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Strategic Alliances Types of Strategic Alliances Reasons for Strategic Alliances Risks of Strategic Alliances Joint Ventures Pros and cons of Joint Ventures Joint venture vs. Strategic Alliance Problems Inherent in a JV Consortia Examples Major strategic alliances of Samsung electronics LG Electronics alliance portfolios Sun Microsystems alliance portfolios Philips Alliances
Strategic Alliance is a significant long/term partnership and collaborative agreement entered into by two or more companies to pursue a set of agreed upon critical goals while remaining (legally) independent organizations. These collaborations can come in many shapes and sizes, including contractual and equity forms. It normally is a synergistic arrangement whereby the participating organizations each brings different strengths and capabilities to the alliance.
Firm A Partnerships between firms Firm B where their Resources Capabilities are combined to pursue mutual interests to
Develop Goods Manufacture Distribute Services
Types of Strategic Alliance
Licensing Franchising Joint R&D Turnkey Project «
Joint Venture Purchase of Equity Share Equity Swap «
Types of Strategic Alliance
the sale of a right to use certain proprietary knowledge in a defined way
a method of doing business wherein a franchisor licenses trademarks and tried and proven methods of doing business to a franchisee
Joint R&D ±
two or more organizations agree to combine their technological knowledge to create new innovative products
Turnkey Project ±
a project in which a separate entity is responsible for setting up a plant or equipment and putting it into operations
Equity Joint Venture Independent firm is created by the joining assets from two other firms where each contributes 50% of the total
Equity Strategic Alliance Partnership where the 2 partners don¶t own equal shares
NonNon-Equity Strategic Alliance Contract is given to supply, produce or distribute a firm¶s goods or services (without equity sharing)
Competition Reduction Alliances Competition Response Alliances Uncertainty Reduction Alliances Diversification Alliances
Synergistic Alliances Franchising
Business-Level Strategic Alliances Business`
Vertical Strategic Alliance
A cooperative partnership across the value chain. Are most effective when partners trust each other.
Horizontal Strategic Alliance
A cooperative partnership in which firms at the same stage of the value chain share resources and capabilities. Intended to enhance the capabilities of the partners to compete in their markets. Developed to respond to competitors¶ actions, share risks, and/or to reduce the competition.
Vertical and horizontal alliances
CorporateCorporate-Level Strategic Alliances
Diversification by Alliance
Integrating unique knowledge stocks to create products that serve new markets and customers. Valuable if the new products developed are related to current products in such that synergy can be created.
Synergy by Alliance
Partners share resources or integrate complementary capabilities to build economies of scope. Franchising: the licensing of a good or service and business model to partners for specified fees (usually a signing fee and a percentage of the franchisee¶s revenues or profits).
Supplier Value Chain
Partnerships that build on the complementarities among firms that make each more competitive Include distribution, supplier or outsourcing alliances where firms rely on upstream partners or downstream partners to build competitive advantage
Buyer Value Chain
Japanese manufacturers rely on close relationships with and among suppliers to implement Just-In-Time inventory systems
Used to increase the strategic competitiveness of the partners
Buyer Value Chain
Buyer Value Chain
Marketing agreements between Various Airlines
International Strategic Alliances
Cross-border strategic alliances are the most prominent means of entering foreign markets.
Countries require that firms form joint ventures with local firms in order to enter their markets. Foreign firms need local knowledge and other resources to understand and compete effectively in the newly entered markets.
Different cultures and a lack of trust hinders the transfer of knowledge or sharing of other resources.
PROS/CONS of Strategic Alliance
- Sharing costs/risks - Developing new technologies - Capturing economies of scale - Access to new markets/technologies - Organizational learning - Overcoming governmental barriers
- Possible opportunistic behavior of partners - Searching costs - Coordination costs - Monitoring costs - Technology/information leakage
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Gain access to a new or restricted market Develop new goods or services Facilitate new market entry Share significant R&D investments Share risks and buffer against uncertainty Develop market power Gain access to complementary resources Build economies of scale Meet competitive challenges Learn new skills and capabilities Outsource for low costs and high quality output
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Strategic, not tactical Focused on long-range goals and major economic benefits Features: - tight linkages - vested interests - high level support - cooperation and collaboration
Components of a Strategic Alliance
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Confidentiality agreement Mission, vision, values statements Long-term goals and objectives Plan for implementation of activities Plan for managing the process and measuring success Exit strategy
Stages of Alliance Formation
Strategy Development Partner Assessment Contract Negotiation Alliance Operation
studying the alliance¶s feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people.
analyzing a potential partner¶s strengths and weaknesses, creating strategies for accommodating all partners¶ management styles, preparing appropriate partner selection criteria, understanding a partner¶s motives for joining the alliance and addressing resource capability gaps that may exist for a partner.
Stages of Alliance Formation (cont¶d)
Strategy Development Partner Assessment Contract Negotiation Alliance Operation
determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partner¶s contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.
addressing senior management¶s commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, and measuring and rewarding alliance performance.
Growth in alliancing activities
Hagedoorn (2002) rapid growth in the number of new R&D partnerships particularly in IT industry and pharmaceuticals over 50% of alliances are international (globalization)
Alliances as a Percentage of Company Revenue Top 1,000 U.S. Public Corporations
10 21 1 7 3
2 1 980
Source: Columbia University, European Trade Commission, et all, republished in ³Stand and Deliver´,by Working Council for Chief Financial Officers Alliances
20 0 2
Many Forms of Alliances are Possible
Strategic alliances Integration of business process
Forms of alliances
Industry consortium T c nic l tr inin Suppli r Distribution r r m nt m nt Increasin commitment from bot partners
Fr nc isin T c nolo y lic nsin R&D cooper tion Equity joint venture
usually many forms employed at the same time
Partnering to gain access to needed resources knowledge and technologies,
foreign markets and customer segments, brand name and reputation
In order to partner effectively, the company needs to have own absorptive capacities Building skills to become independent and abandon the partner ± ³learning race´ Example: Japan¶s company in the 1980s Learning core technologies from Western partners and gradually substituting them
Transaction costs ± make or buy?
Transaction costs (simplified)
cost of the components ± directly related to resources opportunity cost ± if own manufacturing plant is built search costs ± finding suppliers, negotiating, etc. communication and coordination costs ± discussing specifications, technical training, customer complaints handling, ... measurement costs ± necessary changes to product designs, quality management, ...
Not only cost of materials
Transaction costs ± make or buy or partner?
Asset specificity ± investment useful only in a specific relationship e.g. technology used only by one company, factory built close to a client¶s site Two approaches: 1. Rotating suppliers bargaining to always get the best price problem: new technologies, future products think about transaction costs ± not only component costs! 2. Long-term cooperation economies of scale, experience effects, joint R&D of new product generations
Success factor of Strategic Alliance
Existing Networks, Corporate Culture of Partner
Resources and Core Competence of Partner
Passion, Longing of Partner for the Alliance
Risks of Strategic Alliances
Strategic alliances can lead to competition rather than cooperation, to loss of competitive knowledge, to conflicts resulting from incompatible cultures and objectives, and to reduced management control . A study of almost 900 joint ventures found that less than half were mutually agreed to have been successful by all parties (Harrigan, 1986; Dacin et al , 1997 Spekman et al, 1996).
Reasons for Failure
60% of partnerships fail!
Lack of partnership experience Cultural mismatch Misunderstood operating principles Lack of financial commitment Slow results or payback Lack of shared benefits Poor communications Overly optimistic 0 50 20 Caution 28 31 32 Critical 42 49 54 73 100
Source: ³Alliance Analyst´ Survey of 455 CEO¶s
An alliance can fail for many reasons
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failure to understand and adapt to a new style of management failure to learn and understand cultural differences between the organizations lack of commitment to succeed strategic goal divergence insufficient trust operational and geographical overlap unrealistic expectations
A ³union´ of two or more parties who contractually agree to contribute to a specific venture which is usually limited to a specific task for a specific period of time A joint venture is a separate legal entity generally governed under partnership law²which varies from state to state The JV parties can be individuals, partnerships or corporations that continue to operate independently from the other except for activities related to the Joint Venture.
Pros and cons of Joint Ventures
Allows for sharing of risk (both financial and political) Provides opportunity to learn new environment Provides opportunity to achieve synergy by combining strengths of partners May be the only way to enter market given barriers to entry
Requires more investment than a licensing agreement Must share rewards as well as risks Requires strong coordination Potential for conflict among partners Partner may become a competitor
Components of a JV Agreement
The Union The contract can be viewed as a pre-nuptial agreement The alliance is the union The new legal entity can be viewed as the child. The Separation Separation is inevitable because JVs generally have a limited life and purpose.
To operate under a JV, all parties have decided to keep core business separate and limit interaction to joint operations.
JV vs. Strategic Alliance
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Contractual Separate legal entity Significant matters of operating and financial policy are predetermined and ³owned´ by the JV
May or may not be contractual Generally, not a separate legal entity Significant matters of operating and financial policy may or may not be predetermined but are ³owned´ by the indi idual participants
JV vs. Strategic Alliance (cont¶d)
Exist for a specific time Exist for a specific project or purpose Limited with respect to future expectations
Indefinite life or a specific time Fluid and allows for greater amounts of ambiguity
A A B B
Companies A and B combine to form a new company C
Companies remain independent
Motives for IJV Formation
New Markets To take existing products to new markets
To diversify into a new business
To strengthen the existing business
To bring foreign products to local markets
Strengthening the Existing Business
International joint ventures are used in a variety of ways by firms wishing to strengthen or protect their existing businesses through:
Achieving Economies of Scale. Raw Material and Component Supply. Research and Development. Marketing and Distribution. Divisional Mergers.
Joint Ventures are also used for:
Acquiring technology in the core business Reducing financial risk
Other motives for International JVs
Taking products to foreign markets
Following Customers to Foreign Markets Investing in ³markets of the future´
Bringing foreign products to local markets
Complementarily of interests
Problems Inherent in a JV
Each party is responsible for the actions of the JV and one another The best JV agreement cannot insulate the JV and parties from all risks
Consortia are similar to joint ventures and could be classified as such except for two unique characteristics They typically involve a large number of participants They frequently operate in a country or market in which none of the p articipants is currently active Consortia are developed to pool financial and managerial resources and to lessen risks
Major strategic alliances of Samsung electronics
KDDI Bang & Olufsen Kent State University Qualcomm Toshiba (TSST) Sony (S-LCD) IBM Dell Hewlett-Packard Disney Napster Sony NEC Matsushita Best Buy Microsoft
Areas of Cooperation
Supply CDMA2000 1xEV-DO network equipment in Eastern Japan Partner in home theater business Co-develop display technologies Cooperation in MDDI (Mobile Display Data Interface) technology Develop and market optical storage devices Establish joint venture for 7th generation LCD (1870 x 2200 mm) line Co-develop nano-logic process technologies Supply multi-functional laser printers Share technology for ink-jet printers Supply "Movie Beam" set-top box for VOD Co-develop and market Samsung-Napster player Expand and consolidate memory stick business Cooperate in high-end business computer systems Standardize technology, co-produce and jointly market DVD recorders Sell side-by-side refrigerators through a network of more than 500 retailers Co-develop digital household electronics
Source : http://www.samsung.com/us/aboutsamsung/companyprofile/
LG Electronics alliance portfolios
Sun Microsystems alliance portfolios
Suppliers ( 20.2%) Sun micro systems
Customers ( 5.8%)
Sun Microsystems business and alliance strategy
Highly vertical: ownership of technology (operating system plus CPU), provide services
Align with partners to provide services (e.g., IBM, EDS, Andersen Consulting) Licensing of technology (e.g., Java, Use of shared software and hardware Solaris, SPARC) to develop industry components among different vendors to standards create industry standards Align with resellers to sell into indirect channels Belief in open systems to allow Outsource manufacturing of SPARC computers to talk to one another chips to Texas Instruments Internet alliances (e.g., Internet/e-commerce specialist Netscape/AOL) to deliver applications and services
Dell computers alliance portfolios
Suppliers ( 41.7%) Dell computers
Customers ( 3.9%)
Dell computers business and alliance strategy
Virtual integration: control flow of information from suppliers to customers Assembler versus owner of technology Direct model (with both suppliers and customers) offers competitive advantage (low cost, first-to-market with latest technology) Desire to move into the enterprise computer market
OEM alliances with key component suppliers such as Intel Service alliances with Decision One, IBM, EDS, Andersen Consulting Generate revenue ³outside the box´ by aligning with Internet service providers (e.g., AOL) Streamline logistics with suppliers by implementing valuechain.com Distribution alliances with valueadded resellers and retailers to gain international presence Technology transfer agreements (e.g., IBM) to move into enterprise market
Asiana airlines alliances with competitiors (Star alliances)
Codeshare agreements of airline industry First truly global airline alliance
NEC Rockets Past Its Competitors:
In the 1980s, NEC used more than 100 joint ventures to gain a leading position in three critical high-tech markets: computers, semiconductors, and telecommunications.
NEC Rockets Past Its Competitors: (cont¶d)
During a period of eight years NEC grew more than fivefold, from $4 billion in sales to more than $20 billion. It shot past its competitors and emerged as one of the leading international companies with in-depth competence in all three key markets. NEC did this while spending a far smaller portion of its revenue on R&D than its competitors.
Nortel and Microsoft
Nortel and Microsoft Form Strategic Alliance to Accelerate Transformation of Business Communications
Microsoft CEO Steve Ballmer (R) and Nortel President and CEO Mike Zafirovski today announced a strategic alliance between the two companies at Microsoft headquarters in Redmond, Wash.
What is FlexRay? (Philips)
FlexRay ± Industry Standard Development
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http://en.wikipedia.org/wiki/Strategic_alliance Thomson Canada limited Cross-Border Strategic Alliances and Foreign Market Entry (Larry D. Qiu, Hong Kong University of Science and Technology) Strategic alliances and their role in the management of technology (Dr. Krzysztof Klincewicz, Tokyo institute of technology) Global Market Entry Strategies: Licensing, Investment, and Strategic Alliances (Kristopher Blanchard, North Central University) Understanding business strategy (Hoskission, Hitt, 1st edition) , ( , 2007)
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