Chapter Copyright© 2004 Thomson Learning All rights reserved 8 International Strategic Alliances: Design and Management

Chapter

Copyright© 2004 Thomson Learning All rights reserved

8International Strategic Alliances: Design and Management

Copyright© 2005 South-Western/Thomson Learning All rights reserved

Learning Objectives

• Know the steps for implementation of successful international strategic alliances

• Understand how to link value chains in international strategic alliances

• Understand the importance of choosing the right partners for alliances

• Know the important characteristics to look for in potential alliance partners

• Know the steps for implementation of successful international strategic alliances

• Understand how to link value chains in international strategic alliances

• Understand the importance of choosing the right partners for alliances

• Know the important characteristics to look for in potential alliance partners


Learning Objectives

• Know the differences between equity-based international joint ventures and other types of international cooperative alliances

• Know the basic components of an international strategic alliance contract

• Understand the control systems and management structures used in alliance organization

• Know the differences between equity-based international joint ventures and other types of international cooperative alliances

• Know the basic components of an international strategic alliance contract

• Understand the control systems and management structures used in alliance organization


Learning Objectives

• Appreciate the unique problems in human resource management

• Realize the importance of interfirm commitment and trust

• Understand how companies assess the performance of their international strategic alliances

• Know when companies should continue or dissolve their international strategic alliances

• Appreciate the unique problems in human resource management

• Realize the importance of interfirm commitment and trust

• Understand how companies assess the performance of their international strategic alliances

• Know when companies should continue or dissolve their international strategic alliances


Strategic Alliances Issues

• Increasingly popular strategy to develop new product and to expand into new markets

• However, strategic alliances are very risky and unstable

• Failure rate of 30% to 60%• Even profitable alliances can be torn by conflict

• Increasingly popular strategy to develop new product and to expand into new markets

• However, strategic alliances are very risky and unstable

• Failure rate of 30% to 60%• Even profitable alliances can be torn by conflict


Exhibit 8.1: Implementing a Strategic-Alliance Strategy


Where to Link in the Value Chain

• Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks

• Upstream/downstream alliances serve the objective of low-cost supply/manufacturing

• Operations/marketing alliances provide access to markets

• Depends on the objective that the firm seeks to achieve

• Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks

• Upstream/downstream alliances serve the objective of low-cost supply/manufacturing

• Operations/marketing alliances provide access to markets

• Depends on the objective that the firm seeks to achieve


Exhibit 8.2: Linking Value Chains in Strategic Alliances: Some Examples


Exhibit 8.3: The Mixture of Value-Chain Links


Choosing a Partner: The Most Important Choice?

• Key criteria for picking an appropriate alliance partner• Seek strategic complementarity

• Understand objectives and seek complementarity• Pick a partner with complementary skills

• One that enhances but does not necessarily duplicate an alliance partner’s skills

• Key criteria for picking an appropriate alliance partner• Seek strategic complementarity

• Understand objectives and seek complementarity• Pick a partner with complementary skills

• One that enhances but does not necessarily duplicate an alliance partner’s skills


Criteria for Choosing Partners

• Seek out companies with compatible management styles

• Seek a partner that will provide the “right” level of mutual dependency

• Avoid the “anchor” partner• Anchor partner: a partner that holds back the

strategic alliance because it cannot or will not provide its share of the funding

• Seek out companies with compatible management styles

• Seek a partner that will provide the “right” level of mutual dependency

• Avoid the “anchor” partner• Anchor partner: a partner that holds back the

strategic alliance because it cannot or will not provide its share of the funding


Criteria for Choosing Partners (cont.)

• Be cautious of the “elephant-and-ant” complex• Occurs when two companies are greatly unequal in

size• Assess operating-policy differences with potential

partners• Assess the difficulty of cross-cultural communication

with a likely partner

• Be cautious of the “elephant-and-ant” complex• Occurs when two companies are greatly unequal in

size• Assess operating-policy differences with potential

partners• Assess the difficulty of cross-cultural communication

with a likely partner


Exhibit 8.4: International Strategic Alliances for Small Multinational Companies


Exhibit 8.4: International Strategic Alliances for Small Multinational Companies


Choosing an Alliance Type

• Three main types of strategic alliances• Informal international cooperative alliances• Formal international cooperative alliances• International joint venture

• Three main types of strategic alliances• Informal international cooperative alliances• Formal international cooperative alliances• International joint venture


Informal International Cooperative Alliance

• Non-legally binding agreements between companies from two or more countries• Agreements of any kind • Provide links anywhere on their value chains• Limited involvement between companies

• Non-legally binding agreements between companies from two or more countries• Agreements of any kind • Provide links anywhere on their value chains• Limited involvement between companies


Formal Cooperative Alliances

• Higher degree of involvement than informal alliances• Formal contract• Popular in high tech industries because of high costs

and risks

• Higher degree of involvement than informal alliances• Formal contract• Popular in high tech industries because of high costs

and risks


International Joint Ventures (IJV)

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

• No need for equal ownership• Equity based on cash or other contributions

• Ex.: One partner brings technology while other partner brings financial contributions

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

• No need for equal ownership• Equity based on cash or other contributions

• Ex.: One partner brings technology while other partner brings financial contributions


Exhibit 8.5: Types of Alliances


Negotiating the Agreement

• IJV negotiation issues• equity contributions• management structure• “prenuptial” agreements

• IJV negotiation issues• equity contributions• management structure• “prenuptial” agreements


Exhibit 8.6: Selected Questions for a Strategic-Alliance Agreement


Organizational Design in Strategic Alliances

• Depends on the type of alliance chosen• Informal ICAs often have no formal design issues• Formal ICAs may require separate organization unit

housed in one company• IJV—Parent companies set up separate legal entity

• Depends on the type of alliance chosen• Informal ICAs often have no formal design issues• Formal ICAs may require separate organization unit

housed in one company• IJV—Parent companies set up separate legal entity


Decision-making Control

• Majority ownership does not necessarily control• Operational decisions• Strategic decisions

• In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management.

• Majority ownership does not necessarily control• Operational decisions• Strategic decisions

• In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management.


Management Structures

• Dominant parent: controls or dominates strategic decision making

• Often has majority ownership• Treats the IJV as wholly owned subsidiary

• Shared management: both parent companies contribute approximately the same number of managers to the alliance organization

• Dominant parent: controls or dominates strategic decision making

• Often has majority ownership• Treats the IJV as wholly owned subsidiary

• Shared management: both parent companies contribute approximately the same number of managers to the alliance organization



• Split control management control: partners usually share strategic decision making and split functional decision making

• Independent management structure: alliance managers act more like managers from a separate company• IJVs often recruit managers from outside the parent

companies

• Split control management control: partners usually share strategic decision making and split functional decision making

• Independent management structure: alliance managers act more like managers from a separate company• IJVs often recruit managers from outside the parent

companies



• Rotating management: key positions rotate among partners• Popular in developing countries• Trains management talent and transfers expertise

• Rotating management: key positions rotate among partners• Popular in developing countries• Trains management talent and transfers expertise


Choosing a Strategic Alliance Management Structure

• If partners have similar technologies or know-how and contribute equally• Shared management structure preferred

• If partners have different technologies but contribute equally• Split management structure preferred

• If one partner has dominant equity position• Dominant management structure more likely

• If partners have similar technologies or know-how and contribute equally• Shared management structure preferred

• If partners have different technologies but contribute equally• Split management structure preferred

• If one partner has dominant equity position• Dominant management structure more likely


Human Resource Management in Strategic Alliances

• HRM functions include recruiting and staffing for alliance positions

• The HRM functions of an IJV are more complex • Managers (and sometimes workers) come from two

or more firms or from two or more cultures

• HRM functions include recruiting and staffing for alliance positions

• The HRM functions of an IJV are more complex • Managers (and sometimes workers) come from two

or more firms or from two or more cultures


Critical HRM Problems and Issues

• HRM planning: Employees need to know strategic intent of alliance.

• Parent involvement: As alliances get older and larger, they tend to develop their own HRM practices.

• Staffing the alliance management and technical personnel—crucial and risky decision

• HRM planning: Employees need to know strategic intent of alliance.

• Parent involvement: As alliances get older and larger, they tend to develop their own HRM practices.

• Staffing the alliance management and technical personnel—crucial and risky decision



• Staffing the alliance workforce• Assigning managers strategic or operations tasks• Performance assessment—needed for retention,

promotion and salary decisions• Loyalty—managers may often feel dual loyalty

• To parent and to alliance

• Staffing the alliance workforce• Assigning managers strategic or operations tasks• Performance assessment—needed for retention,

promotion and salary decisions• Loyalty—managers may often feel dual loyalty

• To parent and to alliance



• Career development—must provide clear information on how alliance assignments fit within careers

• Cultural differences• Training

• Career development—must provide clear information on how alliance assignments fit within careers

• Cultural differences• Training


Exhibit 8.7: HRM Issues in Strategic Alliances


Exhibit 8.7: HRM Issues in Strategic Alliances


Commitment and Trust

• Commitment: putting forth extra effort to make the venture work• Attitudinal commitment: willingness to dedicate

resources and efforts and face risks to make the alliance work

• If partners demonstrate these aspects of commitment, alliance will develop based on fair exchange.• Occurs when partners believe that they receive

benefits from the relationship equal to their contributions

• Commitment: putting forth extra effort to make the venture work• Attitudinal commitment: willingness to dedicate

resources and efforts and face risks to make the alliance work

• If partners demonstrate these aspects of commitment, alliance will develop based on fair exchange.• Occurs when partners believe that they receive

benefits from the relationship equal to their contributions


Calculative Commitment

• Commitment also has a practical side: calculative commitment• Alliance partner evaluations, expectations, and

concerns regarding potential rewards from the relationship

• Businesses require tangible outcomes for a relationship to continue

• Commitment also has a practical side: calculative commitment• Alliance partner evaluations, expectations, and

concerns regarding potential rewards from the relationship

• Businesses require tangible outcomes for a relationship to continue


Trust

• Commitment and trust go hand in hand• Credibility trust: confidence that the partner has the

intent and ability to meet promised obligations and commitments

• Benevolent trust: confidence that the partner will behave with goodwill and with fair exchange

• Commitment and trust go hand in hand• Credibility trust: confidence that the partner has the

intent and ability to meet promised obligations and commitments

• Benevolent trust: confidence that the partner will behave with goodwill and with fair exchange


Exhibit 8.8: The Trust/Commitment Cycle


Why Is Trust Important?

• When there is no trust, partners hold back or take advantage of each other.

• Formal contracts can never identify all issues that will arise

• Technology and knowledge also include tacit elements that can only be learned through trust.

• When there is no trust, partners hold back or take advantage of each other.

• Formal contracts can never identify all issues that will arise

• Technology and knowledge also include tacit elements that can only be learned through trust.


Building and Sustaining Trust and Commitment

• Pick your partner carefully• Know each side’s strategic goals• Seek win-win situations• Go slowly• Invest in cross-cultural training• Invest in direct communication• Find the right levels of trust and commitment

• Pick your partner carefully• Know each side’s strategic goals• Seek win-win situations• Go slowly• Invest in cross-cultural training• Invest in direct communication• Find the right levels of trust and commitment


Exhibit 8.9: The “Right” Levels of Trust and Commitment


Assessing the Performance of an International Strategic Alliance

• If strategic intent is to produce immediate results, standard financial and efficiency measures can be used.

• Other strategic alliance provide indirect strategic benefits.

• IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning.

• If strategic intent is to produce immediate results, standard financial and efficiency measures can be used.

• Other strategic alliance provide indirect strategic benefits.

• IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning.


Exhibit 8.10: Selected Performance Criteria for Strategic Alliance


Exhibit 8.10: Selected Performance Criteria for Strategic Alliance


If the Alliance Does Not Work

• Negotiate an end or improve implementation• Know when to quit/invest more• Avoid “escalation of commitment”

• Companies continue in an alliance longer than necessary because of financial and emotional investments.

• Plan end—“prenuptial agreements”• Death not always failure

• Negotiate an end or improve implementation• Know when to quit/invest more• Avoid “escalation of commitment”

• Companies continue in an alliance longer than necessary because of financial and emotional investments.

• Plan end—“prenuptial agreements”• Death not always failure

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Chapter Copyright© 2004 Thomson Learning All rights reserved 8 International Strategic Alliances: Design and Management