Global Strategy Mike W. Peng c h a p t e r 77 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. Global Strategy Mike W. Peng Chapter 7 Making Strategic Alliances and Networks Work

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 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 Mergers and Acquisitions (M&A) Mergers and Acquisitions (M&A) Market Transactions Market Transactions Figure 7.1

© M. W. Peng ( 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. 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

© M. W. Peng ( Industry-based considerations Figure 2.1 2–7

© M. W. Peng ( Resource-based considerations Alliances can create or diminish value (V) Reduce costs, risks and uncertainties. Access complementary assets and learning opportunities. Use alliances as real options. Choosing wrong partners. Potential partner opportunism. Risk of helping nurture competitors (learning race).

© M. W. Peng ( … R, I, O aspects of alliances Rarity – relational (collaborative) capabilities, the ability to manage inter- firm relationships, may be rare. Inimitability – alliances may make it easier to observe and imitate firm- specific capabilities. Organization – some successful alliances are organized in a way that is difficult to replicate.

INFLUENCE OF INSTITUTIONS Formal institutions Antitrust concerns – antitrust authorities more likely to approve alliances than acquisitions. Entry requirements – many governments place limitations on foreign firm’s mode of entry

INFLUENCE OF INSTITUTIONS Informal institutions Normative pillar –firms copy other reputable organizations to establish legitimacy. Cognitive pillar – internalized, taken-for- granted values that guide 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. Strategic Alliances and Networks: Advantages and Disadvantages Strategic alliances and networks must create value Advantages must outweigh disadvantages Table 7.1 ADVANTAGESDISADVANTAGES Reduce costs, risks, and uncertaintiesPossibilities of choosing the wrong partners Gain access to complementary assets and capabilitiesCosts of negotiation and coordination Opportunities to learn from partnersPossibilities of partner opportunism Possibilities to use alliances networks as real optionsRisks of helping nurture competitors (learning race)

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

© M. W. Peng ( FORMATION OF ALLIANCES

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 resourcesHighLow (degree of tacitness and complexity) Importance of direct organizationalHighLow monitoring and control Potential as real optionsHigh (for possible upgrading to M&As)High (for possible upgrading to equity-based relationships) Influence of formal institutionsHigh (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  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

Source: M. Peng and O. Shenkar (2002). Joint venture dissolution as corporate divorce. Academy of Management Executive, 16 (2): 95. Evolution (cont)

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 LEVELPARENT FIRM LEVEL Objective  Financial performance (for example, profitability)  Product market performance (for example, market share)  Stability and longevity  Stock market reaction Subjective  Level of top management satisfaction  Assessment of goal attainment Table 7.4

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. Debates and Extensions Majority JVs as control mechanisms versus minority JVs as real options Alliances versus acquisitions Acquiring versus not acquiring alliance partners

© M. W. Peng ( Alliances versus 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. Improving the Odds for Alliance Success Table 7.7 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. AREASDO’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 signsIdentify symptoms of frequent criticism, defensiveness (always blaming others for problems), and stonewalling (withdrawal during a fight). Investment in the relationshipLike 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.

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