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Business Alliances and Networks. Gerrit Rooks. The alliance explosion. Sony Ericsson Sony does the marketing and designing Ericsson does the manufacturing

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examples of alliances
Sony Ericsson

Sony does the marketing and designing

Ericsson does the manufacturing

Philips and Sara Lee/DE combined their knowledge in respectively household appliances and coffee to create the successful Senseo coffee concept

Examples of alliances
examples of alliances1
Coca Cola shares its knowledge with McDonalds. This allowed McDonalds to enter more markets, faster and more succesfully

Friesland foods manages the inventory of some of its buyers (Vendor managed Inventory), enhancing customer service and reducing inventory costs

Examples of alliances
example of alliances
Helio, a cellphone venture Internet-service provider EarthLink of Atlanta and South Korean wireless operator SKI Telecom, entered a strategic alliance with MySpace.

Ghananian business firms only work together with a few selected, trusted partnerfirms.

Example of alliances
examples of alliances2
Toyota works very closely with a selected number of suppliers, whereas American companies like GM, Chrysler and Ford work with arms length suppliers.

Philips plugs its marketing gap with alliances

Philips (electronics) and NIke combined their strength to develop wearable electronics, (MP3 related equipment)

Philips works together with Robijn on ironing products

Philips works together with IKEA

Examples of alliances
alliances lead to networks
In only two years, 75% of the industry is directly or indirectly connectedAlliances lead to networks

Source: De Man, 2006, Alliantiebesturing

networks compete
In some industries networks of former competitors now compete with each other

Note, in the airline sector it is all about market power and cost savings.

Every network member profits. Stable technical environment.

Mergers are often not possible

Networks compete

Source: De Man, 2006, Alliantiebesturing

slide15

Strategic alliances are voluntary arrangements between firms involving exchange, sharing, or codevelopment of products, technologies, or services.

    • (Gulati, 1998)
theoretical perspectives on alliances
Theoretical perspectives on alliances
  • Resource dependency
  • Transaction cost theory
  • Social networks
  • Alliance management
the general and specific environments
The general and specific environments

REGULATORY INSTITUTIONS

LEGISLATIVE INSTITUTIONS

COMPETITOR

SUPPLIER

FIRM

EMPLOYEE

DISTRIBUTOR

CUSTOMER

ECONOMIC INSTITUTIONS

OTHER INDUSTRIES

GOVERNMENT

resource dependency
Resource dependency
  • Organizations are dependent on their environments
    • They need resources to survive and grow
  • Environment becomes poor if:
    • Important customers are lost or new competitors enter
  • Organizations manage their transactions with the environment
    • The goal: Ensure predictability of access to resources, reduce uncertainty and dependency
interorganizational strategies for managing resource dependence
Interorganizational strategies for managing resource dependence
  • Two basic interdependencies in the specific environment:

1) Symbiotic interdependence

      • Exist among an organization and its suppliers and distributors

2) Competitive interdependence

      • Exist among organizations that compete for scarce inputs and outputs
  • Strategies to reduce uncertainy / dependence
    • Reputation building
    • Strategic alliances / long term contracts
    • Co-optation
    • Merger / Acquisition
    • Collusion
resource dependency explanation of alliance instability
Resource dependency explanation of alliance instability
  • Changes in 'resource fit' increase the hazard of dissolution of business relationships
  • Changes in resource fit can result from:
    • increases in a firm’s resource requirement
    • a decrease in the firm’s partner resource provisions
    • increases in potential resource provisions by alternative partners
transaction cost theory tce
Transaction cost theory (TCE)
  • Tries to answer the fundamental question: “Why do firms exist?” or alternatively "what are the boundaries of the firm?"
  • Transaction costs:
    • Negotiating contracts,
    • Monitoring contracts,
    • Enforcing contracts,
  • Transaction costs = friction within the economy
transaction cost theory cont d
Transaction cost theory (cont’d)
  • The goal of the organization is to minimize transaction costs (formally production costs are also included)
    • of exchanging resources in the environment
    • of managing exchanges inside the organization
    • “Every dollar or hour of a manager’s time spent in negotiating or monitoring exchanges with other organizations or inside the organization is a dollar or hournot used for creating value”
sources of transaction costs
Sources of transaction costs
  • Uncertainty and bounded rationality
  • The environment is uncertain and complex
  • Transactions (especially R&D) are complex
  • People have a limited ability to process infromation and to understand the environment surrounding them
  • The higher the level of uncertainty, the greater is the difficulty of managing transactions between organizations
sources of transaction costs cont d
Sources of transaction costs (cont’d)
  • Opportunism and small numbers
  • Though not all, some people behave opportunistically — they cheat or exploit other stakeholders in the environment
  • When an organization is dependent on one supplier or a small number of traders, the potential for opportunism is higher
  • The organization has to spend resources to negotiate, monitor, and enforce agreements with trading partners to protect itself (i.e., transaction costs increase)
sources of transaction costs cont d1
Sources of transaction costs (cont’d)
  • Risk and specific assets
  • Investments in skills, machinery, knowledge, and information that create value in one exchange relationship but have no value in any other exchange relationship
  • Specific asset investments increase risk in a business relationship
  • To counter such a risk, the investing firm may try to negotiate extensively and enforce terms of a contract which increases transaction costs
tce and linkage mechanisms
TCE and Linkage mechanisms
  • Transaction costs are low when:
    • Organizations are exchanging nonspecific goods and services
    • Uncertainty is low
    • There are many possible exchange partners
  • Transaction costs increase when:
    • Organizations exchange more specific goods and services
    • Uncertainty increases
    • The number of trading partners fall
explaining alliance failure

Explaining alliance failure

(note we already discussed resource dependency and transaction costs theory)

social network explanation trust
Social network explanation: trust

B

  • Opportunism problems are fundamental problems in alliances
    • interfirm rivalry
    • incomplete contracts
    • learning races
  • Transaction cost theory does not consider the social embeddedness of business alliances
    • past
    • future expectations
    • third parties
social embeddedness
Social Embeddedness

Single firm

Only transactions no relations

Dyad

Transactions often take place within relation

Network

Relations are nested within networks of relations

Temporalembeddedness

Networkembeddedness

slide37

Payoffs

TrustorTrustee

Learning an conditional cooperation

No trust

Trustor

Punishment Punishment

0

0

Trust

Abuse trust

Trustee

Sucker Temptation

5

-1

Honor trust

Reward Reward

3

3

Preference:Temptation > Reward > Punishment > Sucker

repeated games
Repeated games
  • Suppose you play iterated prisoner’s dilemma against a rangeof opponents…What strategy should you choose, so as to maximize your overall payoff?
  • Axelrod (1984) investigated this problem, with a computer tournament for programs playing the prisoner’s dilemma
  • Axelrod’s tournament: invited political scientists, psychologists, economists, game theoreticians to play iterated prisoners dilemma
  • Guess who won?
  • Anatol Rapoport contribution 'Tit-for-Tat'
  • The shadow of the future
    • cooperation because of anticipated sanctions
  • The shadow of the past
    • learning because of past interactions
third parties and trust
Third parties and trust
  • reputation effects
  • Information diffusion
    • selection
    • for sanctioning

B

A

B

A

centrality and resources
Centrality and resources
  • Resources = those tangible and intangible assets which are tied semi-permanently to the firm
  • Ties are channels through which resources can flow
  • The more ties, i.e. the higher the degree, the more resources a firm can acquire
slide43
The better the resource fit of two firms, the more stable the alliance
  • Changes in resource fit can result from:
    • increases in a firm’s resource requirement
    • a decrease in the firm’s partner resource provisions
    • increases in potential resource provisions by alternative partners
  • Asymmetry in degree centrality can affect resource fit
difference in degree centralities change resource fit
increased resource requirements of the better connected partner,

the less well connected partner is less well able to provide needed resources,

the better connected partner has more alternative partners.

Difference in degree centralities change resource fit

A

B

A

B

alliance capabilities
Some firms manage the alliance process better than others

Apparently those firms have built up a capability in managing alliances

Firms with a superior alliance capabilities create more shareholder value (Anand and Khanna, 2000)

Star performers are Hewlet-Packard, Nike, Intel, Benetton, Disney, Cisco, Microsoft, Toyota

Alliance capabilities
alliance capabilities1
Sending staff to an alliance training is especially useful for firms that have no experience with alliances

Alliances specialists raise the success rates, particularly when they are in middlemanagement (not in the staff and not too close to operations)

Evaluation is a remarkably strong tool for raising alliance success. Especially the comparison of different alliances of one company is a powerful learning tool which increases alliances success

Alliance capabilities

Source Duijsters, 2006

philips is building up its alliance capabilities
It has defined corporate alliances

It has defined different alliance functions

Corporate Executive Sponsor

Corporate Relationship Manager

Alliance specialist

It has created a Corporate Alliance Website on its intranet

For managing the Microsoft alliance, Philips has:

Set up a database containing all contracts, projects, people

Opened a Microsoft program office next door to Microsoft's head office

Philips is building up its alliance capabilities

Source: Kempen 2001

alliance management techniques
Alliance management techniques

Partner A

Alliance

Partner B

1

3

2

3

1

  • Clear strategic intent
  • Absorptive capacity
  • Open culture / Organizational form
  • Infrastructure
  • Complementary goals/create win-win situation
  • Matching targets & compensation practices
  • (Co-) location
  • Managing cultural differences
  • Choice of governance structure
  • Personal Unions
  • ‘Boundary spanners’
  • Staff rotation
  • Debriefing

Source: De Man , Koene en Rietkerken, 2001

slide49

Communication is the key: multiple points of contact

Philips

Sara Lee/DE

Corporate level

Corporate level

International Steering Committee

Core Line

Marketing & equity meeting

OPCO

OPCO

OPCO

DAP

Senseo

PIM Meeting

National Steering Committees

NSO's

Joint sales teams per country

some rehearsal questions
Some rehearsal questions
  • What alternative is not a strategic alliance?
    • Two competing firms that secretly make price agreements
    • Buyer A purchases exclusively from Supplier B
    • A firm manufactures an article under license
    • A+B
    • A+C
    • B+C
    • All
    • None