1. International Strategic Alliances: Design and Management9
International Strategic Alliances: Design and Management

2. Learning Objectives
Know the steps for implementation of successful international strategic alliances
Understand how to link value chains in international strategic alliances
Understand the importance of choosing the right partners for alliances
Know the important characteristics to look for in potential alliance partners

3. Learning Objectives
Know the differences between equity-based international joint ventures and other types of international cooperative alliances
Know the basic components of an international strategic alliance contract
Understand the control systems and management structures used in alliance organization

4. Learning Objectives
Appreciate the unique problems in human resource management
Realize the importance of interfirm commitment and trust
Understand how companies assess the performance of their international strategic alliances
Know when companies should continue or dissolve their international strategic alliances

5. Strategic Alliances Issues
Increasingly popular strategy to develop new product and to expand into new markets
Offer fast and flexible ways to gain complementary resources
However, strategic alliances are inherently unstable
Failure rate of 30% to 60%
Even profitable alliances can be torn by conflict

6. Exhibit 9.1: Implementing a Strategic-Alliance Strategy

7. Where to Link in the Value Chain
Benefits of strategic alliances
Gain access to local partner’s knowledge of market, meet government requirements, share risks, share technology, economies of scale, access lower cost raw materials or labor.
Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks
Depends on the objective that the firm seeks to achieve

8. Exhibit 9.3: Value-Chain Links in US International Alliances

9. Choosing a Partner: The Most Important Choice?
Key criteria for picking an appropriate alliance partner
- Seek strategic complementarity
Understand objectives and seek complementarity
- Pick a partner with complementary skills
One that enhances but does not necessarily duplicate an alliance partner’s skills

10. Criteria for Choosing Partners
- Seek out companies with compatible management styles
- Seek a partner that will provide the “right” level of mutual dependency
- Avoid the “anchor” partner
Anchor partner: a partner that holds back the strategic alliance because it cannot or will not provide its share of the funding

11. Criteria for Choosing Partners (cont.)
- Be cautious of the “elephant-and-ant” complex
Occurs when two companies are greatly unequal in size
- Assess operating-policy differences with potential partners
- Assess the difficulty of cross-cultural communication with a likely partner

12. Exhibit 9.4: International Strategic Alliances for Small Multinational Companies

13. Choosing an Alliance Type
Three main types of strategic alliances
- Informal international cooperative alliances
- Formal international cooperative alliances
- International joint venture

14. Informal International Cooperative Alliance
Non-legally binding agreements between companies from two or more countries to cooperate on any value chain activity
- Agreements of any kind
- Provide links anywhere on their value chains
Limited scope of involvement with other company
May resist revealing proprietary information

15. Formal Cooperative Alliances
Non equity alliance with formal contracts specifying what each company must contribute to the relationship
Calls for high degree of involvement among partners
Formal contract specifying contribution of each
Sharing of proprietary information
Backing out of this alliance more difficult
Popular in high tech industries because of high costs and risks

16. International Joint Ventures (IJV)
Separate legal entity owned by two or more parent companies from different countries
Self standing legal entity
Require formal agreements
No need for equal ownership
Equity based on cash or other contributions
Ex.: One partner brings technology while other partner brings financial contributions

17. Exhibit 9.5: Types of Alliances

18. Negotiating the Agreement
IJV negotiation issues
- equity contributions
- management structure
- “prenuptial” agreements regarding dissolution

19. Exhibit 9.6: Selected Questions for a Strategic-Alliance Agreement

20. Organizational Design in Strategic Alliances
Design depends on the type of alliance chosen
Informal ICAs often do not require formal design
Formal ICAs may require separate organization unit housed in one company, with employees from both
IJVs are separate legal entities, and require separate organization to carry out the alliances objectives

21. Decision-making Control
Two areas of decision making
- Operational decisions (daily running of organization)
Strategic decisions (for long term survival)
Majority owners do not necessarily control both
In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management.
In non equity ICAs, strategic decisions remain with parent companies

22. Management Structures
Dominant parent: controls or dominates strategic and operational decision making
- Often has majority ownership
- Treats the IJV as wholly owned subsidiary
Shared management: both parent companies contribute approximately the same number of managers to the alliance organization

23. Management Structures
Split control management control: partners usually share strategic decision making and split functional decision making
Independent management structure: alliance managers act more like managers from a separate company
- IJVs often recruit managers from outside the parent companies

24. Management Structures
Rotating management: key positions rotate among partners
- Popular in developing countries
- Trains management talent and transfers expertise

25. Choosing a Strategic Alliance Management Structure
If partners have similar technologies/ know-how and contribute equally- Shared management structure preferred
If partners have different technologies but contribute equally- Split management structure preferred
If one partner has dominant equity position, or is more important to one partner
- Dominant management structure more likely

26. Choosing a Strategic Alliance Management Structure
For joint ventures
Mature joint ventures move to independent structures as the joint venture’s management team gains more expertise
Joint ventures in countries with a high degree of government intervention produce IJVs with local partner dominance
Independent management structures are more likely when the market is expanding, the venture does not require much capital, or the venture dose not require much R&D input from its parents

27. Commitment and Trust: Soft Side of Alliance Management
Commitment: taking care of each other and putting forth extra effort to make the venture work
- Attitudinal commitment: willingness to dedicate resources and efforts and face risks to make the alliance work
If partners demonstrate these aspects of commitment, alliance will develop based on the principles of fair exchange.
Fair Exchange- Occurs when partners believe that they receive benefits from the relationship equal to their contributions

28. Calculative Commitment
Commitment also has a practical side: calculative commitment
Alliance partner evaluations, expectations, and concerns regarding potential rewards from the relationship
Businesses require tangible outcomes for a relationship to continue

29. Trust Commitment and trust go hand in hand
Credibility trust: confidence that the partner has the intent and ability to meet promised obligations and commitments
Benevolent trust: confidence that the partner will behave with goodwill and with fair exchange

30. Exhibit 9.7: The Trust/Commitment Cycle

31. Why Is Trust Important?
When there is no trust, partners hold back or take advantage of each other.
Formal contracts can never identify all issues that will arise
Technology and knowledge also include tacit elements that can only be shared when there is trust.

32. Building and Sustaining Trust and Commitment
Pick your partner carefully
Know each side’s strategic goals
Seek win-win situations
Go slowly
Invest in cross-cultural training
Invest in direct communication
Find the right levels of trust and commitment

33. Exhibit 9.8: The “Right” Levels of Trust and Commitment

34. Assessing the Performance of an International Strategic Alliance
If strategic intent is to produce immediate results, standard financial and efficiency measures can be used.
Other strategic alliance provide indirect strategic benefits, and may never generate profits.
IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning, and subjective measures like satisfaction and harmony

35. Exhibit 9.9: Selected Performance Criteria for Strategic Alliance

36. If the Alliance Does Not Work
Negotiate an end or improve implementation
Know when to quit/invest more
Avoid “escalation of commitment”
- Companies continue in an alliance longer than necessary because of past financial and emotional investments.
Plan end at the beginning —“prenuptial agreements”
Death not always failure, many alliances are short term

37. Dedicated Strategic Alliance Units
Specialized units to manage alliance
Provide processes and procedures that help managers
identify the need for an alliance
Evaluate partners
Negotiate agreements
Structure the alliance organizations
Develop specific performance indicators

38. Key Lessons from Cross-Border Alliances
Understand and appreciate business and cultural differences
Keep strong executive support
Communicate
Negotiate logic before control
Commitment, trust and dedication
Have “checkpoint” as the alliance is being implemented
Review alliance’s viability

39. Conclusion
Use of international strategic alliances continues to grow in international business
Chapter provides solid understanding of the basics and how to manage strategic alliances
Strategic alliances are prone to failure and great effort must be taken to make them successful