responsibilities should be well detailed and the work division as well.
Characteristics of Strategic Alliances • Process • Incentives to partners who perform better than the others should be put into place. • It is not always easy to define milestones in the development phase
3. Why Strategic Alliances are Formed? 1. Providing higher value to clients • Strategic alliances allow companies to provide higher value to clients since it is not common to find companies in the construction sector which possess the qualities to meet all the clients’ needs. • A complex projectis best performed by a strategic alliance of companies.
Why Strategic Alliances are formed 2. Decrease competition • Strategic alliance is one form of competitive advantage a contracting firm can use to be differentiated from its competitors. • Strategic alliances can sometimes be the only way for small companies to stay competitive and even to survive since the business world nowadays is technologically advanced and constantly changing
Why Strategic Alliances are formed 3. Acquire resources By partnering up with other companies, a firm makes intangible investments.
Why Strategic Alliances are formed 4. Penetrating new markets The key to a fast and successful entry to a new market for a construction company is to partner up with another company which is already well implemented in that market.
Why Strategic Alliances are formed • Access to new technologies and/or the best quality or the lowest cost • By forming alliances with firms which possess these resources or technologies they are able to keep their position in the market. • Outsourcingis another reason for creating alliances
Why Strategic Alliances are formed 6. Reduce Risks • Some companies may find it very risky for them to venture into a new market they know little about. In such cases, two or more companies can come together and decide to share the risks among all of them.
RISKS AND PROBLEMS IN STRATEGIC ALLIANCES 1. Clash of cultures and “incompatible personal chemistry” • Language • Work culture
RISKS AND PROBLEMS IN STRATEGIC ALLIANCES 2. Lack of Trust • Strategicalliances should be formed in order to enhance trust between individuals. • It is important that in case of any failure in the project, one party doesn’t point his finger at another
RISKS AND PROBLEMS IN STRATEGIC ALLIANCES 3. Lack of clear goals and objectives • Some companies will form alliances as a mean to tackle competitors. • It is necessary that partners cooperate at every level of the operations and that managers are familiar with the principles of cooperation
RISKS AND PROBLEMS IN STRATEGIC ALLIANCES 4. Lack of coordination between management teams • Top level management should be aware of the actions taken by the subordinates and these actions should be in accordance with the spirit of the top management. • Partners should comply with the rules established while forming the alliance and shouldn’t in any circumstance operate on their own in a manner that could be detrimental to the alliance.
RISKS AND PROBLEMS IN STRATEGIC ALLIANCES 5. Differences in operating procedures and attitudes among partners When one company’s operating procedures impact negatively the performance of another partner, problems may arise
RISKS AND PROBLEMS IN STRATEGIC ALLIANCES 6. Relational risk Relational risk is the risk that partners may not fully be committed to the alliance or that they put their own interests before the ones of the group.
RISKS AND PROBLEMS IN STRATEGIC ALLIANCES 7.Performance risk • Performance risk is the risk that an alliance may fail, even though the members are fully committed to the alliance. • Sources of performance risk are: • Environmental factors • Market factors • Internal factors
RISKS AND PROBLEMS IN STRATEGIC ALLIANCES 8. Strategic alliances may create a future competitor • When companies enter into alliance, they learn from each other • Some partners use the alliance only to test the market and prepare to venture into a new sector or to launch a new subsidiary. , • Each company takes the risk to possibly be threatened in its area of business in the future.
RISKS AND PROBLEMS IN STRATEGIC ALLIANCES 8. Other problems • Breakdown in trust • Change in strategy • Value not materialized • Cultures that did not mesh • Systems not integrated
4. Types of Strategic Alliances Alliances can be classified according to: • Their market position • Their organizational structure
Types of Strategic Alliances The market position can • Vertical Alliances • Horizontal Alliances • Inter-sectoral Alliances
1. Vertical Alliances • formed between organizations in different industries • collaboration of expertise • offeringcomplete solutions
2. Horizontal Alliances • formed between organizations in sameindustries • especially common in the construction industry • to achieve scale, share risk, use combination of power
3. Inter-sectoral Alliances • formed between organizations neither in the same industry nor related through the vertical chain • aim is usually to use the distribution links or to reach the client portfolio
Types of Strategic Alliances The organizational structure can • Joint ventures • Consortia • Networks • Franchising • Licensing
1. Joint Ventures • A legally distinct new organization is created while partner companies remain independent • Shares may vary • Aim is to have a powerful independent body for a certain type of work
1. Joint Ventures • Joint ventures are grouped in two types: • Project-based Joint Venture • Full-blown Joint Venture
1. Joint Ventures • Project-based Joint Venture • For to carry out a specific project • May last longer after the project if successful and similar projects are ahead
1. Joint Ventures b. Full-Blown Joint Venture • expected to remain a viable entity • requires significant resource input and effort
2. Consortia • Partner companies do not form a separate entity • Partner companies do not share the complete responsibility of the whole project • Each company is responsible of what they undertake
3. Networks • Loose partnership without formal agreements • Usually appear as collaborations that make mutual advantage • Not common in construction sector
Other types of Strategic Alliance • Franchising - Using a brand name, its reputation, its delivery channels, manufacturing capabilities etc. • Licensing - Taking a right to produce a certain product
5. Stages of Alliance Formation • Strategy Development • Partner Assessment • Contract Negotiation • Alliance Operation • Alliance Termination
1. Strategy Development • Defining scope, tasks and vision • Deciding if an alliance is necessary • studying the alliance’s feasibility, objectives and rationale • Obstacles and challenges
2. Partner Assessment • analyzing a potential partner’s strengths and weaknesses • Defining how to manage an alliance with a certain partner • preparing appropriate partner selection criteria • Understanding partner’s motives for entering to alliance
3. Contract Negotiation • Arranging negotiation meetings • forming capable negotiating teams • Defining responsibilities, equities, partnership type, penalties • Defining how to solve possible problems
4. Alliance Operation • A senior management team to be established to monitor, assess and control the operations • linking of budgets and resources with strategic priorities • measuring and rewarding performance
5. Alliance Termination • termination according to the rules defined on the contract • Partnership may be terminated before the project ends if disputes can not resolve • Sometimes alliance may continue if it is successful
6. Advantages and Disadvantages PARTNERSHIP • A long term agreement • Debts and profits shared between partners • Partners are responsible for the company’s actions • Partnership agreements cover the termination policy of the agreement
Joint Venture • Temporarily partnership that two companies form to gain mutual benefits • Companies use joint ventures to; • speed up the expansion of the company • to share costs, risks and rewards • gain experience from bigger and experienced firms • Companies enter into several different markets
The Difference Between Partnership and Joint Venture • Joint Ventures are; • Short Term agreements • Joint Venture Agreement outlines the purpose of the joint venture Partnerships are; • Long term agreements • Agreement covers the distribution of shares, responsibilities of each partner