chapter 8 international strategic alliances: management and design

STRATEGIC ALLIANCES STRATEGIC ALLIANCES ISSUESISSUES

Stability and risk Failure rate of 30 to 60 percentEven profitable alliances can

be torn by conflict

Successful Alliances Must:Successful Alliances Must:Not Only Make Strategic Not Only Make Strategic

Sense But Also Require Good Sense But Also Require Good ImplementationImplementation

(See Exhibit 8.1 for Steps in (See Exhibit 8.1 for Steps in Implementation of Strategic Implementation of Strategic

Alliances)Alliances)

Decide Link inValue Chain

Select aPotentialPartner

Choose anAlliance Type

Negotiate anAgreement

Build theOrganization

Terminateor

ReviseImplementation

YesNoMeets

StrategicObjectives?

Build Trustand

Commitment

Acceptable?

Yes

Begin Over

Continue orIncrease

Involvement

No

AssessPerformance

WHERE TO LINK IN THE WHERE TO LINK IN THE VALUE CHAIN?VALUE CHAIN?

Depends on the objectives that the firm seeks to achieve

Exhibit 8.2 gives some examples of common links in the value chain

InputLogistics

Operations

Marketingand Sales

OutputLogistics

Service

InputLogistics

Operations

Marketingand Sales

OutputLogistics

Service

R&D R&DR&D

Supply/Production

Production/Marketing

Operations

CompanyB

CompanyA

Marketing

Delivery

EXHIBIT 8.3 VALUE CHAIN EXHIBIT 8.3 VALUE CHAIN LINKS IN U.S. ALLIANCESLINKS IN U.S. ALLIANCES

0102030405060

%

R&

D

Op

er.

Mkt

.

Pro

d./

Mkt

.

Oth

er

CanadaorMexico

W.Europeor Japan

Others

SELECTING A PARTNER: THE SELECTING A PARTNER: THE MOST IMPORTANT CHOICE? MOST IMPORTANT CHOICE?

Seek – strategic complementaritystrategic complementarity– skill complementarityskill complementarity– compatible management compatible management

stylesstyles

ISSUES TO CONSIDER IN ISSUES TO CONSIDER IN CHOOSING A PARTNERCHOOSING A PARTNER

The level of mutual dependency The "anchor" partner The "elephant and the ant"

complexOperating policy differences Difficulties of cross-cultural

communication

TYPES OF STRATEGIC TYPES OF STRATEGIC ALLIANCESALLIANCES

International cooperative alliances – informal–formal

International joint ventures

INFORMAL COOPERATIVE INFORMAL COOPERATIVE ALLIANCESALLIANCES

Non-legally binding agreements between companies from two or more countries– limited involvement between companies

FORMAL COOPERATIVE FORMAL COOPERATIVE ALLIANCESALLIANCES

Higher degree of involvement than informal alliances

Formal contractPopular in high tech industries

because of high costs and risks

INTERNATIONAL JOINT INTERNATIONAL JOINT VENTURESVENTURES

Separate legal entity owned by two or more parent companies from different countries

No need for equal ownershipEquity based on cash or other

contributions

AllianceType

Degree ofInvolvement

Ease ofDissolution

Visibility toCompetitors

Contract LegalEntity

InformalICA

Usuallylimited inscope

Easy, at theconvenienceof eitherside

Often unknownto competitors

No None

Formal lCA Deeperinvolvement

Morediffi cult todissolve priorto end ofcontract

Often visibleto competitors

Yes None

I J V Deepinvolvement

Mostdiffi cult todissolve

High visibility Yes Yes,

EXHIBIT 8.5 TYPES OF EXHIBIT 8.5 TYPES OF ALLIANCES: SUMMARYALLIANCES: SUMMARY

NEGOTIATING THE NEGOTIATING THE AGREEMENTAGREEMENT

Joint venture contracts: legal documents that bind partners together

The formal agreement is not as important as the ability of managers to get along

EXHIBIT 8.6 ISSUES IN EXHIBIT 8.6 ISSUES IN ALLIANCE AGREEMENTSALLIANCE AGREEMENTS

For both ICAs and IJVs–under which country’s law does the agreement operate?

–how will profits be divided?–do you need a prenuptial agreement?

Primarily for IJVs–what are the equity contributions of each partner?

Exhibit 8.6 issues in alliance Exhibit 8.6 issues in alliance agreements, continuedagreements, continued

ORGANIZATION DESIGN IN ORGANIZATION DESIGN IN STRATEGIC ALLIANCESSTRATEGIC ALLIANCES

DECISION MAKING CONTROLDECISION MAKING CONTROL

Majority ownership does not necessarily = control

Operational decisionsStrategic decisions

MANAGEMENT STRUCTURES MANAGEMENT STRUCTURES

DOMINANT PARENT DOMINANT PARENT

One parent controls strategic and operational decision making –dominant parent often has majority ownership

–dominant parent treats the IJV as wholly owned subsidiary

SHARED MANAGEMENT SHARED MANAGEMENT

Both parents contribute approximately the same number of managers to the board of directors, the top management team, and functional area management

SPLIT CONTROL SPLIT CONTROL

Partners usually share strategic decision making and split functional decision making

INDEPENDENT MANAGEMENTINDEPENDENT MANAGEMENT

IJV managers act like managers from a separate company – IJVs often recruit managers from outside the parent companies

ROTATING MANAGEMENT ROTATING MANAGEMENT

Key positions rotate among partners–popular in developing countries trains management talent and transfers expertise

CHOOSING AN ALLIANCE CHOOSING AN ALLIANCE MANAGEMENT STRUCTUREMANAGEMENT STRUCTURE

If one parent has dominant equity position– dominant management structure more likely

Equal ownership–shared, split, or rotating management structure preferred

Similar technologies or know-how–shared management structure preferred

Choosing an alliance Choosing an alliance management structure, management structure,

continuedcontinued

If different technologies –split management structure preferred

More strategic importance to one partner–dominant management structure preferred

Choosing an alliance Choosing an alliance management structure, management structure,

continuedcontinued

HUMAN RESOURCE HUMAN RESOURCE MANAGEMENT IN STRATEGIC MANAGEMENT IN STRATEGIC

ALLIANCESALLIANCES

The HRM functions of an IJV are more complex because managers (and sometimes workers) come from two or more firms or from two or more cultures

HRM ISSUESHRM ISSUES

HRM planningParent involvementStaffing the alliance management

and technical personnelStaffing the alliance workforceAssigning managers strategic or

operations tasks

HRM issues, continuedHRM issues, continued

Performance assessmentLoyaltyCareer developmentCultural differencesTraining

COMMITMENT AND TRUST: THE COMMITMENT AND TRUST: THE SOFT SIDE OF ALLIANCE SOFT SIDE OF ALLIANCE

MANAGEMENTMANAGEMENT

Without trust and commitment the alliance will fail entirely or never reach its potential

COMMITMENTCOMMITMENT

Taking care of each other and putting forth extra effort to make the venture work–attitudinal commitment–calculative commitment

TRUSTTRUST

The confidence that the partner will deliver on their expected contributions to the venture and behave with good will–benevolent trust–credibility trust–“trust cycles”

Exhibit 8.8 The Trust/CommitmentCycle

CREDIBILITYTRUST

BENEVOLENTTRUST

CALCULATIVECOMMITMENT

ATTITUDINALCOMMITMENT

CREDIBILITYTRUST

BENEVOLENTTRUST

CALCULATIVECOMMITMENT

ATTITUDINALCOMMITMENT

CREDIBILITYTRUST

BENEVOLENTTRUST

CALCULATIVECOMMITMENT

ATTITUDINALCOMMITMENT

Time

Time

Start

WHY ARE TRUST AND WHY ARE TRUST AND COMMITMENT IMPORTANT? COMMITMENT IMPORTANT?

Required for IJV participants to contribute tacit knowledge and quality inputs

Weakness of formal contracts–can never identify all the issues

KEY FACTORS TO BUILD AND KEY FACTORS TO BUILD AND SUSTAIN TRUST AND SUSTAIN TRUST AND

COMMITMENTCOMMITMENT

Pick your partner carefully Know each side’s strategic

goalsSeek win-win situations Go slowly

Key factors to build and sustain Key factors to build and sustain trust and commitment, trust and commitment,

continuedcontinued Invest in cross-cultural training Invest in direct communicationFind the “right” levels

EXHIBIT 8.9 THE “RIGHT” EXHIBIT 8.9 THE “RIGHT” LEVELS OF TRUST AND LEVELS OF TRUST AND

COMMITMENTCOMMITMENT

Vulnerabilities &Benefits

Trus

t &

Com

mitm

ent

Vulnerabilities

BenefitsTrade Off

Point

HighLow

Low

High

ASSESSING ALLIANCE ASSESSING ALLIANCE PERFORMANCEPERFORMANCE

Match strategic objectives with performance measures

EXHIBIT 8.10 SELECTED EXHIBIT 8.10 SELECTED PERFORMANCE CRITERIA FOR PERFORMANCE CRITERIA FOR

STRATEGIC ALLIANCESSTRATEGIC ALLIANCES

Management ProcessesOrganizational LearningCompetitiveMarketingFinancial

IF THE ALLIANCE DOES NOT IF THE ALLIANCE DOES NOT WORKWORK

Negotiate an end or improve implementation

Know when to quit/invest moreAvoid “escalation of commitment”Plan end - “prenuptial agreements”Death not always failure

CONCLUSIONSCONCLUSIONS

The importance of international strategic alliances

Most important decision: picking the right partner

No set structure in ownership, decision making control, or management control