1. Strategic Alliances MBA 693R Strategic Management Mark Hansen Paul Godfrey

2. Strategic Alliances MBA 693R Strategic Management 2 Definition: any agreement or effort to cooperate with another firm (e.g., joint ventures, licensing, franchising, long term contracts, distribution agreements, R&D agreements, etc.) Motivation: technology markets production finance distribution R & D 1) access to resources and capabilities 2) leverage internal resources & capabilities Strategic Alliance

3. Strategic Alliances MBA 693R Strategic Management 3 Three Critical Factors: Compatibility of Intent Complementary Resources Trust  synergism  gains from trade  complementary & similar  simultaneous satisfaction of interests  competence  character

4. Strategic Alliances MBA 693R Strategic Management 4 CanadaMexico Wheat bushels/hr. Bananas lbs./hr. 6 4 1 5 Exchange Rate: 1 bu. = 1 lbs. Canada: 2 hrs. = 6 bu. Wheat and 4 lbs. Banana 2 hrs. = 12 bu. Wheat By trading Canada can get: 6 bu. Wheat and 6 lbs. Bananas (a ½ hour gain from trade) Gains from Trade

5. Strategic Alliances MBA 693R Strategic Management 5 CanadaMexico Wheat bushels/hr. Bananas lbs./hr. 6 4 1 5 Exchange Rate: 1 bu. = 1 lb. Mexico:2 hrs. = 5 lbs. Bananas and 1 bu. Wheat 2 hrs. = 10 lbs. Bananas By trading Mexico can get: 5 bu. Wheat and 5 lbs. Bananas (a 4 hour gain from trade) Gains from Trade

6. Strategic Alliances MBA 693R Strategic Management 6 Trust Character Trust Strong Form Trust Semi-Strong From Trust  confidence in the quality of moral development  you won’t cheat because your moral development would impose an internal cost  confidence in the quality of rationality  you won’t cheat because the contract we have in place would impose an external cost

7. Strategic Alliances MBA 693R Strategic Management 7 Two competing objective functions in alliances: 1 - maximize the gains from trade 2 - minimize the threat of opportunism Alliance Management Approaches How the relationship is governed influences the value created by the relationship

8. Strategic Alliances MBA 693R Strategic Management 8 (the trade-off is not absolute, both matter, but one is generally emphasized compared to the other) These objectives suggest two extremes in the approach to alliance management: Opportunism Minimization Opportunity Maximization Alliance Management Approaches

9. Strategic Alliances MBA 693R Strategic Management 9 Opportunity Maximizing Approach 1 – complementary resources exist 2 – strategic intent of partners is endogenously compatible Characteristics : potential gains from trade exist there is usually an intent to create something new the deal itself binds partners together partners recognize their interdependence

10. Strategic Alliances MBA 693R Strategic Management 10 3 – based on strong form trust (character-based trust) 4 – cooperative capabilities lie in relational contracting Opportunity Maximizing Approach all partners perceive all other partners to be strong-form trustworthy Characteristics: written contracts remain in the background for clarification issues are resolved based on trusting relationships

11. Strategic Alliances MBA 693R Strategic Management 11 Opportunity Maximizing Approach Sources of Rents from the Approach 1 - Governance Cost Reduction -management effort focused on the business -expensive governance not necessary 2 - Expanded Opportunity Sets -opportunities that would not be available in the absence of strong form trustworthiness -opportunities may arise which were unanticipated at the formation of the alliance -distribution of rents not a problem due to alignment of partner interests

12. Strategic Alliances MBA 693R Strategic Management 12 Opportunism Minimizing Approach 1 – complementary resources exist 2 – strategic intent of partners is made compatible through written contract Characteristics: potential gains from trade exist gain is based on exchange of existing resources contracts are used to constrain behavior

13. Strategic Alliances MBA 693R Strategic Management 13 3 – based on semi-strong form trust (contract-based trust) 4 – cooperative capabilities lie in legal (written) contracting Opportunism Minimizing Approach all parties must perceive all other parties to be rational Characteristics: written contracts guide the operations of the relationship issues are resolved based on contract

14. Strategic Alliances MBA 693R Strategic Management 14 Opportunism Minimizing Approach Sources of Rents from the Approach 1 - Governance Cost Reduction -contracts prevent opportunism by creating incentives not to cheat

15. Strategic Alliances MBA 693R Strategic Management 15 Trust and Competitive Advantage Strong Form Trust may lead to Competitive Advantage because of:  lower governance costs  increased revenues  expanded opportunity sets  the ability to pursue alliances that would be irrational without strong form trust

16. Strategic Alliances MBA 693R Strategic Management 16 Summary Successful alliances depend on…  compatibility of intent  complementary resources  trust Alliances happen because we want to…  access to resources and capabilities  leverage internal resources & capabilities