Chapter 4 Global strategicAlliances 1

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Strategic alliances

The combination of capabilities between 2 or more companies for:• Market entry• Resources acquisitions• Global competitiveness

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Strategic alliances cont.

Partners join together toa gain a mutual learningfrom each other and to co-developnew knowledge. E.g. Nummi

Partners combine their respective uniquecapabilities that complement each otherto create a business, to develop new products or technology or to reinforce their competitiveness through specialization. E.g. Renault-Nissan

COSPECIALIZATIONCOALITION

Partners group together to gainglobal access or to establish a common standard.Example: Airlines

LEARNING

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Scope of thealliance

Purpose of thealliance

Globally based

Country based

Market Resources

CoalitionCo-specialisation

E.g. AirlinesRenault-Nissan

ConsortiaLearning

E.g. GSM

Joint venturefor market entry

Typical in emergingcountries

Joint venturefor resource exploitationE.g. Mining, agriculture based, oil and gas

International strategic alliances

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Strategic value• Defining the scope• Strategic objectives

• Value creation potential

Partners’ fit• Strategic fit

• Capabilities fit• Cultural fit

• Organizational fit

Negotiation and design• Operational scope

• Interface• Governance

Implementation• Integration

• Co-operation• Evolution

What are the benefits of thealliance?What do we get from it?

How workable is the relationship?

How do we organize andmanage?

How do we work?

Framework for strategic alliances

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Defining the scope of the alliance

Strategic scopeWhat is the alliancestriving at?

Economic scopeWhat each partnerscontribute and get

Operational scopeWhat the alliance isdoing

Coalition Co-specialisation Learning

Increasing reachto global market

Complementing capabilities for new businessor competitiveness

Learning from and in the alliance

Enlarged revenuesCost sharing

Generally verylimited to fewelements of the value chain(e.g. code sharing)

Specialisation leads to faster and cheaper developmentcost sharing

The alliance provides the interface for co-ordination or assembly of partners’ contribution

The alliance is a platform for transfer of knowledge and learning together

Acquisition and/ortransfer of know-how

E.g. Star alliance; Visa E.g. Fuji Xerox; Renault-Nissan E.g. Nummi ( GM-Toyota)

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Value creation in strategic alliancesValue of the

parent A

Value of parent B

RoyaltiesDividends

Management feesTransfer pricing

Learning from A

Cost saving due to combined operations

Increased revenues due to joint marketing andcomplementary products

Increased profitability from joint innovation

DIRECT VALUEValue coming from the

alliance

SYNERGY VALUEValue coming from joint

operations

Learning from B Learning from ALearning from B

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Partner analysis

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• How important and urgent is the business of the alliance for partners?- Restructuring- Competitiveness enhancing (cost, differentiation)- Global reach- New business development

• To what extent do partners need to achieve their objectives? (Degree of capabilities autonomy)?

- Can partners achieve objectives alone - Timing pressure- Resources and competencies

CRITICALITY

DIFFERENCES IN EXPECTATIONS

• How different are the expectations?• To what extent are any differences

compatible?

Determines the degree of commitment to the alliance

Strategic fit

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Criticality and commitment in alliances

Commitment is a function of…

Strategic importance of the project

Need of a partner

High

High

Low

Low

Highcommitment

Powerbattle

Lackof support

Lowcommitment

AA = High commitmentBB = No partnershipCC = Low commitmentDD = Very low commitmentAB = Potential conflictsAC = Potential conflictsAD = High level of conflict

AB

CD

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Differences in expectations

• Market development of existing products

• New business

• Product complements

• Cost reduction

• Learning

• Cost reduction

• Learning• Product complements

• New business

• Market development of existing products

If no territorialOverlap

Fit Possiblefit

Problematic fit

A

B

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Capabilities fit

Partner A Partner B

Products

Resources

Process

Knowledge

Assets

OverlapsGapsHow to

attribute?How to

develop?

• What are the relative competitive strengths of partners ?• To what extent does the assembling of partners create a robust business model?

TECHNOLOGY SOURCING PRODUCTION MARKETING

Who contributes to what ?

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Cultural fit

What to anticipate?

How to deal with it?

Views about businessobjectives:o Growtho Profitabilityo Riskso Long/short termo Shareholder valueo Stakeholders

Views about competitiveapproaches:o Customer orientationo Pricingo Importance of qualityo Importance of technologyo Ethics

Ways to manage:o Leadership styleo Trust/controlo Motivating factors

Communication:o Openness/secrecyo Formal/informalo Importance of personal relationships

PARTNER A PARTNER B

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Organisational fit

What to anticipate?

How to deal with it?

PARTNER A PARTNER B

Structural differences:o Centralisation/decentralizationo Form of organisation

Systems and processes:o Importance of formal systemso Sophistication of financial controlso Quality of ITo Importance of team work/ committees

Performance: o Performance based rewardso Career mobilityo Quality of Management

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Organisational fit cont.

BIGGER, MORE BUREAUCRATIC PARTNER (A)

SMALLER, MORE ENTREPRENEURIAL PARTNER (B)

Formal, explicit decisions Informal, tacit, shared decisions

Periodic, scheduled plans Continuous, unscheduled planning

Low contextual embeddedness

High contextual embeddedness

Slow, sequential inputs to decisions

Fast, simultaneous inputs to decisions

Analytical choices Intuitive judgments

Aggregation, consolidation of data

Real-time immersion in data

BIGGER, MORE BUREAUCRATIC PARTNER AS SEEN BY THE SMALLER ENTREPRENEURIAL

SMALLER, MORE ENTREPRENEAURIAL PARTNER AS SEEN BY THE LARGER FIRM

Ponderous, slow, and stupid

A bunch of cowboys

Preoccupied with reviewing everything to death

Shooting from the hip

Awash in mindless procedures

Disorganized, slippery

Risk averse, procrastinating

Going off in all directions, unfocused

Characterized by paralysis through analysis

Characterized by sloppy work

Divided, fragmented Exclusive, clannish, hostile

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Overall assessment

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Design

STRUCTURE Role of the alliance structure: broker/operator

INTERFACE How value is distributed among partners Degree of task integration People appointment (alliance management)

GOVERNANCE Legal structure Executive authority/ supervisory authority Communication/information/reporting Conflict resolution

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Four structural designs in alliances

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The alliance designed Project Management:the GE/SNECMA design

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The alliance designed as a self-contained JV:the Fuji Xerox case

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The alliance designed as a joint committee:the AlZA-Cibe Geigy case

ALZA

CIBA53% shareholding80% voting right

Exclusive right to ADDSRight to produceRight to market

Audit committee

Joint researchconference

Joint researchboard

Scientificliaison

ScientificliaisonInformation

5Board

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The alliance designed as a transfer JV:the case of NUMMI

GM TOYOTA

FREEMONT PLANT

2500 GMunionized workers

GM engineers (25)

Management

Lean manufacturingKnow-how

Jointventure

50% 50%

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How to solve valuation issues

• Clearly define alliance scope and trade terms between partners

• Create separate economic entity

• Seek external benchmarks

• Plan for renegotiation

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Distribution of value

• Profit sharing vs revenue sharing

• Transfer pricing

• Tasks definition and costs allocation

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Partner A Partner BCost sharing

Alliance revenues 1000Alliance direct costs (100)Net revenues 900 450 450

Revenue sharing

Partner A allocated costs

Partner B allocated costs

(Ca)

(Cb)

Net profit 900-Ca-CbPartner A Partner B

(900-Ca-Cb)/2 (900-Ca-Cb)/2

Profit sharing vs revenue sharing

Partner A Partner B

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Task integration

LimitedintegrationPLUG-IN

E.g. GE/SNECMA

Highintegration

E.g.Fuji and Xerox

Requires a lot of operational interactions

Limited interactions

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The 8 criteria for successful alliances (the 8 I’s)• INDIVIDUAL EXCELLENCE

• IMPORTANCE

• INTERDEPENDENCE

• INVESTMENT

• INFORMATION

• INTEGRATION

• INSTITUTIONALIZATION

• INTEGRITY

- Both partners are strong- Have something to contribute- Positive intent- Fits strategy of both partners- Long term view- Partners need each other- Complementing capabilities- Nobody can do it alone

- Partner shows commitment- Investment/re-investment- Reasonable open communication- Sharing of operational information

- Shared operating procedures- Numerous connections- Teachers/learners

- Clear responsibilities- Clear decision processes

- No abuse- Willingness to enhance trust

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GE/SNECMA: the ingredients of success• Strong mutual trust at the top• Near perfect complementarity - little overlap (the possibility to

isolate each partner’s contribution from other partner’s interference)

• Revenue sharing eliminates issues of transfer pricing• Willingness of partners to learn and adapt - cooperation over

time• A small structure is in charge of the whole project (ownership)

and manages the relationships between partners• Mutual respect• Successful products

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Firm orders: 100+ passenger aircraft

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• A clear definition of responsibilities encompasses all management, manufacturing, marketing and support functions

• Environment-friendly technology • Manufacturer position in the industry• Committed, worldwide product

support

• The two parent companies had a common goal and no competing products

• By limiting the agreement to two partners, the operational structure maintained a simplicity required for efficient decision making

• GE and Snecma participate equally in all operational activities

Advantages of the CFM partnership