Chapter 9Understanding Alliances and Cooperative Strategies

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OBJECTIVES

Describe why strategic alliances are important strategy vehicles    

1

Describe the motivations behind alliances and show how they’ve changed over time

2

Explain the various forms and structures of strategic alliances

3

Explain alliances as both business‑level and corporate‑level strategy vehicles

4

Understand the characteristics of alliances in stable and dynamic competitive contexts

5

Summarize the criteria for successful alliances 6

3

AN ALLIANCE THAT FITS LIKE A GLOVE

gloves

Magla

Mr. Clean

Expand into

European markets

Differentiate its

product

P&GExtend the

brand

4

THE WHITE WAVE-DEAN ALLIANCE

35% ownership DeanFoods

$15 million

Leverage over retailers(e.g., slotting fees)

WhiteWave

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BENEFITS OF STRATEGIC ALLIANCES

• Share investments and rewards

• Reduce risk

• Reduce uncertainty

• Focus resources on what eachpartner does best

• Foster economics of scale and scope

Companies which participate most actively in alliances outperform the least active firms by 5 to 7 percent

Why?

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ALLIANCES ARE NOT STRATEGIES IN THEMSELVES

An alliance is one vehicle for realizing a strategy

Arenas

Differentiators

Economic Logic

Staging Vehicles

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THE USE OF ALLIANCES AS STRATEGIC VEHICLE HAS BALLOONED

1980 1995

2%

16%

Alliances as percent of revenues

As of 2007,large MNCs have over 20%

of their total assets tiedup in alliances

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ALLIANCES OFFER BENEFITS, CONTRACTS CANNOT

Joint Investment

Increase returns by encouraging firms to make investments that they’d be otherwise unwilling to make (e.g., Wal-Mart supplier becomes willing to invest in new equipment)

Complementary Resources

Opportunity to create a stock of resources that is unavailable to competitors. This may create a shared advantage (e.g., Nestlé and Coke combined resources to offer canned tea and coffee products

Knowledge sharingConsistent information-sharing routines enhances learning (e.g., John Deere exchanges key employees with alliance partner Hitachi)

Informal managementAlliances may make it more cost effective to manage an activity than arm’s-length transactions or acquisitions

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ALLIANCES MAY BUILD COMPETITIVE ADVANTAGE

Alliances may serve to build a competitive advantage if

Rivals cannot ascertain what generates the returns because of causalambiguity surrounding the alliance

Rivals can figure out what generates the returns but cannot quicklyreplicate the resources owing to time decompression diseconomies

Rivals cannot imitate practices or investments because they are missing complementary resources (they have not made the previous investmentsthat make subsequent investments economically viable) and because the current costs associated with prior investments are now prohibitive

Rivals cannot find a partner with the necessary complementary strategic resources

Rivals cannot access potential partners’ resources because they are indivisible

Rivals cannot replicate a distinctive and socially complex institutional environment that has the necessary formal and informal controls thatmake managing alliances possible

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MOTIVATION FOR ALLIANCES HAS CHANGED OVER TIME

Source: Adapted from J. Harbison and P. Pekar, Smart Alliances: A Practical Guide to Repeatable Success (San Francisco: Jossey-Bass, 1998)

Product performancefocus

1970s

Produce with latesttechnology

Market beyond nationalborders

Sell product stressingperformance

Position focus

1980s

Build industry stature

Consolidate position

Gain economies of scaleand scope

Learning andcapabilities focus

Post 2000

Ensure constant streamof new prospects withadvancing technology

Proactively maximize delivered value

Optimize total cost by pro-duct/customer segment

Gain advantage in res-ponse to changing condi-tions and responsibilities

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THE WAL-MART – CIFRA ALLIANCE

Cifra

Knowledge of Wal-Mart’s business model

Knowledge of the

market in Mexico

Wal-Mart

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ALLIANCES CAN TAKE MANY FORMS

Examples of cooperative arrangements in the continuum of organizational forms

Permanent

Keiretsu in Japan or Chaebols in South Korea

Caltrex, which was jointly owned by Chevron and Texaco prior to their merger.

Long-term

Outsourcing Many technology standards consortia

Examples include technology collaborations like the PowerPC chip between Motorola, IBM, and Apple

Anheuser-Busch’s cross ownership with Kirin in Japan and Modelo in Mexico

Stand-alone joint ventures like Dow-Corning.

Transactional

Purchase agreements that are renewable annually or every several years

Agreements to distribute productsor services

Cross-licensing like that between Disney and Pixar or R&D partnerships like Millennium Pharma-ceuticals and some of its smaller partners

Simple purchase order for commodities, some-times called a spot transaction

Short-term agreements on functions like advertising or manufacturing to achieve

efficiencies – for example, contract brewing of Miller Beer by Anheuser Busch

Level of Commitment

No Linkages Beyond Transaction

Information Sharing

Asset, Resource, and Capability Sharing

Cross-Equity(partners take

ownership in one party or each other)

Shared Equity

Source:Adapted from J. Harbison and P. Pekar, Smart Alliances: A Practical Guide to Repeatable Success (San Francisco: Jossey-Bass, 1998

Non-Equity Alliances Equity Alliances

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MULTI-PARTY ALLIANCES

2 party alliances Multiparty alliances

Example: SEMATECH, a consortiumof semiconductor manufacturers

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WHO MIGHT BECOME AN ALLIANCE PARTNER?

Newentrants

Suppliers

Rivals

Customers

Substitutes

Any otherorganization couldbecome an alliance

partner

Firms

Complementors

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2 TYPES OF BUSINESS STRATEGY ALLIANCES

Examples

Timkin andsuppliers

Mondavi andtop foreign wineproducers

Vertical

Partner with one or more suppliers or customers. Typically done to create more value for the end customer and to lower total production costs along the value chain

1

Partner with a rival or potential competitor to gain access to multiple segments of the industry and reduce risk, improve efficiency, or foster learning

Horizontal2

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EXAMPLES OF NETWORKS OF BUSINESS ALLIANCES

Coopetition is essentially the notion that companies are com-plementors when they make markets and competitors whenthey divide markets. This relationship is called a value net

Timken Co. is getting its cus-tomers to think of them as morethan simply a bearings supplier byemploying sophisticated bundlingprocesses to combine basicbearings with additionalcomponents in order to providecompanies with exactly what theyneed. As a result, their bundledproducts are a source of reliabilityand cost reduction for theircustomers like Caterpillar. Also,Timken’s acquisitions don’t createvalue simply due to added productlines, but instead due to the greatervalue added by a more complexand tailored bundle

YourCompany

Suppliers

Most often ignoredsource of value creation

Only recently are firms recognizing that workingwith suppliers is as important as listening tothe customer….

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RISKS ARISING FROM ALLIANCES

Poor contract managementFailure to make complementaryresources available

Misrepresentation of resourcesand capabilities

Being held hostage throughspecific investments

Misappropriation of resourcesand capabilities

Misunderstanding a partner’sstrategic intent

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RISKS ARISING FROM ALLIANCES

? Redhook Ale

Was Redhook Ale held captive by

its alliance with Anheuser Busch?

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FIVE LEVERS FOR INCREASING THE PROBABILITY OF ALLIANCE SUCCESS

Understand the determinants of trust

Be able to manage knowledge and learning

Understand alliance evolution

Know how to measure alliance performance

Create a dedicated alliance function

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BENEFITS OF TRUST

KnowledgeSharing

Routines

DedicatedAsset

Investments

Interfirm

Trust

• TRUST is one party’s confidence that the other party in the exchange relationship will fulfill its promises and commitments and will not exploit its vulnerabilities

• Trust and alliances are a conundrum from a classical economics perspective – assumption of opportunism means firms must choose market or hierarchy, make or buy, not an alliance

’

BUT

Trust lowers transaction costs• Search costs• Contracting costs• Monitoring costs• Enforcement costs

AND

• Increases knowledge sharing• Increases investments in dedicated

assets

Trust and Competitive Advantage

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FOUR KEY FACTORS AFFECT TRUST

Initialconditions

Negotiationprocess

Reciprocalexperiences

Outsidebehavior

Trust

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COMPONENTS OF A DEDICATED ALLIANCE FUNCTION

Alliancebusiness case

Partnerassessmentand selection

Alliance negotiation andgovernance

Alliancemanagement

Assessmentand termination

• Value-chain analysis form

• Needs-analysis checklist

• Manufacturing-vs.-partnering analysis

• Partner screening form

• Technology and patent-domain maps

• Cultural-fit evaluation form

• Due-diligence team

• Negotiations matrix

• Needs-vs.-wants checklist

• Alliance-contract template

• Alliance-structureguidelines

• Alliance-metrics framework

• Problem-tracking template

• Trust-building work sheet

• Alliance-contact list

• Alliance-communication infrastructure

• Relationship-evaluation form

• Yearly status report

• Termination checklist

• Termination-planning work sheet

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• Strategic fit?

• Resource fit?

• Cultural fit

• Structural fit?

• Other questions?

Why?

WHEN DO PARTNERS FIT?

Firms must address a number of issues to determine fit …