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Strategic Alliances
MBA 693R Strategic Management
Mark HansenPaul Godfrey
Strategic Alliances
MBA 693R Strategic Management 2
Definition: any agreement or effort to cooperate withanother firm (e.g., joint ventures, licensing, franchising,long term contracts, distribution agreements,R&D agreements, etc.)
Motivation:
• technology
• markets
• production
• finance
• distribution
• R & D
1) access to resources and capabilities
2) leverage internal resources & capabilities
Strategic Alliance
Strategic Alliances
MBA 693R Strategic Management 3
Three Critical Factors:
Compatibility of Intent
Complementary Resources
Trust
synergism
gains from trade
complementary & similar
simultaneous satisfaction of interests
competence character
Strategic Alliances
MBA 693R Strategic Management 4
Canada Mexico
Wheatbushels/hr.
Bananaslbs./hr.
6
4
1
5
ExchangeRate:
1 bu. = 1 lbs.
Canada: 2 hrs. = 6 bu. Wheat and 4 lbs. Banana2 hrs. = 12 bu. Wheat
By trading Canada can get: 6 bu. Wheat and 6 lbs. Bananas(a ½ hour gain from trade)
Gains from Trade
Strategic Alliances
MBA 693R Strategic Management 5
Canada Mexico
Wheatbushels/hr.
Bananaslbs./hr.
6
4
1
5
ExchangeRate:
1 bu. = 1 lb.
Mexico: 2 hrs. = 5 lbs. Bananas and 1 bu. Wheat2 hrs. = 10 lbs. Bananas
By trading Mexico can get: 5 bu. Wheat and 5 lbs. Bananas(a 4 hour gain from trade)
Gains from Trade
Strategic Alliances
MBA 693R Strategic Management 6
Trust
Character Trust
Strong Form Trust
Semi-Strong From Trust
confidence in the quality of moral development
you won’t cheat because your moral developmentwould impose an internal cost
confidence in the quality of rationality
you won’t cheat because the contract we have inplace would impose an external cost
Strategic Alliances
MBA 693R Strategic Management 7
Two competing objective functions in alliances:
1 - maximize the gains from trade
2 - minimize the threat of opportunism
Alliance Management Approaches
How the relationship is governed influencesthe value created by the relationship
Strategic Alliances
MBA 693R Strategic Management 8
(the trade-off is not absolute, both matter, but one is generallyemphasized compared to the other)
These objectives suggest two extremes in the approachto alliance management:
OpportunismMinimization
OpportunityMaximization
Alliance Management Approaches
Strategic Alliances
MBA 693R Strategic Management 9
Opportunity Maximizing Approach
1 – complementary resources exist
2 – strategic intent of partners is endogenously compatible
Characteristics:
• potential gains from trade exist
• there is usually an intent to create something new
• the deal itself binds partners together
• partners recognize their interdependence
Strategic Alliances
MBA 693R Strategic Management 10
3 – based on strong form trust (character-based trust)
4 – cooperative capabilities lie in relational contracting
Opportunity Maximizing Approach
• all partners perceive all other partners to bestrong-form trustworthy
Characteristics:
• written contracts remain in the background forclarification
• issues are resolved based on trusting relationships
Strategic Alliances
MBA 693R Strategic Management 11
Opportunity Maximizing Approach
Sources of Rents from the Approach
1 - Governance Cost Reduction-management effort focused on the business-expensive governance not necessary
2 - Expanded Opportunity Sets-opportunities that would not be available in the absence of strong form trustworthiness-opportunities may arise which were unanticipated at the formation of the alliance-distribution of rents not a problem due to alignment of partner interests
Strategic Alliances
MBA 693R Strategic Management 12
Opportunism Minimizing Approach
1 – complementary resources exist
2 – strategic intent of partners is made compatiblethrough written contract
Characteristics:
• potential gains from trade exist• gain is based on exchange of existing resources
• contracts are used to constrain behavior
Strategic Alliances
MBA 693R Strategic Management 13
3 – based on semi-strong form trust (contract-based trust)
4 – cooperative capabilities lie in legal (written) contracting
Opportunism Minimizing Approach
• all parties must perceive all other parties to berational
Characteristics:
• written contracts guide the operations of the relationship
• issues are resolved based on contract
Strategic Alliances
MBA 693R Strategic Management 14
Opportunism Minimizing Approach
Sources of Rents from the Approach
1 - Governance Cost Reduction-contracts prevent opportunism by creating incentives not to cheat
Strategic Alliances
MBA 693R Strategic Management 15
Trust and Competitive Advantage
Strong Form Trust may lead toCompetitive Advantage because of:
lower governance costs
increased revenues
expanded opportunity sets
the ability to pursue alliances that would be irrational without strong form trust
Strategic Alliances
MBA 693R Strategic Management 16
Summary
Successful alliances depend on…
compatibility of intent
complementary resources
trust
Alliances happen because we want to…
access to resources and capabilities
leverage internal resources & capabilities