Strategic Alliances

Presented
by

F.A. HANDOKO SASMITO

Graduate School of Management

Airlangga University

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More powerful, better informed consumers

The breakup of traditional channel structures
Deregulation, privatization and globalization
The convergence of traditional and new technologies
Changing competitive boundaries
The evolution of new standards
Shorter product life cycles
The greater involvement of business in ecological and social issues

Discontinuous Change

Demand uncertainty
Differentiation risks
Inefficiency risks

Formation of an alliance ?

An alliance is a partnership between firms whereby their resources, capabilities, and core
competencies are combined to pursue mutual interests in designing, manufacturing, or
distributing goods or services (Hitt, Ireland & Hoskisson, 2001:362).

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DIFFERENT PERSPECTIVES
1.

Economic perspectives

2.

3.

Game theory

There is a need to balance and reconcile cooperation and competition between partners
Highly self-interested behavior in business relations tends to become self-defeating.
If cooperation between partners is established according to clear principles, such as Firm-but-Fair, there is a good possibility
that their relationship will become progressively self-strengthening.

Strategic Management theory

4.

Cooperative strategies can enhance market power (MPT).

One of the considerations in choosing whether to cooperate with other firms and the form of that cooperation, is the level
of transaction costs involved (TCE).
In the absence of common interests and mutual trust, an alliance needs to provide
each partner with adequate incentives
not to take advantage of the other and with systems to monitor their respective contributions (AT).
In increasing-returns industries dense ecologies of alliances and technology
companies coalesce in the pursuit of first-mover-inspired dominance of markets (IRT).

Executives need to be clear about their motives for adopting a cooperative strategy in general and for entering into specific
alliances in particular.
The selection of a suitable partner is of fundamental importance and likely to have a major bearing on the success
of the alliance.
It is important for alliance partners to work out a good mutual strategic fit, and then to optimize the process of their
cooperation by improving cultural fit.

Organization theory

The ability of a partner to exercise control over an alliance will be significantly determined by its dependence on the other(s)
for the provision of non-substitutable resources which are crucial for the alliances operations. This implies that the formal
rights inherent in equity share or contracts may not be sufficient to ensure control.
Alliance are hybrid organizations that combine some features of conventional hierarchical management with those of
networks. Their organization has to recognize and support a number of dilemmas which stem from this hybrid nature,
such as the tension between the ability to control an alliance and to learn from it.

Source: Child & Faulkner, 1998:40-41.

Types of Strategic Alliance

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Strategic Alliances

Joint Venture
Cooperating firms form an independent firm in
which they invest. Profits from this independent
firm compensate partners for this investment.

Nonequity Alliance
Cooperation between firms is managed directly
through contracts, without cross-equity holdings
or an independent firm being created.

Equity Alliance
Cooperative contracts are supplemented by equity
investments by one partner in the other partner.
Sometimes these investments are reciprocated
Source: Barney, 2007:412.

Loose (market)
relationships

Contractual
relationships

Formalised
ownership/
relationships

Formal integration

Networks Opportunistic
alliances

Subcontracting Licenses
and franchises

Consortia Joint ventures

Assets do not need

joint management

Asset management
can be isolated

Assets need to be jointly managed

Asset separability

Assets cannot be separated

Assets/skills can be separated

Asset appropriability

High risk of assets being appropriated

FORMS OF ALLIANCE
INFLUENCES
Asset management

Source: Johnson & Scholes, 1999:341; 2002:380.

Low risk of assets being appropriated

Acquisitions and mergers

Assets cannot be separated

High risk of asset
appropriation

Motives Underlying Entry of Firms into Strategic Alliances

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Market entry and market position-related motives

Gain access to new international markets
Circumvent barriers to entering international markets posed by legal, regulatory, and/or political factors
Defend market position in present markets
Enhance market position in present markets

Product-related motives
Fill gaps in present product line
Broaden present product line
Differentiate or add value to the product

Product/market-related motives
Enter new product/market domains
Enter or maintain the option to enter evolving industries whose product offerings may emerge as either substitutes for,
or complements to, the firms product offerings

Market structure modification-related motives

Reduce potential threat of future competition
Raise entry barriers/erect entry barriers
Alter the technological base of competition

Market entry timing-related motives

Accelerate pace of entry into new product-market domains by accelerating pace of R&D, product development, and/or market entry

Resource use efficiency-related motives

Lower manufacturing costs
Lower marketing costs

Resource extension- and risk-reduction related motives

Pool resources in light of large outlays required
Lower risk in the face of large resource outlays required, technological uncertainties, market uncertainties, and/or other uncertainties

Skill enhancement-related motives

Learning new skills from alliance partners
Enhancement of present skills by working with alliance partners
Source: Varadarajan & Cunningham, 1995:285.
The decision to form an ICV (international cooperative venture), as well as the selection of cooperative strategies, organizational forms and partners, is not strictly
economic, but also a social, psychological and emotional phenomenon.....It is no coincidence that ICVs are frequently described using such terms as trust,
shared visions and understanding. (Tallman & Shenkar, 1994:92)

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Functional, Industry, and Geographic Scope of Strategic Alliance

10. Franchising

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S
ea
r
lA

Al
f
eo

ce
n
a
li

9. Reciprocal after sales service

8. Reciprocal marketing

7. Joint marketing

6. Manufacturing-marketing alliances

a
5. Joint manufacturing
on
i
t
c
n
4. Joint product development
Fu
3. Joint R&D and technology development
2. Joint exploration and development of sources of raw materials

Intraindustry

Interindustry

1. Technology exchange, licensing and cross-licensing

Intranational
Based on Varadarajan & Cunningham, 1995:288.

International

Factors Influencing the Propensity of a Firm to Enter into Strategic Alliances

A. Firm Characteristics
Product-market diversity of firm
Firms size and resource position (ability to mobilize
resources independently)
Prior involvement in strategic alliances
Top managements attitudes towards strategic alliances
Corporate culture
B. Industry Characteristics
Minimum efficient scale
Convergence of industries and associated costs of
product development
Importance of speed of entry into market
Cost structure
Threat of new entrants
Threat of competition from substitutes
C. Environmental Characteristics
Changes in buying patterns
Degree of market uncertainty
Rate of technological change
Breadth of competencies/skills/capabilities required to
capitalize on environmental opportunities
Political, legal and regulatory environment

Source: Varadarajan & Cunningham, 1995:291.

Propensity of Firm to Enter

into Strategic Alliances

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Reasons for Strategic Alliances by Market Type

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Market

Reason

Slow Cycle

Gain access to restricted market

Establish a franchise in a new market
Maintain market stability (e.g., establishing standards)

Fast Cycle

Speed up development of new goods or services

Speed up new market entry
Maintain market leadership
Form an industry technology standard
Share risky R&D expenses
Overcome uncertainty

Standard Cycle

Gain market power (reduce industry overcapacity)

Gain access to complementary resources
Overcome trade barriers
Meet competitive challenges from other competitors
Pool resources for very large capital projects
Learn new business techniques

Source: Ireland , Hoskisson & Hitt, 2009:251.

Types of Business- and Corporate- Level Strategic Alliances

Business Level

Corporate Level
Source: Ireland, Hoskisson & Hitt, 2009:252-261.

Complementary strategic alliances

Vertical
Horizontal
Competition response strategy
Uncertainty-reducing strategy
Competition-reducing strategy
Diversifying alliances
Synergistic alliances
Franchising

Achieving Competitive Advantage Through Strategic Alliances

Strategic Alliance Partner A

Strategic Alliance Partner B

Marketing skills
Innovation and product development
Positioning and segmentation
Advertising and sales promotion

Patent(s)

Customer base

Product line
Brand equity

Marketing resources
Marketing infrastructure
Sales force size

Reputation
For product quality
For customer service
For product innovations

Established relationship with

Suppliers
Marketing intermediaries
End use customers

Image
Corporate level
Business unit level
Product line / brand level

Manufacturing resources
Location
Size, scale economies, scope economies,
excess capacity, newness of plant and equipment

Knowledge of product-market

Information technology and systems

Skills

Resources

Pooled Resources and Skills

Manufacturing skills
Miniaturization
Low cost manufacturing
Flexible manufacturing
R&D skills
Planning and implementation related skills
Organizational expertise, producer learning,
and experience effects

Value Chain
Impact of Pooled Resources and Skills on Performance of :

- Primary Activities
- Support Activities

Competitive Positional Advantage(s) of Strategic Alliances

Cost Advantage
Differentiation Advantage

Sustainability of Competitive Positional Advantage(s)

Barriers to Imitation

Strategic Alliance Performance

Extent of Realization of Common Goals
Extent of Realization of Unique Goals:
Source: Varadarajan & Cunningham, 1995:292.

- Alliance Partner A
- Alliance Partner B

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PARTNER SELECTION
Porter & Fuller (1986) as quoted by Child, Faulkner & Tallman (2005:97):
Possession by the partner of the desired source of competitive advantage
The need for a complementary or balanced contribution from the partner
A compatible view of international strategy
There must be a low risk of the partner becoming a competitor
The partner has pre-emptive value in relation to rivals
The partners organizational compatibility is high
Geringer (1991:45) as quoted by Child, Faulkner & Tallman (2005:99):
Task-related criteria
Variables which are intimately related to the viability of a proposed ventures operations: access to finance, managerial
and employee competences, site facilities, technology, marketing and distribution systems and favorable institutional
environment (a partners ability to negotiate acceptable regulatory and public policy provisions)
Partner-related criteria
Variables which characterize the partners national or corporate cultures: their size and structure, the degree of favorable
past association between them, and compatibility and trust between their top management teams

The Strategic fit-cultural fit Matrix

High

Box 1
Many start here

Box 2
Optimal

Low

Box 4
No point

Box 3
No competitive advantage

Strategic fit

Low
Cultural fit

Source: Child, Faulkner & Tallman, 2005:102.

High

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Environmental
orientation

Employee
orientation

The cultural profile

International
orientation

Customer
orientation

Quality
orientation

Cost
orientation

Technology
orientation

Innovation
orientation

Source: Adapted from Buono & Pritzl (1992) by Child, Faulkner & Tallman, 2005:106.

Four options on the management of cultural diversity in alliances

Domination
by one
partner

No
Yes

Segmentation
1. segregation
2. pluralism

Synthesis
Domination

Breakdown

Yes
Source: Child, Faulkner & Tallman, 2005:344.

No
Integration

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A taxonomy of alliance forms

Focused
Scope
Complex
Two

Several

Collaboration
Corporate entity
Joint venture

Number of partners
A strategic alliance should be set up as a separate joint-venture company if:
1. the scope of the alliance constitutes a distinct business;
2. the alliance assets are specific, easily separable from the parents, and need to be jointly managed;
3. the alliance objectives can be clearly measured in relation to the use of the assets;
4. there is a perceived need to tie in the partners;
5. it is legally necessary - for instance, to enter a national market;
6. the partners wish to allocate a predetermined level of resources to the venture;
7. the scope of the venture is not central to the partners core business, or is at least geographically distinct.
A collaborative form is appropriate for an alliance if:
1. there is high uncertainty as to what tasks will be involved in the cooperative enterprise;
2. there is a great need for flexibility between the partners;
3. visible commitment by the partners is not sought;
4. the boundaries of the alliance do not circumscribe a distinct business area.
A consortium is the appropriate alliance form if:
1. two partners alone cannot realistically provide sufficient resources to meet the identified challenge or opportunity;
2. large size is necessary for the enterprise to be credible to potential customers, such as governments;
3. the specialist skills required are so wide and varied that two companies could not provide them adequately;
4. extensive geographical coverage is needed to achieve strong market presence;
5. there is the need to spread and limit the financial risk to each partner.
Source: Child & Faulkner, 1998:106-110.

Level of ascending integration of cooperative forms

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HIERARCHY

INTEGRATION
Firms merge a limited part of their domain with each other and
attempt to achieve with their joint value chains the competitive
advantage that might individually have eluded them

STRATEGIC ALLIANCE

A loosely coupled enterprise in which the parts are held together

through the medium of sophisticated IT packages

VIRTUAL CORPORATION

A major corporation exists with a wide and varied network of

subcontractors and associated companies, which provide it with
services on a regular basis

DOMINATED NETWORK

One firm provides another with a service on a fairly intimate basis

in exchange for money
Firms engage in reciprocal, preferential, mutually supportive
actions. Calculative quid pro quo behavior is relatively absent.

INDEPENDENCE

UNILATERAL AGREEMENTS
EQUAL-PARTNER NETWORKS
MARKETS

Source: Child, Faulkner & Tallman, 2005:153.

The typical pattern of communication

in a keiretsu

The typical pattern of communication

in an equal-partner network

Sangyo
Ryutsu
Shihon

Source: Child, Faulkner & Tallman, 2005 :155-157.

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From hierarchies to markets

Key features

Hierarchy

Virtual corporation

Network

Market

Normative basis

Employment relationship

Complementary strengths

Complementary strengths

Contract property rights

Means of communication

Routines

Electronic

Relational

Prices

Conflict resolution

Fiat;
Supervision

Leadership of brand

Reciprocity and reputation

Haggling and resort to law

Flexibility

Low

High

Medium

High

Commitment

High

Medium

Medium

Nil

Tone

Formal
Bureaucratic

High-tech
Modern

Open-ended
Mutual benefit

Precision
Suspicion

Actor preference

Dependent

Independent

Interdependent

Independent

Mixing of forms

Informal organization

Equality Subjugation

Status
Hierarchy

Repeat transactions

Profit centres
Transfer pricing

Market relations

Multiple partners
Formal rules

Contracts

Source: Adapted from Powell (1990) by Child, Faulkner & Tallman, 2005:146.

Configuration of the collaboration

1.
2.
3.
4.
5.
6.
7.

An analysis of the strategic fit between the companies

An analysis of the cultural fit between the companies
Identification of goal congruence
Identification of primary joint project and of its scope
Identification of the level and nature of contribution expected from each partner
Agreement on the structure of the alliance and its decision-making machinery
Agreement on a termination formula in the event of one or both partners wishing to exit the alliance

Source: Child, Faulkner & Tallman, 2005:124-125.

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The best deal

As interests

Possible negotiation outcomes

A wins
B loses

A wins
B wins

A loses
B loses

A loses
B wins

Bs interests

Source: Child, Faulkner & Tallman, 2005:126.

Degree of concern
for own outcomes

Competing

The managerial grid

of negotiating posibilities

Collaborating
Compromising

Avoiding

Accommodating
Degree of concern
for others outcomes

1.
2.
3.
4.
5.

compete and attempt to force the other party to back down;

accommodate, i.e. back down himself;
compromise, i.e. agree to split the difference;
take avoidance action by refusing to consider the issue;
collaborate by inventing and considering problem-solving approaches.

Source: Child, Faulkner & Tallman, 2005:127.

Steps to the successful negotiation

1.
2.
3.
4.
5.
6.
7.

Gather all possible information

Identify and evaluate the strength of your own and your partners needs
Identify the major issues for negotiation and assign minimum value to your position
Make proposals and listen to the responses
Show flexibility by suggesting alternative approaches
Exchange concessions and compare notes honestly about their value
Close the deal and tie up the details carefully.

Source: Fisher & Ury (1981) as quoted by Child, Faulkner & Tallman, 2005:130.

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Patner-contribution valuation
(Fixed assets, working capital, expertise, contact network,
brand names and technology transfer)
1. The creation of a perceived win-win situation leads to a more effective alliance, even if it means
negotiating in a less hard-nosed way than is customary in company negotiations.
2. The benefits and not just the costs should be considered in valuing assets to be put into or used in
the alliance.
3. The strength of need of the partners will influence the value negotiations to some extent.
4. The uniqueness of particular asset, such as brand name or technology, creates a premium value
determinable only by negotiation.
5. The valuation range of an asset will be somewhere between its existing value and the assessed
NPV of the future benefits to the alliance accruing from its use.
6. The position in that range will depend upon the relative strength of the partners, their possible
alternative courses of action to the alliance, the uniqueness of the assets, and the negotiating
ability and forbearing or hard attitude of the partners.
Source: Child & Faulkner, 1998:160.

Generating and Maintaining Cooperation

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1. the achievement of agreed alliance objectives in

quantifiable terms;
2. the achievement of spin-off benefits;
3. high morale amongst alliance members;
4. a good alliance reputation in the partner companies;
5. a good alliance reputation in the industry at large

Sense-making
(an informal process that
helps individuals view and align
their own preferences in relation to
the others involved in a cooperative
relationship)

Negotiational process
Transactional process
Administrative process

Committing

Source: Child & Faulkner, 1998:172-176.

(an informal process that produces psychological contracts between

the cooperating individuals, in which they come to accept
unwritten and largely non-verbalized expectations and
assumptions about each others prerogatives and obligations)

Alliance Management Qualities

being able to function in fluid conditions and to cope with ambiguity and personal stress
being capable to work in and manage teams with diverse memberships
having personal self-reliance
having relationship and negotiating skills
being capable to communicate in more than one language
being sensitive to different cultures
being aware of their own cultural background
being open to learn from new situations and diverse points of view
being capable to build trust among people

Source: Child & Faulkner, 1998:179-181.

Understanding
(an informal process whereby the
parties to a cooperative relationship
reach a shared understanding of the
context in which their alliance operates)

Strategic Alliance Orientations for Primary Risks and Resources

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Primary Risk
Relational Risk
Property
( physical, financial )

Control
making sure that its properties are used in
consonance with its own interests and intentions

Performance Risk
Flexibility
enabling a firm to minimize sunk
costs, adapt to new situations, and recover
more investment Should the alliance fail

Primary Resource
Knowledge
( technological, managerial )

Security

Productivity

limiting the exposure of tacit knowledge

and knowhow to its partner firm(s)

making knowledge and knowhow be used

to yield effective results in an alliance

Source: Das & Teng, 1999:53.

Options to retain control

Contractual control : specifying the details of usage of properties in the alliance agreement
Equity control
: having majority equity ownership or asking the partner to take some equity position in the alliance
Managerial control : having ones own staff in key posts to insure tight monitoring of alliance operations
Options to be flexible
Short-term, recurrent contracts that specify an incremental process of alliance making
Alliance forms (such as licensing, funded research, shared distribution and product bundling) that are relatively less engaging
Exit provisions that lay out how an alliance termination will be executed, should there be one. Specific costing and
pricing formulas as well as clear property rights should be featured explicitly

Options to ensure security

Alliance forms (such as funded research, outsourcing agreements) in which partners work separately
Knowledge/information restrictions that curb unauthorized learning and sharing
Options to ensure productivity
Compatibility focus : seeking compatibility of organizational routines and culture of partners
Stickiness elimination : eliminating internal stickiness and learning barriers that prevent integration with partners superior knowledge

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Dimensions of Control in Strategic Alliances

Extent of control

: if parents either singly or together try to control their alliances too much, this may inhibit the flexibility which the latter need
in order to develop within their own competitive environments.

Focus of control

: it is effective for alliance parents to exercise control selectively over those activities and decisions the parent regards as critical.

Control mechanisms : see below.

A typology of control mechanisms

Control
mechanism

What the mechanism does

Examples

Input control

Facilitates action on grounds of controlled conditions

Transfer prices, distribution of resources, information,

management, training and personnel development

Behavioral
control

Specifies the correct way to do the work

Policies, plans, specification of methods, rules,

direct supervision

Output control

Specifies intended results, monitors and rewards their

achievement

Targets, budgets, reporting of results, performancerelated pay.

Value
socialization

Defines and creates common values

Organizational cultures expressed through belief

systems, rituals, traditions

Adaptation
socialization

Make people familiar with each others values and

practices

Skills standardization, peer pressure, culture sensitivity

programmes

Personal
involvement

Signals what partner managers think is important

Visits and participation by managers, spoken communication

Hierarchical
structure

Emphasizes and supports partner and alliance goals

Boards of directors, appointment of managers, reporting lines

Lateral structure Influences people to interact across formal boundaries Gatekeepers between partners, cross-partner teams.
Source: Child, Faulkner & Tallman, 2005:224.

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Japanese management practice

Long-term orientation:
strategic rather than financial,
emphasis on growth,
long-term employment commitment;
Rewards based primarily on seniority and superiors evaluation;
Internal training and seniority system; heavy investment in training;
Collective orientation
decision-making and knowledge creation via collective participation and responsibility
flexible tasks
low specialization,
synthetical orientation;
emphasis on lean production and continuous improvement.

Management practice in the USA

short-term financial orientation;

rewards related to specific performance indicators;
high rate of job change and inter-company mobility;
rationalistic approach: emphasis on analysis and planning;
reliance on formalization and systems;
delegation down extended hierarchies.

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German management practice

long-term business orientation:

towards production improvement rather than short-term profit distribution
but orientation towards employment is not necessarily long-term;
strong technical and production emphasis, including a substantial investment in training;
managers and staff tend to remain within one functional area during their career;
emphasis on planning, procedures, and rules;
preference for participation and collective action.

French Management practice

strategic rather than financial orientation;

tall organizational hierarchies, with a large proportion of managerial personnel;
high degree of specialization;
widespread use of written media;
individual rather than collective working and decision-making, though the latter tends to be
centralized.

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British management practice

short-term financial orientation;

large general management superstructures;
low level of functional specialization;
high mobility of managers between functions;
use of formal meetings, especially committees;
interactive informality - limited formal and paper-based reporting;
limited importance attached to systems and standard operating procedures.

Source: Child & Faulkner, 1998:237-239.

Reasons for too many failures (Day, 1995:298) :

Shifting strategic requirements

Lack of clear decision-making responsibility, leading to conflicts over who is in control
Conflicts in objectives, cultures, and styles of making decisions
Long-term commitment or interest wanes on either side.

An alliance is advantageous when (Day, 1995:300) :

there is mutual value to the partners

there is durability through mutual commitment
there are barriers to emulation
it has the capacity to adjust to changes due to its complex, organic and dynamic nature
it has good parentage
it is a part of a larger network of alliances

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