1. Chapter Copyright© 2004 Thomson Learning All rights reserved 8 International Strategic Alliances: Design and Management

2. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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. Copyright© 2005 South-Western/Thomson Learning All rights reserved Strategic Alliances Issues Increasingly popular strategy to develop new product and to expand into new markets However, strategic alliances are very risky and unstable Failure rate of 30% to 60% Even profitable alliances can be torn by conflict Increasingly popular strategy to develop new product and to expand into new markets However, strategic alliances are very risky and unstable Failure rate of 30% to 60% Even profitable alliances can be torn by conflict

6. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.1: Implementing a Strategic-Alliance Strategy

7. Copyright© 2005 South-Western/Thomson Learning All rights reserved Where to Link in the Value Chain Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks Upstream/downstream alliances serve the objective of low-cost supply/manufacturing Operations/marketing alliances provide access to markets Depends on the objective that the firm seeks to achieve Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks Upstream/downstream alliances serve the objective of low-cost supply/manufacturing Operations/marketing alliances provide access to markets Depends on the objective that the firm seeks to achieve

8. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.2: Linking Value Chains in Strategic Alliances: Some Examples

9. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.3: The Mixture of Value-Chain Links

10. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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

11. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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

12. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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

13. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.4: International Strategic Alliances for Small Multinational Companies

14. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.4: International Strategic Alliances for Small Multinational Companies

15. Copyright© 2005 South-Western/Thomson Learning All rights reserved Choosing an Alliance Type Three main types of strategic alliances Informal international cooperative alliances Formal international cooperative alliances International joint venture Three main types of strategic alliances Informal international cooperative alliances Formal international cooperative alliances International joint venture

16. Copyright© 2005 South-Western/Thomson Learning All rights reserved Informal International Cooperative Alliance Non-legally binding agreements between companies from two or more countries Agreements of any kind Provide links anywhere on their value chains Limited involvement between companies Non-legally binding agreements between companies from two or more countries Agreements of any kind Provide links anywhere on their value chains Limited involvement between companies

17. Copyright© 2005 South-Western/Thomson Learning All rights reserved Formal Cooperative Alliances Higher degree of involvement than informal alliances Formal contract Popular in high tech industries because of high costs and risks Higher degree of involvement than informal alliances Formal contract Popular in high tech industries because of high costs and risks

18. Copyright© 2005 South-Western/Thomson Learning All rights reserved International Joint Ventures (IJV) Separate legal entity owned by two or more parent companies from different countries No need for equal ownership Equity based on cash or other contributions Ex.: One partner brings technology while other partner brings financial contributions Separate legal entity owned by two or more parent companies from different countries No need for equal ownership Equity based on cash or other contributions Ex.: One partner brings technology while other partner brings financial contributions

19. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.5: Types of Alliances

20. Copyright© 2005 South-Western/Thomson Learning All rights reserved Negotiating the Agreement IJV negotiation issues equity contributions management structure “prenuptial” agreements IJV negotiation issues equity contributions management structure “prenuptial” agreements

21. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.6: Selected Questions for a Strategic- Alliance Agreement

22. Copyright© 2005 South-Western/Thomson Learning All rights reserved Organizational Design in Strategic Alliances Depends on the type of alliance chosen Informal ICAs often have no formal design issues Formal ICAs may require separate organization unit housed in one company IJV—Parent companies set up separate legal entity Depends on the type of alliance chosen Informal ICAs often have no formal design issues Formal ICAs may require separate organization unit housed in one company IJV—Parent companies set up separate legal entity

23. Copyright© 2005 South-Western/Thomson Learning All rights reserved Decision-making Control Majority ownership does not necessarily control Operational decisions Strategic decisions In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management. Majority ownership does not necessarily control Operational decisions Strategic decisions In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management.

24. Copyright© 2005 South-Western/Thomson Learning All rights reserved Management Structures Dominant parent: controls or dominates strategic 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 Dominant parent: controls or dominates strategic 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

25. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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

26. Copyright© 2005 South-Western/Thomson Learning All rights reserved Management Structures Rotating management: key positions rotate among partners Popular in developing countries Trains management talent and transfers expertise Rotating management: key positions rotate among partners Popular in developing countries Trains management talent and transfers expertise

27. Copyright© 2005 South-Western/Thomson Learning All rights reserved Choosing a Strategic Alliance Management Structure If partners have similar technologies or 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 Dominant management structure more likely If partners have similar technologies or 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 Dominant management structure more likely

28. Copyright© 2005 South-Western/Thomson Learning All rights reserved Human Resource Management in Strategic Alliances HRM functions include recruiting and staffing for alliance positions The HRM functions of an IJV are more complex Managers (and sometimes workers) come from two or more firms or from two or more cultures HRM functions include recruiting and staffing for alliance positions The HRM functions of an IJV are more complex Managers (and sometimes workers) come from two or more firms or from two or more cultures

29. Copyright© 2005 South-Western/Thomson Learning All rights reserved Critical HRM Problems and Issues HRM planning: Employees need to know strategic intent of alliance. Parent involvement: As alliances get older and larger, they tend to develop their own HRM practices. Staffing the alliance management and technical personnel—crucial and risky decision HRM planning: Employees need to know strategic intent of alliance. Parent involvement: As alliances get older and larger, they tend to develop their own HRM practices. Staffing the alliance management and technical personnel—crucial and risky decision

30. Copyright© 2005 South-Western/Thomson Learning All rights reserved Critical HRM Problems and Issues Staffing the alliance workforce Assigning managers strategic or operations tasks Performance assessment—needed for retention, promotion and salary decisions Loyalty—managers may often feel dual loyalty To parent and to alliance Staffing the alliance workforce Assigning managers strategic or operations tasks Performance assessment—needed for retention, promotion and salary decisions Loyalty—managers may often feel dual loyalty To parent and to alliance

31. Copyright© 2005 South-Western/Thomson Learning All rights reserved Critical HRM Problems and Issues Career development—must provide clear information on how alliance assignments fit within careers Cultural differences Training Career development—must provide clear information on how alliance assignments fit within careers Cultural differences Training

32. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.7: HRM Issues in Strategic Alliances

33. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.7: HRM Issues in Strategic Alliances

34. Copyright© 2005 South-Western/Thomson Learning All rights reserved Commitment and Trust Commitment: 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 fair exchange. Occurs when partners believe that they receive benefits from the relationship equal to their contributions Commitment: 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 fair exchange. Occurs when partners believe that they receive benefits from the relationship equal to their contributions

35. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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

36. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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

37. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.8: The Trust/Commitment Cycle

38. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 learned through trust. 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 learned through trust.

39. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 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

40. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.9: The “Right” Levels of Trust and Commitment

41. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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. IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning. If strategic intent is to produce immediate results, standard financial and efficiency measures can be used. Other strategic alliance provide indirect strategic benefits. IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning.

42. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.10: Selected Performance Criteria for Strategic Alliance

43. Copyright© 2005 South-Western/Thomson Learning All rights reserved Exhibit 8.10: Selected Performance Criteria for Strategic Alliance

44. Copyright© 2005 South-Western/Thomson Learning All rights reserved 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 financial and emotional investments. Plan end—“prenuptial agreements” Death not always failure 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 financial and emotional investments. Plan end—“prenuptial agreements” Death not always failure