Chapter 11 Strategic Alliances Marketing 338 Chapter 11 Strategic Alliances

WHAT IS A STRATEGIC ALLIANCE? “Coalignments between two or more firms in which the partners hope to learn and acquire from each other technologies, products, skills and knowledge that are not available to other competitors.” - David Lei

An Alliance is Strategic when the Connections that Bind the Firms are Enduring and Substantial Desire for the relationship to continue over the long run Must be willing to sacrifice /compromise Risk of dependence

FIGURE 11.1: SYMPTOMS OF COMMITMENT IN MARKETING CHANNELS A committed party to a relationship (a manufacturer, a distributor, or another channel member) views its arrangement as a long-term alliance. Some manifestations of this outlook show up in statements such as these, made by the committed party about its channel We expect to be doing business with them for a long time. We defend them when others criticize them. We spend enough time with their people to work out problems and misunderstandings. We have a strong sense of loyalty to them. We are willing to grow the relationship. We are patient with their mistakes, even those that cause us trouble. We are willing to make long-term investments in them, and to wait for the payoff to come. We will dedicate whatever people and resources it takes to grow the business we do with them. We are not continually looking for another organization as a business partner to replace or add to this one. If another organization offered us something better, we would not drop this organization, and we would hesitate to take on the new organization. Source: adapted from Erin Anderson and Barton A. Weitz, “The Use of Pledges to Build and Sustain Commitment in Distribution Channels,” Journal of Marketing Research, 24 (February 1992), pp. 18-34.

Rationale for Strategic Alliances: Upstream Motives Market entry Economies of Scale Risk reduction Market Coverage Consolidation Create barriers to entry Competitive Advantage

Rationale for Strategic Alliances: Downstream Motives Stabilize Product Supply Reduce Costs Create Differentiation Competitive Advantage

Reasons Why Alliances Form COLLABORATIVE ADVERTISING RESEARCH & DEVELOPMENT TECHNOLOGY TRANSFER RESOURCE VENTURING COOPERATIVE BIDDING CROSS-LICENSING CROSS-MANUFACTURING SHARED DISTRIBUTION

TYPES OF STRATEGIC ALLIANCES Licensing Arrangements Joint Ventures Consortia

Do Alliances Outperform Other Types of Channels? Ideally the alliance will bring together what is good about each firm Evaluate each members’ strengths and each members contribution to competitive position

Alliances are not always the best distribution choice Very difficult and costly to create Requires trust Requires commitment

Building Commitment What makes a downstream member want to join an alliance? Members they can trust Members that are open to ideas Members who treat other members fairly Members that the other member knows Expectation of mutual commitment Will the alliance create a synergistic effect?

How do we measure commitment? Past experience with the channel member Actions of the channel member Protection from competitors Is direct selling a part of the distribution strategy? Selectivity suggests commitment Efforts to build company specific assets

Willingness to Build Company Specific Assets suggests Commitment Reduces risk of replacement For the reseller: E.g. dedicated personnel and facilities, compatible/customized reporting systems, product specific training programs For the supplier: E.g. A degree of selectivity in product category, dedicated facilities, personnel trained in your product

This type of company specific assets….. Expands the channel “pie” Keeps channel members motivated to stay in the alliance Signals the supplier that the distributor is committed and vice versa

If Commitment Builds Trust, How can We Increase Trust? Economic Satisfaction Non-economic satisfaction Identify complementary capabilities Consider Decision Structure Improve communication

Economic Satisfaction Is a positive, affective response to financial rewards of the relationship. The better the alliance performs financially, the more satisfied the members Tends to increase the level of trust

Non-economic Satisfaction… Is a positive, affective response to the psychological and social aspects of the relationship Occurs when the interactions with the members involve consideration Tends to increase trust

Decision Structures that Affect Trust Decentralization Shared decision making Centralization tends to undermine trust Formalization Decision making depends on rules and explicit procedures Formalization tends to undermine trust unless it serves to clarify roles

FG 11.3: PHASES OF RELATIONSHIPS IN MARKETING CHANNELS One side tends to spark it Mounting dissatisfaction leads one side to hold back investment Lack of investment provokes the other side to reciprocate Dissolution may be abrupt but is usually gradual Key feature: It takes two to build but only one to undermine. Decline often sets in without the two parties’ realization Each party invests to build and maintain the relationship Long time horizon Parties may be aware of alternatives but do not court them High expectations on both sides High mutual dependence High trust Partners resolve conflict and adapt to each other and to their changing environment Shared values or contractual mechanisms (such as shared risk) reinforce mutual dependence Key features: Loyalty, adaptability, continuity, high mutual dependence set these relationships apart Benefits expand for both sides Interdependence expands Risk taking increases Satisfaction with results leads to greater motivation and deepening commitment Goal congruence increases Cooperation increases Communication increases Alternative partners look less attractive Key feature: Momentum must be maintained. To progress, each party must seek new areas of activity and maintain consistent efforts to create mutual payoffs Testing, probing by both sides Investigation of each other’s natures and motives Interdependence grows Bargaining is intensive Selective revealing of information is initiated and must be reciprocated Great sensitivity to issues of power and justice Norms begin to emerge Role definitions become more elaborated Key feature: Each side draws inferences and tests them This phase is easily terminated by either side One organization sees another as a feasible exchange partner Little interaction Networks are critical: One player recommends another Physical proximity matters: Parties more likely to be aware of each other Experience with transactions in other domains (other products, markets, functions) can be used to identify parties Relationship Stage 5: Decline and Dissolution Relationship Stage 4: Commitment Relationship Stage 3: Expansion Relationship Stage 2: Exploration Relationship Stage 1: Awareness

Why do strategic alliances fail? Lack of strategy development Wrong partners No real reason for the alliance Unrealistic expectations Clash of corporate cultures Dissatisfaction with the deals