Managing Managing Strategic Strategic AlliancesAlliances

Strategic AlliancesStrategic Alliances

Strategic AlliancesStrategic Alliances : : A strategic alliance is a relationship A strategic alliance is a relationship between firms that allows to create more between firms that allows to create more value than they could individually create. value than they could individually create. The firms come together to attain agreed The firms come together to attain agreed upon goals, while maintaining their upon goals, while maintaining their independence.independence.It is a co-operative agreement between It is a co-operative agreement between potential or actual competitors. potential or actual competitors.

e.g. GM & Hitachi collaborating to produce e.g. GM & Hitachi collaborating to produce electronic components for automobiles,electronic components for automobiles,

e.g.- Siemens & Philips to develop new e.g.- Siemens & Philips to develop new semiconductor technologysemiconductor technology

Joint venturesJoint ventures: : Joint ventures involve the partner’s Joint ventures involve the partner’s creation of a third entity representing creation of a third entity representing the interests and capital of the two or the interests and capital of the two or more partners. Partners contribute more partners. Partners contribute their own proportional amounts of their own proportional amounts of capital, distinctive skills, managers, capital, distinctive skills, managers, reporting systems and technologies to reporting systems and technologies to the venture.the venture.Joint ventures often entail complex Joint ventures often entail complex coordination between partners in coordination between partners in carrying out value chain activitiescarrying out value chain activities

Types of strategic alliancesTypes of strategic alliances1. Non Equity Alliance : 1. Non Equity Alliance : Cooperation Cooperation between firms is managed directly through between firms is managed directly through contracts, without cross-equity holdings or contracts, without cross-equity holdings or an independent firm being created.an independent firm being created.

2. Joint venture: 2. Joint venture: Cooperating firms form Cooperating firms form an independent firm in which they invest. an independent firm in which they invest. Profits from this independent firm Profits from this independent firm compensate partners for this investment.compensate partners for this investment.

3. Equity Alliance :3. Equity Alliance :Cooperative contracts Cooperative contracts are supplemented by equity investments by are supplemented by equity investments by one partner in the other partner. Sometimes one partner in the other partner. Sometimes these investments are reciprocatedthese investments are reciprocated

Successful Strategic Alliances

Unsuccessful strategic alliances

Fuji &Xerox

IBM & Toshiba

Siemens & Philips

Toyota & GM

Wipro & GE

Hero Motors & Honda

Maruti & Suzuki

TVS & Suzuki

Godrej Soaps & P&G

Kinetic & Honda

Bajaj & Kawasaki

Mahindra & Renault

Tata Motors & Fiat

Rationale for Joint VenturesRationale for Joint Ventures1.The basic motive for starting a joint 1.The basic motive for starting a joint venture is sharing investment.venture is sharing investment.2. Learning ( knowledge acquisition) is the 2. Learning ( knowledge acquisition) is the second biggest motive for joint ventures.second biggest motive for joint ventures.3. Reduce investment outlay and share risk.3. Reduce investment outlay and share risk.4. to gain endorsement from government 4. to gain endorsement from government authorities.authorities.5. to acquire complementary technological 5. to acquire complementary technological or management resources at lower cost , or or management resources at lower cost , or to drive benefits from economics of scale , to drive benefits from economics of scale , critical mass , and learning experience.critical mass , and learning experience.6. Another rationale for joint ventures is to 6. Another rationale for joint ventures is to gain tax advantagesgain tax advantages

Reasons for the Failure of Joint Reasons for the Failure of Joint VenturesVentures

1.The contract may be too inflexible to 1.The contract may be too inflexible to permit adjustments in the future.permit adjustments in the future.2.Lack of commitment and time in 2.Lack of commitment and time in implementing the projectimplementing the project3. Inability or failure to develop the desired 3. Inability or failure to develop the desired technology.technology.4.Lack of adequate pre-planning for the joint 4.Lack of adequate pre-planning for the joint ventures.ventures.5.Failure to reach an agreement on 5.Failure to reach an agreement on alternative approaches to achieve the basic alternative approaches to achieve the basic objectives of the joint venture.objectives of the joint venture.6. Refusal by managers possessing expertise 6. Refusal by managers possessing expertise in one company to share knowledge with in one company to share knowledge with the counterparts in the joint venture.the counterparts in the joint venture.

7.Inability of parent companies to 7.Inability of parent companies to share control or compromise on share control or compromise on different issues.different issues.

8.Critical issues of public policy and 8.Critical issues of public policy and long- term strategies of individual long- term strategies of individual business firms may arise in certain business firms may arise in certain joint venturesjoint ventures

International Joint International Joint VenturesVenturesThe need to reduce the risk of expansion in The need to reduce the risk of expansion in a foreign environment acts in favour of joint a foreign environment acts in favour of joint ventures. ventures. It can be a requirement for a local partner It can be a requirement for a local partner in some foreign countries, who may in some foreign countries, who may contribute valuable information about the contribute valuable information about the local conditions , which may be of vital local conditions , which may be of vital importance to the success of the venture. importance to the success of the venture. Also in some countries, it is the only way for Also in some countries, it is the only way for entering new markets.entering new markets.

Pros and cons of international joint Pros and cons of international joint ventures and international strategic ventures and international strategic alliancesalliances

Advantages Disadvantages/ potential problems

synergy Conflicts of interests

Shared knowledge, expertise and skills

Some partners gain more than others

Shared technology Difficult to sustain in long run

Shared costs and benefits competitive instincts prevail

Mutual profits Decision making is slower

Knowledge of local markets

Existing business contacts can be used

Reduces political risks

Less costly than a merger

Generic Motives for a Strategic Generic Motives for a Strategic AllianceAlliance Firms are entering into strategic alliances with Firms are entering into strategic alliances with their rivals, suppliers and customers. There are their rivals, suppliers and customers. There are obvious reasons for entering into such obvious reasons for entering into such agreements.agreements.

A) Strategic alliances enable firms to design new A) Strategic alliances enable firms to design new products, minimize costs, enter new markets, products, minimize costs, enter new markets, preempt competitors, and generate higher preempt competitors, and generate higher revenues.revenues.

B) Alliances also enable the transfer of technology B) Alliances also enable the transfer of technology and further organizational learning.and further organizational learning.

C) Companies that wish to expand their C) Companies that wish to expand their geographic reach take the strategic alliance geographic reach take the strategic alliance route.route.

Thus the benefits of a strategic alliance Thus the benefits of a strategic alliance go beyond-go beyond-

a) satisfying the immediate needs of the a) satisfying the immediate needs of the participants in the alliance .participants in the alliance .b) they also open avenues to new b) they also open avenues to new opportunities. opportunities. c) Strategic alliance also can improve the c) Strategic alliance also can improve the firm’s strategic position in the market firm’s strategic position in the market significantly, and even transform a companysignificantly, and even transform a company

Types of Strategic Alliances:Types of Strategic Alliances:Bleeke and Ernst have classified strategic Bleeke and Ernst have classified strategic alliances into six types-alliances into six types-1. Collisions between two partners1. Collisions between two partners : This is an alliance : This is an alliance between two strong companies, that are in direct between two strong companies, that are in direct competition with each other. According to Bleeke &Ernst competition with each other. According to Bleeke &Ernst are short lived and usually end in dissolution, or are short lived and usually end in dissolution, or acquisition by one of the partners or a merger.acquisition by one of the partners or a merger.

2. Evolution to a sale2. Evolution to a sale : Two strong and compatible : Two strong and compatible partners enter into an alliance but competitive tensions partners enter into an alliance but competitive tensions develop and in the end one partner sells out to the otherdevelop and in the end one partner sells out to the other

3. 3. Alliances of complementary equals:Alliances of complementary equals: This is an alliance This is an alliance of two strong and complementary partners that remains of two strong and complementary partners that remains strong during the course of the alliancestrong during the course of the alliance

4. Disguised sale4. Disguised sale : A short lived alliance between : A short lived alliance between a weak company and a strong company. The a weak company and a strong company. The weaker partner remains weak during the course of weaker partner remains weak during the course of the alliance and is eventually acquired by the the alliance and is eventually acquired by the stronger partner.stronger partner.

5.Bootstrap alliance5.Bootstrap alliance : Here the alliance is between : Here the alliance is between a weak and a strong company and the weak a weak and a strong company and the weak company uses the alliance to improve its company uses the alliance to improve its competencies. The weak company remains weak competencies. The weak company remains weak and is acquired by the stronger company in the end.and is acquired by the stronger company in the end.

6)Alliances of the weak6)Alliances of the weak : Two weak companies join : Two weak companies join hands to improve their positions but the weak hands to improve their positions but the weak usually grow weaker and the alliance fails.usually grow weaker and the alliance fails.

Frame work of Yves L. Doz and Gary Hamel :Frame work of Yves L. Doz and Gary Hamel :There are three types of strategic alliances :There are three types of strategic alliances :

1. Alliance between potential competitors to 1. Alliance between potential competitors to neutralize rivalry. An example of such an alliance is neutralize rivalry. An example of such an alliance is the Airbus Consortium, formed by the governments the Airbus Consortium, formed by the governments of European countries to create an entity which of European countries to create an entity which could be a formidable competitor to Boeing.could be a formidable competitor to Boeing.

2. The second type of strategic alliance is between 2. The second type of strategic alliance is between companies that have separate specialized companies that have separate specialized resources. . Companies combine the resources to resources. . Companies combine the resources to create value.create value.Foe example Hitachi tied with Texas Instruments for Foe example Hitachi tied with Texas Instruments for the development of a 265 bit DRAM chip.the development of a 265 bit DRAM chip.

3. The third type of strategic alliance 3. The third type of strategic alliance involves acquisition of new knowledge by involves acquisition of new knowledge by working together or observing each other. working together or observing each other. For example , by forming an alliance with For example , by forming an alliance with Toyota, General Motors hoped to learn about Toyota, General Motors hoped to learn about Toyota’s lean manufacturing system and Toyota’s lean manufacturing system and Toyota about General Motors’ superior Toyota about General Motors’ superior designs.designs.