Chapter 10 Alliances

Scope of Chapter 10 What is an alliance? An instrument of cooperative strategy Alliance forms Organizational challenges posed by alliances Alliance configurations Alliance management

What is an Alliance? An agreement between organizations (usually firms) to jointly pursue business opportunities for mutual benefit while leveraging each other’s skill and resource base In alliances, the partner companies join forces in pursuit of common goals without losing their strategic autonomy and abandoning their own specific interests

Alliances are Agents of Cooperative Strategy Alliances are partnerships between organizations Alliances are “strategic” when they are a response to strategic challenges or opportunities that the partner organizations face They have proliferated over the past 15-20 years in virtually all industries, alongside mergers and acquisitions As foreign direct investment [FDI] has increased faster than domestic investment, so have international alliances [ISAs]

What is Cooperative Strategy? The attempt by firms to realize their objectives through cooperation with other firms, in alliances, rather than through competition with them.

Cooperation and Competition Cooperative strategy is not an alternative to competitive strategy But when cooperation exists alongside competition, there can be tensions and variable results

Cooperation and Competition High Mutual Learning Merger Cooperation Risk of Appropriation Poor results Low Low High Competition

Alliance Forms Alliances take a wide range of different forms, differing along several key dimensions: Degree of integration between the partners Legal and ownership form Primary strategic intention

Some alliance options Informal information exchange Joint marketing Licensing and franchise agreements Joint research contracts Consortia (e.g. Airbus) Equity joint ventures (majority, 50/50)

Alliance Options in terms of Partner Integration Mergers & Equity Joint Formal Medium/long Informal Acquisitions Ventures Contractual term Supply Cooperative Ventures Chain Ventures Relationships Integration & interdependence between partners Expected longevity of alliance High Low

Alliance Forms within the Range of Inter-firm Links See Figure 10.1, Chapter 10

Types of Alliance Partnerships between non-competing firms: International expansion joint ventures Vertical partnerships Cross-industry agreements Alliances between competitors: Shared supply alliances Quasi-concentration alliances Complementary alliances Source: Dussauge & Garrette 1999, in which examples can also be found.

International Expansion Joint Ventures Formed to enter new markets with the support of a local partner E.g. Whirlpool

Vertical Partnerships Accompanies strong trend in manufacturing towards outsourcing Carefully selected suppliers are required to invest in a long-term collaborative relationship with the customer and become partners rather than mere subcontractors E.g. Intel & Hewlett-Packard

Cross-Industry Agreements Links between companies operating in different businesses: partners are neither competitors nor linked in a customer/supplier relationship. Nor is the aim to facilitate international expansion. Objectives: combine competencies, often to develop a new business offer learning for one partner to diversify E.g. Resarail 2000

Shared Supply Alliances Their scope is limited to upstream activities (R&D, parts & components, subsystems), with partner companies remaining direct competitors in end products Objective is often to achieve economies of scale or to share R&D costs E.g. Butachimie

Quasi-Concentration Alliances Cooperation between companies which contribute similar capabilities and assets to the alliance in order to develop, manufacture and market a joint product Aim to benefit from advantages enjoyed by larger rivals without having to merge Sharing of development costs and risks E.g. Airbus

Complementary Alliances Partners contribute different and complementary assets and capabilities to their joint endeavour One partner often contributes a product design or set of critical technologies, while the other provides in-depth knowledge of a local market and access to it Despite potential synergies, the initial complementarity between partners has often given way to competition and withdrawal by one of the partners E.g. The Espace

Organizational Challenges posed by Alliances Achieving trust Managerial role conflict Clashes between partner cultures: Authority Relationships Uncertainty Time Control

Alliance Configurations There is no ‘one size fits all’ solution to the way that alliances are organized Different configurations of ownership, control and management appear to be viable under different circumstances Investigations into foreign joint ventures in China identified three alternative configurations: Surrogate subsidiary Balanced partnership Junior Partnership

Managing Alliances:A Major Challenge Previously, many people believed that the most important thing was simply to find the right partner. Today, there is broad agreement that managing an alliance presents an equally important challenge Managing relations with and between the partners Organizing the alliance Resolving operational conflicts and other problems Developing the alliance over time.

Alliance Management: A Key Core Competence The multiplication of decision-making centers makes alliances much more difficult to manage than organizations with a single chain of command The ability to cooperate and to manage cooperative arrangements is becoming one of the core competencies companies must possess in order to survive and succeed in an increasingly global economy.