Strategic AlliancesStrategic AlliancesChapter 7Chapter 7

April 5, 2006April 5, 2006Dr. Ellen A. DrostDr. Ellen A. Drost

ObjectivesObjectives Why Strategic AlliancesWhy Strategic Alliances

Defining strategic alliances and networksDefining strategic alliances and networks

A comprehensive model of strategic A comprehensive model of strategic alliances and networksalliances and networks

Debates and extensionsDebates and extensions

Basic foreign expansion entry Basic foreign expansion entry decisionsdecisions

A firm contemplating foreign expansion must A firm contemplating foreign expansion must make three decisions:make three decisions:– Which markets to enterWhich markets to enter– When to enter these marketsWhen to enter these markets– What is the scale of entryWhat is the scale of entry

Strategic AlliancesStrategic Alliances

WHY STRATEGIC ALLIANCES?WHY STRATEGIC ALLIANCES? A.A. Spread and reduce costsSpread and reduce costs B.B. SpecializationSpecialization C.C. CompetitionCompetition D.D. Vertical integrationVertical integration E.E. Horizontal integrationHorizontal integration F.F. KnowledgeKnowledge

Alliances are popularAlliances are popular

WHAT ARE THE ALTERNATIVES TO WHAT ARE THE ALTERNATIVES TO ALLIANCES?ALLIANCES?

Develop capability internallyDevelop capability internally Buy inputs/technologyBuy inputs/technology Merger or acquisitionMerger or acquisition

International AlliancesInternational Alliances

WHY INTERNATIONAL ALLIANCES?WHY INTERNATIONAL ALLIANCES? A.A. Gain location specific assetsGain location specific assets B.B. Overcome Government Overcome Government

restrictionsrestrictions C.C. DiversificationDiversification D.D. Minimize exposure to riskMinimize exposure to risk

Structuring the alliance to reduce Structuring the alliance to reduce opportunismopportunism

WHAT FORM SHOULD THE ALLIANCE TAKE?WHAT FORM SHOULD THE ALLIANCE TAKE?

ContractsContracts ---------------------------------------------------------------------- ----------------------------------------------------------------------EquityEquityMarketingMarketing ConsortiumConsortium Wholly Owned Wholly Owned R&D R&D Joint VentureJoint Venture

TurnkeyTurnkey

LicenseLicense

Franchise Franchise

Short-termShort-term ----------------------------------------------------------------------- -----------------------------------------------------------------------Long-termLong-term

---------------------difficult to control ---------------------difficult to control

difficult to monitordifficult to monitor

difficult to enforcedifficult to enforce

difficult to negotiatedifficult to negotiate

Alliances versus Joint VenturesAlliances versus Joint VenturesNot all strategic alliances are joint ventures.Not all strategic alliances are joint ventures.

– A joint venture (JV) is a new organization—a A joint venture (JV) is a new organization—a “corporate child” created by two or more parent “corporate child” created by two or more parent firms which hold partial equity ownership in the firms which hold partial equity ownership in the new venture.new venture. Sony EricssonSony Ericsson

– A non-JV alliance is two (or more) firms working A non-JV alliance is two (or more) firms working together—“getting married” but not having together—“getting married” but not having “children.”“children.” Renault is a strategic investor in alliance with Nissan. Renault is a strategic investor in alliance with Nissan.

Both operate independently and they have not created Both operate independently and they have not created a new firm.a new firm.

Strategic NetworksStrategic NetworksOverall, Overall, strategic alliances and networks are strategic alliances and networks are

cooperative interfirm relationshipscooperative interfirm relationshipsStrategic alliances formed by multiple firms to Strategic alliances formed by multiple firms to

compete against other such groups and against compete against other such groups and against traditional single firmstraditional single firms

Also known as constellationsAlso known as constellations– Star Alliance: United, Lufthansa, Air Canada, SAS, Star Alliance: United, Lufthansa, Air Canada, SAS,

etc.etc.– Sky Team: Delta, Air France, Korean Air, etc.Sky Team: Delta, Air France, Korean Air, etc.– One World: American, British, Cathay Pacific, Qantas, One World: American, British, Cathay Pacific, Qantas,

etc.etc.

Type of alliancesType of alliances ContractsContracts Turnkey ProjectsTurnkey Projects

– Contractor agrees to handle every detail of project for foreign client Contractor agrees to handle every detail of project for foreign client LicensingLicensing

– Agreement where licensor grants rights to intangible property to Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royaltiesanother entity for a specified period of time in return for royalties

FranchisingFranchising– Franchiser sells intangible property and insists on rules for Franchiser sells intangible property and insists on rules for

operating the businessoperating the business Joint VenturesJoint Ventures

– Equity participationEquity participation Wholly Owned SubsidiariesWholly Owned Subsidiaries

– Greenfield versus acquisitionGreenfield versus acquisition

A Three-Stage Decision Model of Strategic Alliance and A Three-Stage Decision Model of Strategic Alliance and Network FormationNetwork Formation

Source: Adapted from S. Tallman & O. Shenkar, 1994, A managerial decision model of international cooperative venture formation (p. 101), Journal of International Business Studies, 25 (1): 91–113.

Managing the allianceManaging the alliance

– WHAT ABOUT PARTNER SELECTION?WHAT ABOUT PARTNER SELECTION? Differences can create valueDifferences can create value Similarities minimize costSimilarities minimize cost

Debate 1: Debate 1: Learning Race versus Cooperative SpecializationLearning Race versus Cooperative Specialization Learning race view: Very influentialLearning race view: Very influential

– Assumption 1: Acquiring partner “know-how” is cost Assumption 1: Acquiring partner “know-how” is cost effectiveeffective

– Assumption 2: Other partners are passively being exploitedAssumption 2: Other partners are passively being exploited

Cooperative specialization view: More realistic?Cooperative specialization view: More realistic?

– Learning races do exist, but they represent more of the Learning races do exist, but they represent more of the pathologies rather than the normspathologies rather than the norms

– Mutual hostage taking can reduce such pathologiesMutual hostage taking can reduce such pathologies

– Preventing spillovers can also reduce problemsPreventing spillovers can also reduce problems

Debate 2: Majority JVs as Control Mechanisms vs.

Minority JVs as Real Options The “high control versus low control” debate in The “high control versus low control” debate in

Chapter 6: UnresolvedChapter 6: Unresolved One additional benefit of minority JVs: Real optionsOne additional benefit of minority JVs: Real options

– The more uncertain the conditions, the higher the value The more uncertain the conditions, the higher the value of real optionsof real options

– Minority JVs have great real options value, especially in Minority JVs have great real options value, especially in uncertain, emerging economies uncertain, emerging economies

– SIA 7.4: Anheuser-Busch’s minority JVs in emerging SIA 7.4: Anheuser-Busch’s minority JVs in emerging economies (e.g., Brazil, China, Mexico, Philippines)economies (e.g., Brazil, China, Mexico, Philippines)

Debate 3: Debate 3: Alliances versus AcquisitionsAlliances versus Acquisitions

Problems with M&As (see Chapter 9)Problems with M&As (see Chapter 9)– Too final: hard to undoToo final: hard to undo

– Too expensiveToo expensive

– Extensive problems with post-merger integrationExtensive problems with post-merger integration

Many large MNEs have an M&A function Many large MNEs have an M&A function (department), which focus exclusively on M&As (department), which focus exclusively on M&As – A combined “mergers, acquisitions, and alliances” A combined “mergers, acquisitions, and alliances”

function may be advisable – Table 7.5function may be advisable – Table 7.5

Acquisition and Green-field- pros & consAcquisition and Green-field- pros & cons

Pro:Pro:– Quick to executeQuick to execute– Preempt competitorsPreempt competitors– Possibly less riskyPossibly less risky

Con:Con:

Disappointing resultsDisappointing results

Overpay for firmOverpay for firm

Optimism about value Optimism about value creation creation

Culture clash.Culture clash.

Problems with propose Problems with propose synergiessynergies

Pro:Pro:– Can build subsidiary it Can build subsidiary it

wantswants– Easy to establish Easy to establish

operating routinesoperating routines Con:Con:

– Slow to establishSlow to establish– RiskyRisky– Preemption by Preemption by

aggressive aggressive competitorscompetitors

Acquisition Greenfield