Session 6_Strategic alliances

Global Strategic Alliances: 

Global Strategic Alliances Session 6

Strategic Alliance: The definition: 

Strategic Alliance: The definition An alliance is the sharing of capabilities between two or more firms with the view of enhancing their competitive advantages and/or creating new business without losing their respective strategic autonomy. A global alliance is one in which the object is either to develop a global market presence (global reach alliance) or to enhance the worldwide competitive capabilities of the firm (global leverage alliance). What makes an alliance ‘strategic’ ? The sharing of capabilities (R&D, manufacturing or marketing) affects the long-term competitiveness of the firms involved and implies a relatively long-term commitment of resources by partners. 2

Ways to organize joint effort involving the contribution of separate firms: 

Ways to organize joint effort involving the contribution of separate firms Market contract (Buyer-supplier contract) Strategic Alliance Merger of capabilities under a single management control (M&As) When either full control is not feasible, for legal or practical reasons When a contract is difficult to draw up because of the uncertainties involved and none of the parties involved has the ability to develop the needed capability internally 3

Types of international alliances: 

Types of international alliances Global Reach Alliances ( Geographically complementing partnerships) Global Leverage Alliances ( R&D partnerships, joint manufacturing) Alliances for Country Market Entry ( Traditional joint ventures in emerging markets) Alliances for Country Resources Access (Joint ventures in resource-rich countries) Scope Global Local Market Capabilities Object 4

Global vs. Local Alliances (1): 

Global vs. Local Alliances (1) Rationale behind local alliances (Joint ventures): Consists of an exchange of market or resources for technology. Foreign investors are invited to bring their products, processes and management technologies alongside their capital in exchange for an entry in the domestic market or an access to key natural resources. The value for the foreign partner: an increase in market penetration, a set of profits coming from various sources – dividends, transfer prices, management fees. The value for the local partner is an increase in know-how, a flow of dividends and other indirect cash flow such as rental fees, local procurement, etc. 5

Global vs. Local Alliances (2): Types of Strategic Alliances: 

Global vs. Local Alliances (2): Types of Strategic Alliances Coalitions Alliances of competitors, distributors and suppliers in a same industry putting together their capabilities with the view of spanning world markets (‘the search for global reach’) or to establish a common standard. Co-specializations Alliances of firms that join their respective unique but complementary capabilities to create a business or develop new products or technology . Each partner contributes by a unique asset, resource or competencies. Combined together, the capabilities of partners create the needed capabilities for business development. Learning alliances The primary purpose of such alliance is to serve as a vehicle for know-how transfer between partners. 6

Differences between strategic alliances and country-based joint ventures: 

Differences between strategic alliances and country-based joint ventures Joint Ventures (JV) Strategic Alliances (SA) Strategic Objectives Rather straightforward ( exchange of market or resources for technology) More complex, market objectives are combined with technological learning or strategic options. Strategic Architecture Simple complementary scheme – market access against technology transfer. Often there is a mixture of complementary capabilities, consolidation of certain activities as well as technology transfer from both sides. Valuation Traditional methods used in case of M&A More difficult, since SA frequently involve contributions in intangible assets and know-how, and in most situations they take place in new and volatile products or processes. Value creation Value is created by the venture and distributed to the partner under the form of dividends or transfer pricing. Value is created not only in the alliance but also outside the alliance through the applied learning that partners can utilize in other products of their own. Partners In most of the cases non-competitors Frequently competitors engage into SAs 7

Framework for the analysis of Strategic Alliances: 

Framework for the analysis of Strategic Alliances Strategic Context and Value Potential Defining the scope Strategic Objectives Value Creation Potential Partners’ Fit Strategic Fit Capabilities’ fit Cultural fit Organizational fit Negotiation and design Operational scope Interface Governance Implementation Integration Co-operation Evolution Industry prospects and competitive forces What are the benefits of the alliance? What do partners get from it? Shape EXPECTATIONS Partner selection How workable is the relationship? Identify ISSUES How do we organize and manage? How do we work? Achieve RESULTS Set the AGREEMENT 8

Strategic Context: Scope of the Alliance: 

Strategic Context: Scope of the Alliance Coalitions Partners looking to develop their market reach by coordinating their geographical assets, pooling their capabilities in order to reduce costs or enhance competitiveness, or integrating their product offering with the view of gaining market acceptance. The strategic scope of the alliance is to create a bigger and stronger competitive player in the global marketplace. Co-specializations Most of the time aim at creating new products or at increasing competitiveness through the assembly of relatively independent capabilities. Each party will concentrate on what it is good at, and as a consequence will deliver a product, a service or a component with the best concentration of resources and skills Learning alliances Set the mechanisms in place to transfer valuable competencies through a symmetric exchange of technological know-how . Learning alliances are also designed for co-learning in the sense that partners develop new competencies together. 9

Strategic Objectives pursued in various types of Alliances: 

Strategic Objectives pursued in various types of Alliances Coalitions Co-specialization Learning Capabilities/ Resources – Financing – Sharing risks – Complementarities of resources – Risk-sharing – Research and marketing personnel – Financing Assets – Distribution – Manufacturing – Customer services – Complementarities of assets – Access to key tangible and intangible assets Competencies – Market knowledge – Complementarities of know-how – Technology – Know-how Economic value – Economies of scale – Economies of scope – Increased revenues – Increased customer responsiveness – Increased quality – Maximisation of asset utilisation by each partner – Faster time to market – Product development – Skills development 10

Value potential (1): 

Value potential (1) Two-step process: Step one: value created by the alliance Step two: value captured by each partner. The value created by the alliance is driven by four factors: Revenues generated by the alliance through volume of sales Revenues generated by the alliance through the ability to command a high differentiated price Future revenues or costs benefits coming from joint R&D products or processes Cost benefits resulting from economies of scale and scope. 11

Value potential (2): 

Value potential (2) The value captured by partners comes from: Distribution of the alliance profits when the alliance is structured as an autonomous economic entity Profit generated by the sales of intermediary products, components or services to the alliance Profits derived from products or processes developed thanks to the alliance Increased revenues or costs reduction coming from the alliance because of increased market reach or economies of scale or scope Profits coming from other products whose sales are boosted because of the alliance. 12

Framework for the analysis of Strategic Alliances: 

Framework for the analysis of Strategic Alliances Strategic Context and Value Potential Defining the scope Strategic Objectives Value Creation Potential Partners’ Fit Strategic Fit Capabilities’ fit Cultural fit Organizational fit Negotiation and design Operational scope Interface Governance Implementation Integration Co-operation Evolution Industry prospects and competitive forces What are the benefits of the alliance? What do partners get from it? Shape EXPECTATIONS Partner selection How workable is the relationship? Identify ISSUES How do we organize and manage? How do we work? Achieve RESULTS Set the AGREEMENT 13

Partner analysis: Strategic Fit: 

Partner analysis: Strategic Fit An analysis of strategic fit implies the following assessments: Criticality of the alliance for the partners The relative competitive position of partners The compatibility in strategic agendas. 14

Partner analysis: Strategic Fit: 

Partner analysis: Strategic Fit Assessing criticality of the alliance for each partner : How important is the alliance for the partners? Do they need an alliance to achieve their objectives? FIT ? Option FIT ? Timing Strategic Importance Need for Partner PARTNER A PARTNER B PARTNER A PARTNER B High High High High Low Low Low Low 15

Strategic Fit: Relative competitive position: 

Strategic Fit: Relative competitive position Competitive positions: leaders (dominant firm in the industry) challengers (second-tier firms in the industry) laggards (firms which need to catch up) Alliances among leaders are plagued with problems ( Doz and Hamel,1998) 16

Strategic Fit: Strategic Agendas: 

Strategic Fit: Strategic Agendas Venturing Agendas In venturing agendas partners have a deliberate desire to engage in collaboration to create a business. Their prime motivation is to see the alliance grow and flourish , and they get their reward from the continuation of a successful partnership. Extractive Agendas The objective is to ‘learn’ or to ‘acquire’ capabilities from the partner or from the alliance. The prospects of a fit in such a case are short-term: as long as one get the necessary capabilities one sticks to the alliance; as soon as the learning or acquisition cycle is achieved, the strategic value of the alliance vanishes. Sharing Agendas Sharing agendas are limited ones, their prime objectives being to maximize efficiency in certain elements of the value chain through economies of scale and scope . Options Agendas Options agendas are based on the desire for partners to ‘look and see ’ without committing vast amounts of resources, and using the alliance as an experimental platform for monitoring the business. 17

Strategic fit against partner’s strategic agendas: 

Strategic fit against partner’s strategic agendas Fit Long-Term Problematic Fit Problematic Fit Possible Fit Problematic Fit Fit Short-Term Possible Short-Term Fit Problematic Fit Problematic Fit Possible Short-Term Fit Fit Possible Short-Term Fit Possible Fit Problematic Fit Possible Short-Term Fit Fit Short-Term Venturing Agenda Venturing Agenda Extractive Agenda Sharing Agenda Option Agenda Option Agenda Sharing Agenda Extractive Agenda 18

Capabilities fit: 

Capabilities fit The objective of a capabilities fit analysis is to assess the extent to which partners are capable of contributing to the necessary competitive capabilities of the business. What are capabilities required for effective competitiveness? Resources Assets Competencies What are the contributions of partner A? Resources Assets Competencies What are the contributions of partner B? Resources Assets Competencies Do they complement each other? What are the gaps? Are there any redundancies? What are the co-investments needed? 19

Cultural fit: 

Cultural fit The role of cultural fit analysis is to understand the nature of the differences, to anticipate their possible consequences in the functioning of the alliance and to take action in order to prevent negative effects Types of differences in organisational cultures: Differences in corporate cultures Differences in industry cultures Differences in national cultures Differences come from: History of the company (start-up versus well-established firm) Ownership structure (family-owned versus public company versus government owned) Managerial style, (entrepreneurial versus bureaucratic) Personality of its leaders Industry cultures are the norms that are derived from the type of business in which firms are engaged National or ethnic cultures are the product of the history, educational systems, religions and social codes that each nation has woven over the centuries. 20

Organizational fit: 

Organizational fit Objective: to assess whether the partners’ organizational structure systems and procedures differ significantly to the extent that the organization of the work between partners within the alliance is affected. Dimensions of organizational fit analysis: The degree of decentralization of decision-making The degree of documentation of policies and rules The accounting and reporting methods and systems The degree of formalization of decision-making The kind of incentives used to motivate personnel . 21

Framework for the analysis of Strategic Alliances: 

Framework for the analysis of Strategic Alliances Strategic Context and Value Potential Defining the scope Strategic Objectives Value Creation Potential Partners’ Fit Strategic Fit Capabilities’ fit Cultural fit Organizational fit Negotiation and design Operational scope Interface Governance Implementation Integration Co-operation Evolution Industry prospects and competitive forces What are the benefits of the alliance? What do partners get from it? Shape EXPECTATIONS Partner selection How workable is the relationship? Identify ISSUES How do we organize and manage? How do we work? Achieve RESULTS Set the AGREEMENT 22

Negotiation and design: Organizational designs in alliances: 

Negotiation and design: Organizational designs in alliances OPERATIONAL CAPABILITIES Operator Broker Coalitions Co-specialization Alliances Learning Alliances SELF-CONTAINED Autonomous subsidiary The joint venture company develops its own strategy and reports to shareholders TRANSFER PLATFORM People and assets are transferred to the joint venture company by the parents Positions have dual staffing PROJECT TEAM The joint venture plays the role of a project manager It implements strategy, but co-ordinates operations from the parent company JOINT COMMITEE Assets and operational people are with parent company The joint venture’s role is to serve as a forum where parent companies exchange their contributions 23

Interface and Governance: 

Interface and Governance Domains for consideration and agreement: The legal structure and the decision-making mechanisms 50/50 joint venture advisable The degree of task integration The appointment of executives The distribution of value The reporting and communication processes The conflict resolution mechanisms. 24

The degree of task integration: 

The degree of task integration Task integration defines which activities are carried on by the alliance, which ones are carried separately, and the extent to which activities carried by each partner need to be integrated. Integration requires co-ordination and joint work and therefore is likely to demand complex management approaches. Alternatively, if integration is limited, each party fulfils its obligations separately, making co-ordination straightforward and simple. Limited integration is possible if tasks are defined precisely up front and the joint output is obtained by ‘assembling’ the separate outputs together with limited interactions. 25

The Appointment of Executives: 

The Appointment of Executives Parent’s transfer Allocation of managers and staff from each parent to the venture as opposed to the independent staffing of the alliance structure. In the case of transfer, the problem arises of the distribution of functions and roles. One technique, known as the ‘shadow’ organization, consists of putting a manager from one partner in charge of a function with a manager from the other partner as his or her deputy. Skills of alliance managers 26

Alliance stages and Roles of Managers: 

Alliance stages and Roles of Managers Stage Alliance Manager Role Anticipating Searching for partners Planning an alliance Serve as driving force behind the alliance’s creation Paint picture of the possibilities that forming an alliance might create Initiate contact with potential partners Understand company’s strategic intent and recognize similarity of intent in potential partner companies Engaging Evaluating partners Identify value-creation opportunities Have authority to commit resources and key personnel to the alliance Define and promote the dream on which the alliance is based Actively promote and sell the alliance internally Help the company identify synergies and imagine possibilities Create an atmosphere of high energy, personal compatibility and strategic complementarity Valuing Building business plans Negotiating Spend a significant amount of time convincing others within the company of the value of the alliance Be responsible for developing support for the alliance Constantly push the dream forward Rally the right people at the right time Make things happen ‘deep’ in the company Act as champion for the alliance 27

Alliance stages and Roles of Managers: 

Alliance stages and Roles of Managers Stage Alliance Manager Role Investing Demonstrate commitment Leveraging synergies Encourage open, honest and straightforward communication among all parties to the alliance Facilitate effective ‘no-blame reviews’ Interact with diplomacy, tact and objectivity Create bridges between diverse parties with different interests Resolve conflicts Exhibit sensitivity to the needs of all parties Co-ordinating Creating teams Aligning work processes across partners Rely on frequent contacts to expedite alliance business Know whom to ask for help and when to ask Put the right people together Access resources quickly and efficiently through others Create links between the partner companies’ internal networks Put in face-to-face time in order to cultivate trust in key relationships Stabilising Consolidating Managing Shoulder responsibilities for sustaining the alliance Ensure that the alliance follows its prescribed path Maintain relationships critical to alliance success Communicate frequently with all partners Maintain the alliance’s momentum Actively develop future alliance managers 28

Distribution of value: 

Distribution of value Profit-sharing scheme Each partner receives the share of profits generated by the alliance on the market proportionately to their share of work. Revenue-sharing scheme Each partner receives the revenues generated by the alliance on the market proportionately to their share of work. 29

Framework for the analysis of Strategic Alliances: 

Framework for the analysis of Strategic Alliances Strategic Context and Value Potential Defining the scope Strategic Objectives Value Creation Potential Partners’ Fit Strategic Fit Capabilities’ fit Cultural fit Organizational fit Negotiation and design Operational scope Interface Governance Implementation Integration Co-operation Evolution Industry prospects and competitive forces What are the benefits of the alliance? What do partners get from it? Shape EXPECTATIONS Partner selection How workable is the relationship? Identify ISSUES How do we organize and manage? How do we work? Achieve RESULTS Set the AGREEMENT 30

Integration and cooperation: 

Integration and cooperation This phase is frequently operationalised by ‘integration teams’ Integration teams are functional working groups made of managers from the different partners who are assigned the task of identifying the practical ways of implementing the alliance: which processes to adopt which IT platform to use the kind of measurements to adopt how to manage relationships with third parties which accounting system to use 31

The ‘Death Valley’ spiral: 

The ‘Death Valley’ spiral 32

Learning: 

Learning Two forms of learning offered by alliance: Learning from the alliance , or co-learning : what the partners learn within the alliance Learning from the partners , or captured learning : what the partners learn from each other. 33

Learning from the alliance: 

Learning from the alliance In implementing alliances, partners can learn: About the business characteristics and trends of markets the industry and its competitive drivers About the tasks About partners’ expectations and capabilities . Crucial: to put in place the organizational mechanisms so that learning is distributed to partners 34

Receptivity in learning: 

Receptivity in learning Weak learning capabilities Strong learning capabilities No systematic collection of information Organised intelligence No sharing of information Networked internal information exchange ‘Not invented here’ attitudes ‘Why’ attitude, curiosity, search for benchmarking and outside best practices No ‘organisational memory’ Planned approach to skill acquisition Pressure to achieve only operational/ financial results Internal training Recruitment of people based only on technical professional skills Allocation of time and budgets to ‘learn’ Recruitment of people based on ‘social’ as well as professional skills 35

Criteria for successful alliances: 

Criteria for successful alliances Individual excellence – Both partners are strong – Have something to contribute – Have positive intent Importance – Fits strategy of both partners – Long-term view Interdependence – Partners need each other – Complementary capabilities – Nobody can ‘go it alone’ Investment – Partner shows commitment – Investment/re-investment Information – Reasonable open communication – Sharing of operational information Integration – Shared operating procedures – Numerous connections – Teachers/learners Institutionalization – Clear responsibilities – Clear decision processes Integrity – No abuse – Willingness to enhance trust 36