chapter 4 global strategic alliances 1. 2 strategic alliances the combination of capabilities...
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Strategic alliances
The combination of capabilities between 2 or more companies for:• Market entry• Resources acquisitions• Global competitiveness
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Strategic alliances cont.
Partners join together toa gain a mutual learningfrom each other and to co-developnew knowledge. E.g. Nummi
Partners combine their respective uniquecapabilities that complement each otherto create a business, to develop new products or technology or to reinforce their competitiveness through specialization. E.g. Renault-Nissan
COSPECIALIZATIONCOALITION
Partners group together to gainglobal access or to establish a common standard.Example: Airlines
LEARNING
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Scope of thealliance
Purpose of thealliance
Globally based
Country based
Market Resources
CoalitionCo-specialisation
E.g. AirlinesRenault-Nissan
ConsortiaLearning
E.g. GSM
Joint venturefor market entry
Typical in emergingcountries
Joint venturefor resource exploitationE.g. Mining, agriculture based, oil and gas
International strategic alliances
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Strategic value• Defining the scope• Strategic objectives
• Value creation potential
Partners’ fit• Strategic fit
• Capabilities fit• Cultural fit
• Organizational fit
Negotiation and design• Operational scope
• Interface• Governance
Implementation• Integration
• Co-operation• Evolution
What are the benefits of thealliance?What do we get from it?
How workable is the relationship?
How do we organize andmanage?
How do we work?
Framework for strategic alliances
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Defining the scope of the alliance
Strategic scopeWhat is the alliancestriving at?
Economic scopeWhat each partnerscontribute and get
Operational scopeWhat the alliance isdoing
Coalition Co-specialisation Learning
Increasing reachto global market
Complementing capabilities for new businessor competitiveness
Learning from and in the alliance
Enlarged revenuesCost sharing
Generally verylimited to fewelements of the value chain(e.g. code sharing)
Specialisation leads to faster and cheaper developmentcost sharing
The alliance provides the interface for co-ordination or assembly of partners’ contribution
The alliance is a platform for transfer of knowledge and learning together
Acquisition and/ortransfer of know-how
E.g. Star alliance; Visa E.g. Fuji Xerox; Renault-Nissan E.g. Nummi ( GM-Toyota)
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Value creation in strategic alliancesValue of the
parent A
Value of parent B
RoyaltiesDividends
Management feesTransfer pricing
Learning from A
Cost saving due to combined operations
Increased revenues due to joint marketing andcomplementary products
Increased profitability from joint innovation
DIRECT VALUEValue coming from the
alliance
SYNERGY VALUEValue coming from joint
operations
Learning from B Learning from ALearning from B
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• How important and urgent is the business of the alliance for partners?- Restructuring- Competitiveness enhancing (cost, differentiation)- Global reach- New business development
• To what extent do partners need to achieve their objectives? (Degree of capabilities autonomy)?
- Can partners achieve objectives alone - Timing pressure- Resources and competencies
CRITICALITY
DIFFERENCES IN EXPECTATIONS
• How different are the expectations?• To what extent are any differences
compatible?
Determines the degree of commitment to the alliance
Strategic fit
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Criticality and commitment in alliances
Commitment is a function of…
Strategic importance of the project
Need of a partner
High
High
Low
Low
Highcommitment
Powerbattle
Lackof support
Lowcommitment
AA = High commitmentBB = No partnershipCC = Low commitmentDD = Very low commitmentAB = Potential conflictsAC = Potential conflictsAD = High level of conflict
AB
CD
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Differences in expectations
• Market development of existing products
• New business
• Product complements
• Cost reduction
• Learning
• Cost reduction
• Learning• Product complements
• New business
• Market development of existing products
If no territorialOverlap
Fit Possiblefit
Problematic fit
A
B
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Capabilities fit
Partner A Partner B
Products
Resources
Process
Knowledge
Assets
OverlapsGapsHow to
attribute?How to
develop?
• What are the relative competitive strengths of partners ?• To what extent does the assembling of partners create a robust business model?
TECHNOLOGY SOURCING PRODUCTION MARKETING
Who contributes to what ?
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Cultural fit
What to anticipate?
How to deal with it?
Views about businessobjectives:o Growtho Profitabilityo Riskso Long/short termo Shareholder valueo Stakeholders
Views about competitiveapproaches:o Customer orientationo Pricingo Importance of qualityo Importance of technologyo Ethics
Ways to manage:o Leadership styleo Trust/controlo Motivating factors
Communication:o Openness/secrecyo Formal/informalo Importance of personal relationships
PARTNER A PARTNER B
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Organisational fit
What to anticipate?
How to deal with it?
PARTNER A PARTNER B
Structural differences:o Centralisation/decentralizationo Form of organisation
Systems and processes:o Importance of formal systemso Sophistication of financial controlso Quality of ITo Importance of team work/ committees
Performance: o Performance based rewardso Career mobilityo Quality of Management
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Organisational fit cont.
BIGGER, MORE BUREAUCRATIC PARTNER (A)
SMALLER, MORE ENTREPRENEURIAL PARTNER (B)
Formal, explicit decisions Informal, tacit, shared decisions
Periodic, scheduled plans Continuous, unscheduled planning
Low contextual embeddedness
High contextual embeddedness
Slow, sequential inputs to decisions
Fast, simultaneous inputs to decisions
Analytical choices Intuitive judgments
Aggregation, consolidation of data
Real-time immersion in data
BIGGER, MORE BUREAUCRATIC PARTNER AS SEEN BY THE SMALLER ENTREPRENEURIAL
SMALLER, MORE ENTREPRENEAURIAL PARTNER AS SEEN BY THE LARGER FIRM
Ponderous, slow, and stupid
A bunch of cowboys
Preoccupied with reviewing everything to death
Shooting from the hip
Awash in mindless procedures
Disorganized, slippery
Risk averse, procrastinating
Going off in all directions, unfocused
Characterized by paralysis through analysis
Characterized by sloppy work
Divided, fragmented Exclusive, clannish, hostile
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Design
STRUCTURE Role of the alliance structure: broker/operator
INTERFACE How value is distributed among partners Degree of task integration People appointment (alliance management)
GOVERNANCE Legal structure Executive authority/ supervisory authority Communication/information/reporting Conflict resolution
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The alliance designed as a joint committee:the AlZA-Cibe Geigy case
ALZA
CIBA53% shareholding80% voting right
Exclusive right to ADDSRight to produceRight to market
Audit committee
Joint researchconference
Joint researchboard
Scientificliaison
ScientificliaisonInformation
5Board
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The alliance designed as a transfer JV:the case of NUMMI
GM TOYOTA
FREEMONT PLANT
2500 GMunionized workers
GM engineers (25)
Management
Lean manufacturingKnow-how
Jointventure
50% 50%
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How to solve valuation issues
• Clearly define alliance scope and trade terms between partners
• Create separate economic entity
• Seek external benchmarks
• Plan for renegotiation
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Distribution of value
• Profit sharing vs revenue sharing
• Transfer pricing
• Tasks definition and costs allocation
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Partner A Partner BCost sharing
Alliance revenues 1000Alliance direct costs (100)Net revenues 900 450 450
Revenue sharing
Partner A allocated costs
Partner B allocated costs
(Ca)
(Cb)
Net profit 900-Ca-CbPartner A Partner B
(900-Ca-Cb)/2 (900-Ca-Cb)/2
Profit sharing vs revenue sharing
Partner A Partner B
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Task integration
LimitedintegrationPLUG-IN
E.g. GE/SNECMA
Highintegration
E.g.Fuji and Xerox
Requires a lot of operational interactions
Limited interactions
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The 8 criteria for successful alliances (the 8 I’s)• INDIVIDUAL EXCELLENCE
• IMPORTANCE
• INTERDEPENDENCE
• INVESTMENT
• INFORMATION
• INTEGRATION
• INSTITUTIONALIZATION
• INTEGRITY
- Both partners are strong- Have something to contribute- Positive intent- Fits strategy of both partners- Long term view- Partners need each other- Complementing capabilities- Nobody can do it alone
- Partner shows commitment- Investment/re-investment- Reasonable open communication- Sharing of operational information
- Shared operating procedures- Numerous connections- Teachers/learners
- Clear responsibilities- Clear decision processes
- No abuse- Willingness to enhance trust
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GE/SNECMA: the ingredients of success• Strong mutual trust at the top• Near perfect complementarity - little overlap (the possibility to
isolate each partner’s contribution from other partner’s interference)
• Revenue sharing eliminates issues of transfer pricing• Willingness of partners to learn and adapt - cooperation over
time• A small structure is in charge of the whole project (ownership)
and manages the relationships between partners• Mutual respect• Successful products
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• A clear definition of responsibilities encompasses all management, manufacturing, marketing and support functions
• Environment-friendly technology • Manufacturer position in the industry• Committed, worldwide product
support
• The two parent companies had a common goal and no competing products
• By limiting the agreement to two partners, the operational structure maintained a simplicity required for efficient decision making
• GE and Snecma participate equally in all operational activities
Advantages of the CFM partnership
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