Making Strategic Alliances and Networks Work Chapter 7 Making Strategic Alliances and Networks Work Global Strategy Mike W. Peng Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Outline Defining strategic alliances and networks A comprehensive model of strategic alliances and networks Formation Evolution Performance Debates and extensions The savvy strategist Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Defining Strategic Alliances and Networks Strategic alliances are “voluntary agreements between firms” Strategic alliances are compromises between pure market transactions and mergers and acquisitions Alliances fall into two broad categories: contractual (non-equity) and equity-based Strategic networks are strategic alliances formed by multiple firms to compete against other networks and singular firms Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Variety of Strategic Alliances A compromise between short-term, pure market transactions (e.g., spot transactions) and long-term, pure organizational solutions (e.g., mergers and acquisitions) The Variety of Strategic Alliances Market Transactions Mergers and Acquisitions (M&A) Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 7.1

A Comprehensive Model of Strategic Alliances and Networks Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 7.2

A Comprehensive Model of Strategic Alliances and Networks Industry-based considerations Traditional: Firms are independent players The dynamic of five forces: Horizontal alliances, entry barriers, upstream alliances with suppliers, downstream vertical alliances with buyers, and alliances and networks to provide substitute products/services Resource-based considerations The resource-based view is embodied in the VRIO framework, which are value, rarity, imitability and organizational aspect of strategic alliance and networks Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Strategic Alliances and Networks: Advantages and Disadvantages Strategic alliances and networks must create value Advantages must outweigh disadvantages ADVANTAGES DISADVANTAGES Reduce costs, risks, and uncertainties Possibilities of choosing the wrong partners Gain access to complementary assets and capabilities Costs of negotiation and coordination Opportunities to learn from partners Possibilities of partner opportunism Possibilities to use alliances networks as real options Risks of helping nurture competitors (learning race) Table 7.1 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Formation Stage one: To cooperate or not to cooperate Stage two: Contract or equity? Stage three: Positioning the relationship Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Three-Stage Decision Model of Strategic Alliance and Network 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. Figure 7.3 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Stage Two: Contract or Equity? DRIVING FORCES EQUITY-BASED ALLIANCES/NETWORKS NON-EQUITY-BASED ALLIANCES/NETWORKS Nature of shared resources High Low (degree of tacitness and complexity) Importance of direct organizational High Low monitoring and control Potential as real options High (for possible upgrading to M&As) High (for possible upgrading to equity-based relationships) Influence of formal institutions High (when required or encouraged by regulations) High (when required or encouraged by regulations) Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Evolution Combating opportunism Evolving from strong ties to weak ties Need to protect against opportunism Contractual safeguards and credible commitment Evolving from strong ties to weak ties Strong ties are cultivated over a long period of time Weak ties are characterized by infrequent interaction and low intimacy Firms have a combination of strong ties and weak ties Benefits of the different types of ties depend on the firms’ strategies Many interfirm relationships evolve from an emphasis on strong ties to a focus on weak ties Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Evolution (cont.) Going through a divorce Initiation Going public Uncoupling Aftermath Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Performance The performance of strategic alliances and networks A combination of objective and subjective measures can be used to determine performance Four factors may influence the performance of alliances and networks: equity, learning and experience, nationality, and relational capabilities The performance of parent firms Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Alliance- and Network-Related Performance Measures ALLIANCE/NETWORK LEVEL PARENT FIRM LEVEL Objective Objective Financial performance (for example, profitability) Financial performance (for example, profitability) Product market performance (for example, market share) Product market performance (for example, market share) Stability and longevity Stock market reaction Subjective Subjective Level of top management satisfaction Assessment of goal attainment Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 7.4

Debates and Extensions Majority JVs as control mechanisms versus minority JVs as real options Alliances versus acquisitions Acquiring versus not acquiring alliance partners Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Improving the Odds for Alliance Success AREAS DO’S AND DON’TS Contract versus “chemistry” No contract can cover all elements of the relationship. Relying on a detailed contract does not guarantee a successful relationship and it may indicate a lack of trust. Warning signs Identify symptoms of frequent criticism, defensiveness (always blaming others for problems), and stonewalling (withdrawal during a fight). Investment in the relationship Like married individuals working hard to invigorate their ties, alliances require continuous nurturing. Once a party starts to waver, it is difficult to turn back. Conflict resolution mechanisms “Good” married couples also fight. Their secret weapon is to find mechanisms to avoid unwarranted escalation of conflicts. Managers need to handle conflicts-inevitable in any relationship-in a credible, responsible, and controlled fashion. Source: Based on text in M. W. Peng & O. Shenkar, 2002, Joint venture dissolution as corporate divorce (pp. 101–102), Academy of Management Executive, 16 (2): 92–105. Table 7.7 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Savvy Strategist New generation of strategists needs to be savvy at both competition and cooperation— “co-opetition” Improving relational (collaborative) capabilities is crucial for success Need to understand the rules of game governing networks - both formal and informal Carefully weigh the pros and cons associated with alliances and acquisitions Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.