Strategic Alliances Chapter 7 April 5, 2006 Dr. Ellen A. Drost

Objectives  Why Strategic Alliances  Defining strategic alliances and networks  A comprehensive model of strategic alliances and networks  Debates and extensions

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

Strategic Alliances  WHY STRATEGIC ALLIANCES?  A.Spread and reduce costs  B.Specialization  C.Competition  D.Vertical integration  E.Horizontal integration  F.Knowledge

Alliances are popular  WHAT ARE THE ALTERNATIVES TO ALLIANCES?  Develop capability internally  Buy inputs/technology  Merger or acquisition

International Alliances  WHY INTERNATIONAL ALLIANCES?  A.Gain location specific assets  B.Overcome Government restrictions  C.Diversification  D.Minimize exposure to risk

Structuring the alliance to reduce opportunism WHAT FORM SHOULD THE ALLIANCE TAKE? Contracts   Equity MarketingConsortium Wholly Owned R&D Joint Venture TurnkeyLicenseFranchise Short-term   Long-term  difficult to control difficult to monitor difficult to monitor difficult to enforce difficult to enforce difficult to negotiate difficult to negotiate

Alliances versus Joint Ventures  Not all strategic alliances are joint ventures. –A joint venture (JV) is a new organization—a “corporate child” created by two or more parent firms which hold partial equity ownership in the new venture.  Sony Ericsson –A non-JV alliance is two (or more) firms working together—“getting married” but not having “children.”  Renault is a strategic investor in alliance with Nissan. Both operate independently and they have not created a new firm.

Strategic Networks  Overall, strategic alliances and networks are cooperative interfirm relationships  Strategic alliances formed by multiple firms to compete against other such groups and against traditional single firms  Also known as constellations –Star Alliance: United, Lufthansa, Air Canada, SAS, etc. –Sky Team: Delta, Air France, Korean Air, etc. –One World: American, British, Cathay Pacific, Qantas, etc.

Type of alliances  Contracts  Turnkey Projects –Contractor agrees to handle every detail of project for foreign client  Licensing –Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties  Franchising –Franchiser sells intangible property and insists on rules for operating the business  Joint Ventures –Equity participation  Wholly Owned Subsidiaries –Greenfield versus acquisition

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.

Managing the alliance –WHAT ABOUT PARTNER SELECTION?  Differences can create value  Similarities minimize cost

Debate 1: Learning Race versus Cooperative Specialization  Learning race view: Very influential –Assumption 1: Acquiring partner “know-how” is cost effective –Assumption 2: Other partners are passively being exploited  Cooperative specialization view: More realistic? –Learning races do exist, but they represent more of the pathologies rather than the norms –Mutual hostage taking can reduce such pathologies –Preventing 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 Chapter 6: Unresolved  One additional benefit of minority JVs: Real options –The more uncertain the conditions, the higher the value of real options –Minority JVs have great real options value, especially in uncertain, emerging economies –SIA 7.4: Anheuser-Busch’s minority JVs in emerging economies (e.g., Brazil, China, Mexico, Philippines)

Debate 3: Alliances versus Acquisitions  Problems with M&As (see Chapter 9) –Too final: hard to undo –Too expensive –Extensive problems with post-merger integration  Many large MNEs have an M&A function (department), which focus exclusively on M&As –A combined “mergers, acquisitions, and alliances” function may be advisable – Table 7.5

Acquisition and Green-field- pros & cons  Pro: –Quick to execute –Preempt competitors –Possibly less risky  Con: Disappointing results Overpay for firm Optimism about value creation Culture clash. Problems with propose synergies  Pro: –Can build subsidiary it wants –Easy to establish operating routines  Con: –Slow to establish –Risky –Preemption by aggressive competitors Acquisition Greenfield