Business Alliances and Networks

Gerrit Rooks

The alliance explosion

Examples of alliances

• Sony Ericsson

– Sony does the marketing and designing

– Ericsson does the manufacturing

• Philips and Sara Lee/DE combined their knowledge in respectively household appliances and coffee to create the successful Senseo coffee concept

Examples of alliances

• Coca Cola shares its knowledge with McDonalds. This allowed McDonalds to enter more markets, faster and more succesfully

• Friesland foods manages the inventory of some of its buyers (Vendor managed Inventory), enhancing customer service and reducing inventory costs

Example of alliances

• Helio, a cellphone venture Internet-service provider EarthLink of Atlanta and South Korean wireless operator SKI Telecom, entered a strategic alliance with MySpace.

• Ghananian business firms only work together with a few selected, trusted partnerfirms.

Examples of alliances

• Toyota works very closely with a selected number of suppliers, whereas American companies like GM, Chrysler and Ford work with arms length suppliers.

• Philips plugs its marketing gap with alliances

– Philips (electronics) and NIke combined their strength to develop wearable electronics, (MP3 related equipment)

– Philips works together with Robijn on ironing products

– Philips works together with IKEA

Unexpected combinations

Unexpected combinations

Alliance networks: the Texas Instrument network

Alliances lead to networks

• In only two years, 75% of the industry is directly or indirectly connected

Source: De Man, 2006, Alliantiebesturing

Networks compete• In some

industries networks of former competitors now compete with each other

• Note, in the airline sector it is all about market power and cost savings.

• Every network member profits. Stable technical environment.

• Mergers are often not possible Source: De Man, 2006,

Alliantiebesturing

Strategic alliances are a popular management tool

Alliance goals

Strategic alliances are voluntary arrangements between firms involving exchange, sharing, or codevelopment of products, technologies, or services.

(Gulati, 1998)

Trend: more flexible alliance forms

Issues in Alliance ResearchResearch issue Empirical questions Theoretical perspectives

The formation of alliances

Which firms enter in alliances, and whom are their partners?

Resource dependence Network as a repository of partners

The governance of alliances

Which ex-ante factors influence the choice of governance structure?

Transaction costs theory

Social networks

The evolution of alliances

Which ex-ante factors and processes influence the development of alliances?

Social and behavioral dynamics (e.g. Negotiation processes)

The performance of alliances

Which factors influence the performance of alliances?

Transaction cost theory

Resource fit

Alliance management

The termination of alliances

Which factors influence the 'survival' of alliances?

Theoretical perspectives on alliances (formation and termination)

Theoretical perspectives on alliances

• Resource dependency

• Transaction cost theory

• Social networks

• Alliance management

The general and specific environments

FIRM

SUPPLIER

CUSTOMER

COMPETITOR

DISTRIBUTOR

EMPLOYEE

REGULATORY INSTITUTIONS LEGISLATIVE INSTITUTIONS

OTHER INDUSTRIES GOVERNMENT

ECONOMIC INSTITUTIONS

Resource dependency

• Organizations are dependent on their environments

– They need resources to survive and grow• Environment becomes poor if:

– Important customers are lost or new competitors enter

• Organizations manage their transactions with the environment – The goal: Ensure predictability of access to

resources, reduce uncertainty and dependency

Interorganizational strategies for managing resource dependence

• Two basic interdependencies in the specific environment:

1) Symbiotic interdependence• Exist among an organization and its suppliers and distributors

2) Competitive interdependence • Exist among organizations that compete for scarce inputs and

outputs

• Strategies to reduce uncertainy / dependence– Reputation building– Strategic alliances / long term contracts– Co-optation– Merger / Acquisition– Collusion

Resource dependency explanation of alliance instability

• Changes in 'resource fit' increase the hazard of dissolution of business relationships

• Changes in resource fit can result from:– increases in a firm’s resource requirement – a decrease in the firm’s partner resource

provisions – increases in potential resource provisions by

alternative partners

Transaction cost theory (TCE)

• Tries to answer the fundamental question: “Why do firms exist?” or alternatively "what are the boundaries of the firm?"

• Transaction costs:– Negotiating contracts,– Monitoring contracts,– Enforcing contracts,

• Transaction costs = friction within the economy

Transaction cost theory (cont’d)

• The goal of the organization is to minimize transaction costs (formally production costs are also included)– of exchanging resources in the environment– of managing exchanges inside the

organization– “Every dollar or hour of a manager’s time spent in

negotiating or monitoring exchanges with other organizations or inside the organization is a dollar or hour not used for creating value”

Sources of transaction costs

• Uncertainty and bounded rationality• The environment is uncertain and complex• Transactions (especially R&D) are complex• People have a limited ability to process

infromation and to understand the environment surrounding them

• The higher the level of uncertainty, the greater is the difficulty of managing transactions between organizations

Sources of transaction costs (cont’d)

• Opportunism and small numbers • Though not all, some people behave

opportunistically — they cheat or exploit other stakeholders in the environment

• When an organization is dependent on one supplier or a small number of traders, the potential for opportunism is higher

• The organization has to spend resources to negotiate, monitor, and enforce agreements with trading partners to protect itself (i.e., transaction costs increase)

Sources of transaction costs (cont’d)

• Risk and specific assets • Investments in skills, machinery,

knowledge, and information that create value in one exchange relationship but have no value in any other exchange relationship

• Specific asset investments increase risk in a business relationship

• To counter such a risk, the investing firm may try to negotiate extensively and enforce terms of a contract which increases transaction costs

TCE and Linkage mechanisms

• Transaction costs are low when:– Organizations are exchanging nonspecific

goods and services – Uncertainty is low– There are many possible exchange partners

• Transaction costs increase when:– Organizations exchange more specific goods

and services– Uncertainty increases– The number of trading partners fall

Transaction cost logic

(i.e. risks)

Explaining alliance failure

(note we already discussed resource dependency and transaction costs theory)

Alliance instability and decay

Study Sample Instability

Beamish 1985 66 joint ventures 46% unstable

Harrigan 1988 895 strategic alliances

45% mutually assessed to be successful

Economist 1995 Boston Consulting Group Studies

< 40% of regional, and < 30% of international alliances are successful

Dussage & Garrette 1997

197 alliances between rival firms

Only 9% ended in a natural end (objectives achieved)

Pangarkar 2003 83 biotechnology alliances

Average duration of alliance 3 years

Harrigan 1988 895 strategic alliances

Average duration of alliance 3.5 years

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.2.2

5.3

ha

zard

of

dis

solu

tion

0 5 10 15 20 25duration of alliance

source MERIT-CATI

The honeymoon effect

Social network explanation: trust

• Opportunism problems are fundamental problems in alliances– interfirm rivalry

– incomplete contracts

– learning races

• Transaction cost theory does not consider the social embeddedness of business alliances– past

– future expectations

– third parties

B

Social Embeddedness

Single firmOnly transactions no relations

DyadTransactions often take place within relation

NetworkRelations are nested within networks of relations

Temporal embeddedness

Network embeddedness

€

Payoffs

Trustor Trustee

Trustor

Trustee

Punishment Punishment

Sucker Temptation

Reward Reward

No trust

Trust

Honor trust

Abuse trust

Preference: Temptation > Reward > Punishment > Sucker

Learning an conditional cooperation

0 0

-1 5

3 3

Alliance: 2 sided prisoners dilemma

Repeated games• Suppose you play iterated prisoner’s

dilemma against a range of opponents…What strategy should you choose, so as to maximize your overall payoff?

• Axelrod (1984) investigated this problem, with a computer tournament for programs playing the prisoner’s dilemma

• Axelrod’s tournament: invited political scientists, psychologists, economists, game theoreticians to play iterated prisoners dilemma

• Guess who won?• Anatol Rapoport contribution 'Tit-for-Tat'• The shadow of the future

– cooperation because of anticipated sanctions

• The shadow of the past– learning because of past interactions

Third parties and trust

• reputation effects

• Information diffusion

– selection

– for sanctioning

BA

BA

Combining social network theory and resource dependence theory

Centrality and resources

• Resources = those tangible and intangible assets which are tied semi-permanently to the firm

• Ties are channels through which resources can flow

• The more ties, i.e. the higher the degree, the more resources a firm can acquire

• The better the resource fit of two firms, the more stable the alliance

• Changes in resource fit can result from:– increases in a firm’s resource requirement – a decrease in the firm’s partner resource

provisions – increases in potential resource provisions by

alternative partners• Asymmetry in degree centrality can affect

resource fit

Difference in degree centralities change resource fit

1. increased resource requirements of the better connected partner,

2. the less well connected partner is less well able to provide needed resources,

3. the better connected partner has more alternative partners.

A

A

B

B

Alliance capabilities

• Some firms manage the alliance process better than others

• Apparently those firms have built up a capability in managing alliances

• Firms with a superior alliance capabilities create more shareholder value (Anand and Khanna, 2000)

• Star performers are Hewlet-Packard, Nike, Intel, Benetton, Disney, Cisco, Microsoft, Toyota

Alliance capabilities• Sending staff to an alliance

training is especially useful for firms that have no experience with alliances

• Alliances specialists raise the success rates, particularly when they are in middlemanagement (not in the staff and not too close to operations)

• Evaluation is a remarkably strong tool for raising alliance success. Especially the comparison of different alliances of one company is a powerful learning tool which increases alliances success Source Duijsters, 2006

Philips is building up its alliance capabilities

• It has defined corporate alliances• It has defined different alliance

functions– Corporate Executive Sponsor– Corporate Relationship

Manager– Alliance specialist

• It has created a Corporate Alliance Website on its intranet

• For managing the Microsoft alliance, Philips has:– Set up a database containing

all contracts, projects, people– Opened a Microsoft program

office next door to Microsoft's head office

Source: Kempen 2001

Alliance management techniques

Source: De Man , Koene en Rietkerken, 2001

Alliance Partner BPartner A

1 3 3 12

• Clear strategic intent• Absorptive capacity• Open culture /

Organizational form• Infrastructure

• Complementary goals/create win-win situation

• Matching targets & compensation practices

• (Co-) location• Managing cultural differences• Choice of governance structure

• Personal Unions• ‘Boundary

spanners’• Staff rotation• Debriefing

Philips Sara Lee/DE

International Steering Committee

National Steering Committees

Joint sales teams per country

Marketing & equity meeting

PIM Meeting

Corporate

level

Corporate

level

DAP

Senseo

NSO's

OPCO OPCO OPCO

Core Line

Communication is the key: multiple points of contact

Some rehearsal questions

• What alternative is not a strategic alliance?a) Two competing firms that secretly make price

agreements

b) Buyer A purchases exclusively from Supplier B

c) A firm manufactures an article under license

d) A+B

e) A+C

f) B+C

g) All

h) None