STRATEGIC ALLIANCES STRATEGIC ALLIANCES ISSUESISSUES

Stability and risk Stability and risk Failure rate of 30 to 60 percentFailure rate of 30 to 60 percentEven profitable alliances can be Even profitable alliances can be

torn by conflicttorn by conflict

SUCCESSFUL ALLIANCES SUCCESSFUL ALLIANCES MUST:MUST:

NOT ONLY MAKE STRATEGIC NOT ONLY MAKE STRATEGIC SENSE BUT ALSO REQUIRE SENSE BUT ALSO REQUIRE

GOOD IMPLEMENTATIONGOOD IMPLEMENTATION

(SEE EXHIBIT 10.1 FOR STEPS (SEE EXHIBIT 10.1 FOR STEPS IN IMPLEMENTATION OF IN IMPLEMENTATION OF STRATEGIC ALLIANCES)STRATEGIC ALLIANCES)

Decide Link inValue Chain

Select aPotentialPartner

Choose anAlliance Type

Negotiate anAgreement

Build theOrganization

Terminateor

ReviseImplementation

YesNoMeets

StrategicObjectives?

Build Trustand

Commitment

Acceptable?

Yes

Begin Over

Continue orIncrease

Involvement

No

AssessPerformance

WHERE TO LINK IN THE WHERE TO LINK IN THE VALUE CHAIN?VALUE CHAIN?

Depends on the objectives that Depends on the objectives that the firm seeks to achievethe firm seeks to achieve

Exhibit 10.2 gives some examples Exhibit 10.2 gives some examples of common links in the value of common links in the value chainchain

InputLogistics

Operations

Marketingand Sales

OutputLogistics

Service

InputLogistics

Operations

Marketingand Sales

OutputLogistics

Service

R&D R&DR&D

Supply/Production

Production/Marketing

Operations

CompanyB

CompanyA

Marketing

Delivery

EX 10.3 VALUE CHAIN LINKS EX 10.3 VALUE CHAIN LINKS IN U.S. ALLIANCESIN U.S. ALLIANCES

0102030405060

%

R&

D

Op

er.

Mk

t.

Pro

d./

Mk

t.

Oth

er

CanadaorMexico

W.Europeor Japan

Others

SELECTING A PARTNER: THE SELECTING A PARTNER: THE MOST IMPORTANT CHOICE? MOST IMPORTANT CHOICE?

Seek Seek

–Strategic complementarityStrategic complementarity

–Skill complementaritySkill complementarity

–Compatible management Compatible management stylesstyles

ISSUES TO CONSIDER IN ISSUES TO CONSIDER IN CHOOSING A PARTNERCHOOSING A PARTNER

The level of mutual dependency The level of mutual dependency The "anchor" partner The "anchor" partner The "elephant and the ant" complexThe "elephant and the ant" complexOperating policy differences Operating policy differences Difficulties of cross-cultural Difficulties of cross-cultural

communicationcommunication

TYPES OF STRATEGIC TYPES OF STRATEGIC ALLIANCESALLIANCES

Informal international Informal international cooperative alliancescooperative alliances

Formal international cooperative Formal international cooperative alliancesalliances

International joint venturesInternational joint ventures

INFORMAL COOPERATIVE INFORMAL COOPERATIVE ALLIANCES (ICAs)ALLIANCES (ICAs)

Nonlegally binding agreements Nonlegally binding agreements between companies from two or between companies from two or more countriesmore countries

Limited involvement between Limited involvement between companiescompanies

FORMAL COPPERATIVE FORMAL COPPERATIVE ALLIANCESALLIANCES

Higher degree of involvement Higher degree of involvement than informal ICAsthan informal ICAs

Formal contractFormal contractPopular in high tech industries Popular in high tech industries

because of high costs and risksbecause of high costs and risks

INTERNATIONAL JOINT INTERNATIONAL JOINT VENTURESVENTURES

Separate legal entity owned by Separate legal entity owned by two or more parent companies two or more parent companies from different countriesfrom different countries

No need for equal ownershipNo need for equal ownershipEquity based on cash or other Equity based on cash or other

contributionscontributions

AllianceType

Degree ofInvolvement

Ease ofDissolution

Visibility toCompetitors

Contract LegalEntity

InformalICA

Usuallylimited inscope

Easy, at theconvenienceof either side

Oftenunknown tocompetitors

No None

Formal lCA Deeperinvolvement

More difficultto dissolveprior to endof contract

Often visibleto competitors

Yes None

IJV Deepinvolvement

Most difficultto dissolve

High visibility Yes Yes,

EX 10.5 TYPES OF EX 10.5 TYPES OF ALLIANCES: SUMMARYALLIANCES: SUMMARY

NEGOTIATING THE NEGOTIATING THE AGREEMENTAGREEMENT

Joint venture contracts: legal Joint venture contracts: legal documents that bind partners documents that bind partners together together

The formal agreement is not as The formal agreement is not as important as the ability of important as the ability of managers to get along managers to get along

EXHIBIT 10.6 ISSURES IN EXHIBIT 10.6 ISSURES IN ALLIANCE AGREEMENTSALLIANCE AGREEMENTS

For both ICAs and IJVsFor both ICAs and IJVs

–Under which country’s law does Under which country’s law does the agreement operate?the agreement operate?

–How will profits be divided?How will profits be divided?

–Do you need a prenuptial Do you need a prenuptial agreement?agreement?

Primarily for IJVsPrimarily for IJVs

–What are the equity What are the equity contributions of each contributions of each partner?partner?

ORGANIZATION DESIGN IN ORGANIZATION DESIGN IN STRATEGIC ALLIANCESSTRATEGIC ALLIANCES

DECISION MAKING CONTROLDECISION MAKING CONTROL

Majority ownership does not Majority ownership does not necessarily = control necessarily = control

Operational decisionsOperational decisionsStrategic decisionsStrategic decisions

MANAGEMENT STRUCTURES MANAGEMENT STRUCTURES

DOMINANT PARENT DOMINANT PARENT One parent controls strategic One parent controls strategic

and operational decision making and operational decision making Dominant parent often has Dominant parent often has

majority ownershipmajority ownershipDominant parent treats the IJV Dominant parent treats the IJV

as wholly owned subsidiaryas wholly owned subsidiary

SHARED MANAGEMENT SHARED MANAGEMENT

Both parents contribute Both parents contribute approximately the same number approximately the same number of managers to the board of of managers to the board of directors, the top management directors, the top management team, and functional area team, and functional area management management

SPLIT CONTROL SPLIT CONTROL

Partners usually share strategic Partners usually share strategic decision making decision making

Partners split functional decision Partners split functional decision makingmaking

INDEPENDENT MANAGEMENTINDEPENDENT MANAGEMENT

IJV managers act like managers IJV managers act like managers from a separate company from a separate company

IJVs often recruit managers IJVs often recruit managers from outside the parent from outside the parent companiescompanies

ROTATING MANAGEMENT ROTATING MANAGEMENT

Key positions rotate among Key positions rotate among partnerspartners

Popular in developing countries Popular in developing countries Trains management talent and Trains management talent and

transfers expertisetransfers expertise

CHOOSING AN ALLIANCE CHOOSING AN ALLIANCE MANAGEMENT STRUCTUREMANAGEMENT STRUCTURE

If one parent has dominant If one parent has dominant equity positionequity position

– Dominant management Dominant management structure more likelystructure more likely

Equal ownershipEqual ownership

–Shared, split, or rotating Shared, split, or rotating management structure preferredmanagement structure preferred

Similar technologies or know-howSimilar technologies or know-how

–Shared management structure Shared management structure preferredpreferred

If different technologies or know-howIf different technologies or know-how

–Split management structure Split management structure preferredpreferred

If the venture has more strategic If the venture has more strategic importance to one partnerimportance to one partner

–Dominant management structure Dominant management structure preferredpreferred

HUMAN RESOURCE HUMAN RESOURCE MANAGEMENT IN STRATEGIC MANAGEMENT IN STRATEGIC

ALLIANCESALLIANCES

The HRM functions of an IJV The HRM functions of an IJV are more complex because are more complex because managers (and sometimes managers (and sometimes workers) come from two or more workers) come from two or more firms or from two or more firms or from two or more cultures cultures

HRM ISSUESHRM ISSUESHRM planningHRM planningParent involvementParent involvementStaffing the alliance management and Staffing the alliance management and

technical personneltechnical personnelStaffing the alliance workforceStaffing the alliance workforceAssigning managers strategic or Assigning managers strategic or

operations tasksoperations tasks

HRM ISSUES (CONTINUED)HRM ISSUES (CONTINUED)

Performance assessmentPerformance assessmentLoyaltyLoyaltyCareer developmentCareer developmentCultural differencesCultural differencesTrainingTraining

COMMITMENT AND TRUST: THE COMMITMENT AND TRUST: THE SOFT SIDE OF ALLIANCE SOFT SIDE OF ALLIANCE

MANAGEMENTMANAGEMENTWithout trust and commitment Without trust and commitment

the JV will fail entirely or never the JV will fail entirely or never reach its potential reach its potential

TRUSTTRUST

The confidence that the partner The confidence that the partner will deliver on their expected will deliver on their expected contributions to the joint venturecontributions to the joint venture

““Trust cycles”Trust cycles”

WHY IS TRUST IMPORTANT? WHY IS TRUST IMPORTANT?

Required for IJV participants to Required for IJV participants to contribute tacit knowledge and contribute tacit knowledge and quality inputsquality inputs

Weakness of formal contracts Weakness of formal contracts can never identify all the issuescan never identify all the issues

KEY FACTORS FOR KEY FACTORS FOR COMMITMENTCOMMITMENT

Pick your partner carefully Pick your partner carefully Know your strategic goals and your Know your strategic goals and your

partner's partner's Seek win-win situations Seek win-win situations Go slowlyGo slowlyInvest in cross-cultural trainingInvest in cross-cultural trainingInvest in direct communicationInvest in direct communication

ASSESSING ALLIANCE ASSESSING ALLIANCE PERFORMANCEPERFORMANCE

Match strategic objectives with Match strategic objectives with performance measuresperformance measures

EXHIBIT 10.8 SELECTED EXHIBIT 10.8 SELECTED PERFORMANCE CRITERIA PERFORMANCE CRITERIA

FOR STRATEGIC ALLIANCESFOR STRATEGIC ALLIANCESManagement ProcessesManagement ProcessesOrganizational LearningOrganizational LearningCompetitiveCompetitiveMarketingMarketingFinancialFinancial

IF THE ALLIANCE DOES NOT WORKIF THE ALLIANCE DOES NOT WORKNegotiate an end or improve Negotiate an end or improve

implementationimplementationKnow when to quit/invest moreKnow when to quit/invest moreAvoid “escalation of commitment”Avoid “escalation of commitment”Plan end - “prenuptial agreements”Plan end - “prenuptial agreements”Death not always failureDeath not always failure

CONCLUSIONSCONCLUSIONSThe importance of international The importance of international

strategic alliancesstrategic alliancesMost important decision: picking Most important decision: picking

the right partner the right partner No set structure in ownership, No set structure in ownership,

decision making control, or decision making control, or management control management control