Professor Jeff Dyer BYU, Marriott School AGENDA n CREATING VALUE THROUGH HORIZONTAL ALLIANCES n CREATING VALUE THROUGH VERTICAL ALLIANCES

Professor Jeff Dyer BYU, Marriott School Strategic Alliances Based on: Yoshino and Rangan, 1995 The Scope of Inter-corporate Linkages Contractual Agreements Equity Arrangements Traditional NontraditionalNo New Firm Creation of EntityDissolution Contracts Contractsof Entity Arm’s-length Joint Research Minority NonsubsidiaryJV Mergers and Buy/Sell Equity JVsSubsidiaries Acquisitions Contracts Investmentsof MNCs Franchising Joint Product Equity Fifty-fifty Development Swaps Joint Ventures Licensing Long-term Unequal Sourcing Equity Agreements Joint Ventures Cross- Joint Manufacturing licensing Joint Marketing Shared Distribution/ Service Standard Setting/ Research Consortia

Professor Jeff Dyer BYU, Marriott School Alliances- How far have we come? “Alliances are mere transitional devices and because of this they are destined to fail” Michael Porter “Many so-called alliances between Western companies and their Asian rivals are little more than sophisticated outsourcing arrangements -- the traffic is almost entirely one way” Hamel, Doz, and Prahalad “Avoid alliances like the plague.” Reich and Mankin

Professor Jeff Dyer BYU, Marriott School Alliances Growing as a Source of Revenue Alliances as a Percentage of Revenue for Top 1,000 U.S. Public Corporations Source: Columbia University, European Trade Commission, Studies by BA&H, AC , , , 1999

Professor Jeff Dyer BYU, Marriott School Total business conducted through alliances 20% 30% 40% 0% 10% 20% 30% 40% 50% Source: EIU Global Executive Survey Andersen Consulting, Warren Company 3-5% 1990

Why Seek a Partner? n Reduce Risks – Size or Uncertainty Associated with Project – Preempt Competitors – Flexibility/Option Value n Gain Efficiency – Economies of Scale and/or Scope – Speed to Market n Access Complementary Skills – New market entry; synergy- sensitive skills n Learning – Acquire New Skills – Gain Market Knowledge and Experience – Monitor Competition n Politics – Sensitive Industries – Regulations – Market Access

Professor Jeff Dyer BYU, Marriott School Objectives of Horizontal Alliances n Reduce Risks – E.g., Oil Drilling JVs (spread risk and cost of drilling) n Gain Efficiency – E.g.., McDonalds and Disney (share advertising costs) n Learning (Development & Innovation) – E.g.,; Autobody and Composites Consortiums (GM, Ford, Chrysler); Fuji-Xerox n Access Complementary Skills – E.g., Apple-Sony partnership to develop Powerbook; n Politics – E.g.,: Otis-Tianjin JV in China (Otis allowed to enter China)

But There are Costs in Collaboration n Coordination Costs – Management Time – Redundant Structures – Communication Programs – Control Systems n Loss of Competitive Position – Leakage of Knowledge – Reduced Flexibility – Create a Potential Competitor n Exposure – Loss of Bargaining Power with Others – Lower Market Valuation due to Loss of Control Premium

Professor Jeff Dyer BYU, Marriott School Challenges for Horizontal Alliances n Leveraging each partner’s resources while protecting proprietary know-how; many horizontal alliances are inherently learning races. n Building trust with potential competitors; simultaneously cooperating and competing (Co- opetition) n Less ability to “control” partner decisions (relative to supplier alliances).

Professor Jeff Dyer BYU, Marriott School Favorable Conditions for Horizontal Alliances n The partner’s strategic goals converge while their competitive goals diverge. – (e.g., Philips and Du Pont collaborate to mfg. compact disks; neither invades the other’s market) n The size, market power, and skills/resources of partners is modest compared with industry leaders; an attempt to catch up. – (e.g., Japanese chipmakers collaborate to develop chips; U.S. automakers collaborate on autobody and battery technology). n Each partner believes it can learn from the other and at the same time limit access to proprietary skills – (e.g., Xerox and Fuji alliance; Xerox gets access to Japanese market and technology in Japan; Fuji participates in copier business; Fuji believes it can protect film business while Xerox believes it can protect worldwide copier business)

Professor Jeff Dyer BYU, Marriott School The Logic for Joint Ventures n Alliance objective is characterized by a high degree of uncertainty, such as R&D alliances (need incentives to bring best technology) n Desire to create a “new culture” (resources, processes, values) that fit the new opportunity. n Desire to limit liability of parent companies. n Superior way to measure alliance performance (separate P&L)

Professor Jeff Dyer BYU, Marriott School n Identify Partners with: – Strategic Fit: Compatible resources, assets, and capabilities – Cultural Fit: Compatible cultures and work processes n Establish clear performance objectives & monitor performance – for the alliance and requirements for each partner; make technology transfer dependent on meeting performance requirements n Develop plan to learn from partners – Invest in absorbing key skills/technology from partners while protecting protect proprietary knowledge/skills as much as possible. n Use appropriate “governance” mechanisms – Build trust and align the incentives of partnering firms (e.g., joint stock ownership is superior to legal contracts for eliciting knowledge transfer). n Create a “Strategic Alliance” function in your firm – Assign responsibility to acquire and codify knowledge with regard to effective alliance management practices. Keys to Horizontal Alliance Success

Professor Jeff Dyer BYU, Marriott School Strategic Fit Organization/Cultural Fit High Low High Optimal Strategic Alliance Solution Compatibility but few Synergies Good Commercial Compatibility but Organizational Integration Difficult No Redeeming Value HOWEVER, Remember that it is the differences between the organizations that drive the formation of the alliance The Importance of Strategic and Cultural Fit