Strategic Strategic AlliancesAlliances

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Chapter 9Chapter 9

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Strategic AlliancesStrategic Alliances

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Mission Objectives

ExternalAnalysis

InternalAnalysis

StrategicChoice

StrategyImplementation

CompetitiveAdvantage

The Strategic Management Process

Corporate LevelStrategy

Which Businessesto Enter?

• Vertical Integration

• Diversification

• Strategic Alliances

• mode of entry

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Strategic AlliancesStrategic Alliances

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Strategic Alliances Defined

Strategic Alliance:

Any cooperative effort between two or moreindependent organizations to develop, manufacture, or sell products or services

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Strategic AlliancesStrategic Alliances

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Motivation for Alliances

Create economic value by:

• accessing complementary resources and capabilities

• leveraging existing resources and capabilities

An alliance is an organizational form of exchangethat:

• should produce a gain from trade due tosome comparative or absolute advantage

Implication: Choose partners that are better atsomething than you are (complementary resources)

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Strategic AlliancesStrategic Alliances

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Canada MexicoWheat

bushels/hr.

Bananaslbs./hr.

6

4

1

5

ExchangeRate:

1 bu. = 1 lb.

Canada: 2 hrs. = 6 bu. Wheat and 4 lbs. Banana, or2 hrs. = 12 bu. Wheat

By trading, Canada can get: 6 bu. Wheat and 6 lbs. Bananas

Gains from Trade

Motivation for Alliances

A ½ hour gainfrom trade!

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Canada MexicoWheat

bushels/hr.

Bananaslbs./hr.

6

4

1

5

ExchangeRate:

1 bu. = 1 lb.

Mexico: 2 hrs. = 1 bu. Wheat and 5 lbs. Bananas, or2 hrs. = 10 lbs. Bananas

By trading, Mexico can get: 5 bu. Wheat and 5 lbs. Bananas

Gains from Trade

Motivation for Alliances

A 4 hour gainfrom trade!

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Strategic AlliancesStrategic Alliances

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Three TypesOf

Alliances

NonequityAlliance

Contracts

• licensing• supply &

distributionagreements

JointVenture

EquityAlliance

Cross EquityHoldings• partners own

stakes ineachother

Joint EquityHoldings• independent

firm iscreated

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Strategic AlliancesStrategic Alliances

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How Strategic Alliances Create Value

Improve Current Operations

Shaping the Competitive Environment

Facilitating Entry and Exit

ValueCreation

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How Strategic Alliances Create Value

Improving Current Operations

Exploiting economies of scale

• a partner brings increased market shareand/or manufacturing capacity

Learning from partners

• a partner brings technology and/ormarket knowledge

Risk and cost sharing

• a partner bears a portion of the risk and/orcost of the alliance

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How Strategic Alliances Create Value

Shaping the Competitive Environment

Facilitating technology standards

Facilitating tacit collusion

• partners may agree on a standard and avoida market battle for the standard

• partners may communicate within an alliancein subtle, legal ways whereas the samecommunication between competitors outsidean alliance would be illegal

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Strategic AlliancesStrategic Alliances

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How Strategic Alliances Create Value

Facilitating Entry and Exit

Low-cost entry into new industries

Low-cost exit from industries

Managing uncertainty

Low-cost entry into new geographic markets

• a partner provides instant access and legitimacy

• a partner is an informed buyer

• alliances may serve as ‘real options’

• partners provide local market knowledge, access,and legitimacy with governments and customers

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Challenges to Value Creation and Allocation

Incentives to Misappropriate Value (Cheat)

An alliance is an exchange context in which:

• partner inputs may be difficult to monitor

• actual value creation may be difficult to monitor

• value appropriation (allocating the value) may be:

• difficult to monitor

• subject to power dynamics

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Challenges to Value Creation and Allocation

Three Forms of

MisappropriatingValue

AdverseSelection

MoralHazard

Holdup

misrepresentingthe value of inputs

providing inputsof lesser valuethan promised

exploiting the transaction-specific investment of partners

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Sustained Competitive Advantage

Are strategic alliances rare?

As a form of organizing economic exchange, NO!

The sources of value creation within alliancesmay be rare.

However,

• firms may form a combination of complementaryresources within an alliance that is rare

• the stock of such complementary resources maybe limited so that first movers have a rare combination

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Sustained Competitive Advantage

Are strategic alliances costly to imitate?

As a form of organizing economic exchange, NO!

However,

The resource combinations that create value inalliances may be very costly, if not impossible,to imitate if:

• the organizational form per se is easily duplicated

• the value creating combination depends onsocial complexity (trust), causal ambiguity,and/or historical uniqueness

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Sustained Competitive Advantage

Are strategic alliances substitutable?

Substitutes for Strategic Alliances

InternalDevelopment

Mergers &Acquisitions

If:

• no partneris available

• transaction-specificinvestment is high

• low uncertainty aboutthe investment

If:

• there are noanti-trust issues

• low uncertainty aboutthe investment

• firms can beintegrated easily

• value of combined firms isnot tied to independence

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Organizing Strategic Alliances

Governance Responses to the Challenges ofValue Creation and Allocation

Explicit Contracts& Legal Sanctions

Equity InvestmentsJoint Ventures

Formal/Codified

• imposes costsfor cheating

• creates mutualunderstanding

• conflict resolution

• aligns interests ofpartners throughownership of independent firm

• aligns interests ofpartners throughownership in each other

• direct effect • indirect effect

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Trust Firm Reputations

Informal

Organizing Strategic Alliances

Governance Responses to the Challenges of Value Creation and Allocation

• the shadow of thefuture constrainscheating

• may allow partnersto exploit opportunitiesthat would be infeasiblewith other mechanisms

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Organizing Strategic Alliances

Governance Responses to the Challenges of Value Creation and Allocation

These responses are not mutually exclusive:

• contracts may be used with equity investmentsand joint ventures along with firm reputation and trust

• reputation and trust come into play in every typeof alliance

Reputation and trust may be sources of competitiveadvantage because they are costly to imitate

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Strategic AlliancesStrategic Alliances

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Summary

• create alliances that will produce gainsfrom trade—complementary resources

• identify the sources of value creation

• assess the likelihood of challenges to valuecreation and allocation

• adopt appropriate governance responses to the challenges to value creation and allocation

Successful alliance managers will:

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Strategic AlliancesStrategic Alliances

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Summary

Alliances may generate competitive advantage if:

• combinations of complementary resourcesmeet the VRIO criteria

• governance responses meet the VRIO criteria

The Big Challenge of Strategic Alliances:Maximizing gains from trade whileminimizing the threat of cheating

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Prisoner’s Dilemma GameOn each round of play each team can choose either Strategy Aor Strategy B.

The objective is to maximize your payoff.

Payoff MatrixTeam I

Tea

m I

I

I. $3,000II. $3,000

I. $-0-II. $5,000

I. $5,000II. $-0-

I. $1,000II. $1,000

Strategy A Strategy B

Str

ateg

y B

Str

ateg

y A

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Payoff Schedule

Team I Team II

Round 1 _____________ _____________

Round 2 _____________ _____________

Round 3 _____________ _____________

Round 4 _____________ _____________

Round 5 _____________ _____________

Total _____________ _____________

Round 6 _____________ _____________

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