Chapter 9 Understanding Alliances and Cooperative Strategies

1. Chapter 9Understanding Alliances and Cooperative Strategies

2. 1 Describe why strategic alliances are important strategy vehicles 2 Describe the motivations behind alliances and show how they’ve changed over time 3 Explain the various forms and structures of strategic alliances 4 Explain alliances as both business‑level and corporate‑level strategy vehicles 5 Understand the characteristics of alliances in stable and dynamic competitive contexts 6 Summarize the criteria for successful alliances OBJECTIVES

3. AN ALLIANCE THAT FITS LIKE A GLOVE gloves Differentiate its product Extend the brand P&G Magla Expand into European markets Mr. Clean

4. CHARACTERISTICS OF STRATEGIC ALLIANCES • Alliances have a beginning and an end • Alliances enable participants to share investments and rewards whilereducing the risk or uncertainty each firm would otherwise face on its own • Shared activities enable each organization to focus on its strengths; collectively firms combine resources and capabilities to create mutual competitive advantage • Alliances foster economies of scale and scope between partners • Benefits include: growth opportunities, more rapid time to market, opportunities to extend reach more cost effectively

5. Share investments and rewards • Reduce risk • Reduce uncertainty • Focus resources on what eachpartner does best • Foster economics of scale and scope BENEFITS OF STRATEGIC ALLIANCES Companies which participate most actively in alliances outperform the least active firms by 5 to 7 percent Why?

6. ALLIANCES ARE NOT STRATEGIES IN THEMSELVES Arenas An alliance is one vehicle for realizing a strategy Economic Logic Vehicles Staging Differentiators

7. 2 THE USE OF ALLIANCES AS STRATEGIC VEHICLE HAS BALLOONED Alliances as percent of revenues 16% As of 2007,large MNCs have over 20%of their total assets tiedup in alliances 2% 1980 1995

8. Complementary Resources Opportunity to create a stock of resources that is unavailable to competitors. This may create a shared advantage (e.g., Nestlé and Coke combined resources to offer canned tea and coffee products) Knowledge sharing Informal management Consistent information-sharing routines enhances learning (e.g., John Deere exchanges key employees with alliance partner Hitachi) Alliances may make it more cost effective to manage an activity than arm’s-length transactions or acquisitions ALLIANCES OFFER MULTIPLE BENEFITS Joint Investment Increase returns by encouraging firms to make investments that they’d be otherwise unwilling to make (e.g., Wal-Mart supplier becomes willing to invest in new equipment)

9. ALLIANCES MAY BUILD COMPETITIVE ADVANTAGE • Alliances may serve to build a competitive advantage if • Rivals cannot ascertain what generates the returns because of causalambiguity surrounding the alliance • Rivals can figure out what generates the returns but cannot quicklyreplicate the resources owing to time decompression diseconomies • Rivals cannot imitate practices or investments because they are missing complementary resources (they have not made the previous investmentsthat make subsequent investments economically viable) and because the current costs associated with prior investments are now prohibitive • Rivals cannot find a partner with the necessary complementary strategic resources • Rivals cannot access potential partners’ resources because they are indivisible • Rivals cannot replicate a distinctive and socially complex institutional environment that has the necessary formal and informal controls thatmake managing alliances possible

10. Learning andcapabilities focus Position focus 1980s Post 2000 Ensure constant streamof new prospects withadvancing technology Build industry stature Proactively maximize delivered value Consolidate position Gain economies of scaleand scope Optimize total cost by pro-duct/customer segment Gain advantage in res-ponse to changing condi-tions and responsibilities MOTIVATION FOR ALLIANCES HAS CHANGED OVER TIME Product performancefocus 1970s Produce with latesttechnology Market beyond nationalborders Sell product stressingperformance Source: Adapted from J. Harbison and P. Pekar, Smart Alliances: A Practical Guide to Repeatable Success (San Francisco: Jossey-Bass, 1998)

11. Knowledge of Wal-Mart’s business model Knowledge of the market in Mexico THE WAL-MART – CIFRA ALLIANCE Wal-Mart Cifra

12. ALLIANCES CAN TAKE MANY FORMS Examples of cooperative arrangements in the continuum of organizational forms Financial Commitment Equity Alliances Non-Equity Alliances Source: Adapted from J. Harbison and P. Pekar, Smart Alliances: A Practical Guide to Repeatable Success (San Francisco: Jossey-Bass, 1998

13. Multiparty alliances MULTI-PARTY ALLIANCES 2 party alliances Example: SEMATECH, a consortiumof semiconductor manufacturers

14. Rivals Newentrants Any otherorganization couldbecome an alliancepartner Substitutes Suppliers Customers WHO MIGHT BECOME AN ALLIANCE PARTNER? Complementors Firms

15. Partner with one or more suppliers or customers. Typically done to create more value for the end customer and to lower total production costs along the value chain 1 Vertical Partner with a rival or potential competitor to gain access to multiple segments of the industry and reduce risk, improve efficiency, or foster learning 2 Horizontal 2 TYPES OF BUSINESS STRATEGY ALLIANCES Examples Timkin andsuppliers Mondavi andtop foreign wineproducers

16. Timken Co. is getting its cus-tomers to think of them as morethan simply a bearings supplier by employing sophisticated bundling processes to combine basic bearings with additional components in order to provide companies with exactly what they need. As a result, their bundled products are a source of reliability and cost reduction for their customers like Caterpillar. Also, Timken’s acquisitions don’t create value simply due to added product lines, but instead due to the greater value added by a more complex and tailored bundle Only recently are firms recognizing that workingwith suppliers is as important as listening tothe customer…. YourCompany Most often ignoredsource of value creation Suppliers EXAMPLES OF NETWORKS OF BUSINESS ALLIANCES Coopetition is essentially the notion that companies are com-plementors when they make markets and competitors when they divide markets. This relationship is called a value net

17. Failure to make complementaryresources available Poor contract management Misrepresentation of resourcesand capabilities Being held hostage throughspecific investments Misappropriation of resourcesand capabilities Misunderstanding a partner’sstrategic intent RISKS ARISING FROM ALLIANCES

18. Understand the determinants of trust Be able to manage knowledge and learning Understand alliance evolution Know how to measure alliance performance Create a dedicated alliance function FIVE LEVERS FOR INCREASING THE PROBABILITY OF ALLIANCE SUCCESS

19. BUT Trust lowers transaction costs • Increases knowledge sharing • Increases investments in dedicatedassets • Search costs • Contracting costs • Monitoring costs • Enforcement costs AND BENEFITS OF TRUST Trust and Competitive Advantage Dedicated Knowledge AssetInvestments SharingRoutines Interfirm Trust ’ • TRUST is one party’s confidence that the other party in the exchange relationship will fulfill its promises and commitments and will not exploit its vulnerabilities • Trust and alliances are a conundrum from a classical economics perspective – assumption of opportunism means firms must choose market or hierarchy, make or buy, not an alliance

20. Initialconditions Negotiationprocess Trust Reciprocalexperiences Outsidebehavior FOUR KEY FACTORS OF RELATIONAL QUALITY AFFECT TRUST What are the attitudes of partners prior to negotiation? How will relationships formed during negotiations impact the outcome? Do partners share information and disclose potential problems? What is the reputation of the partner outside the alliance?

21. Alliances experience high failure rates – some lack a strong business case, or the fit between partners is inappropriate • Lack of an effective measurement system also contributes to failures: • People rely on intuition – problems which surface are more difficult to correct • Input from corporate parents may be difficult to track and account for • Partner firms have different information and reporting systems • The value of outputs can be difficult to measure CHALLENGES IN MEASURING ALLIANCE PERFORMANCE

22. COMPONENTS OF A DEDICATED ALLIANCE FUNCTION Partnerassessmentand selection Alliance negotiation andgovernance Alliancebusiness case Alliancemanagement Assessmentand termination • Value-chain analysis form • Needs-analysis checklist • Manufacturing-vs.-partnering analysis • Partner screening form • Technology and patent-domain maps • Cultural-fit evaluation form • Due-diligence team • Negotiations matrix • Needs-vs.-wants checklist • Alliance-contract template • Alliance-structureguidelines • Alliance-metrics framework • Problem-tracking template • Trust-building work sheet • Alliance-contact list • Alliance-communication infrastructure • Relationship-evaluation form • Yearly status report • Termination checklist • Termination-planning work sheet

23. WHEN DO PARTNERS FIT? Firms must address a number of issues to determine fit … Why? • Strategic fit? • Resource fit? • Cultural fit • Structural fit? • Other questions?