Chapter 8: Strategic Alliances

Question 1

Strategic Alliance (aka partnership)

Answer 1

A cooperative arrangement in which two or more
firms combine their resources and capabilities to create new value; sometimes referred to as a
partnership.

Question 2

Choosing an Alliance

Companies have three choices:

Answer 2

1) make
2) buy
3) ally

Question 3

“Arm’s-length relationship”

Answer 3

in which the buyer purchases an input with no obligation to have a long-term relationship with the supplier

Question 4

Four kinds of inputs and activities

might qualify as “strategic” inputs that merit forming an alliance relationship:

Answer 4

1) Inputs that can differentiate your product in the minds of customers
2) Inputs that influence your brand or reputation
3) High-value inputs or activities that make up a high percentage of your total costs.

4) Inputs or activities that require significant coordination in order to achieve the desired fit,
quality, or performance

Question 5

1) Inputs that can differentiate your product in the minds of customers

Answer 5

Automakers are much more likely to want to partner with a supplier that provides important engine or drivetrain components that influence engine performance or reliability than one that provides fasteners

Question 6

2) Inputs that influence your brand or reputation

Answer 6

Volvo, a Swedish manufacturer of cars and
trucks, has tried to develop a reputation on the safety of its cars.

Consequently, it has
worked closely with key suppliers, including Autoliv, a Swedish supplier of seat belts and
airbags, to put pioneering safety technology into its vehicles

Question 7

3) High-value inputs or activities that make up a high percentage of your total costs.

Answer 7

Companies that make refrigerators are more likely to partner with the supplier who provides the
compressor—the component that costs the most and cools the refrigerator—than with the
suppliers of plastic trays or fixtures.

Question 8

4) Inputs or activities that require significant coordination in order to achieve the desired fit,
quality, or performance

Answer 8

Whenever you need to coordinate closely with another firm to get
the desired performance from their input or activity, you probably want a partnership relationship.

Question 9

Types of Alliances

Three basic types of strategic alliances:

Answer 9

1) Nonequity or Contractual Alliance
2) Equity Alliance
3) Joint Venture

Question 10

Nonequity or Contractual Alliance definition

Answer 10

Two or more firms write a contract to govern their
relationship. Ownership is shared between the companies.

Example: Disney and McDonald’s to put new movie characters into Happy Meals for kids.

Question 11

Different types of nonequity alliances include:

Answer 11

•Licensing agreements, in which one firm receives a license, or permission to use a resource,
such as a brand or a patent, from another firm in return for a percentage of the revenues or profits.

• Supply agreements, in which a supplier might agree to develop certain customized inputs for a customer.

• Distribution agreements, in which a distributor or retailer might agree to provide certain
customized services in order to help sell a product

Question 12

Equity Alliance definition

Answer 12

The collaborating firms in an alliance supplement
contract with equity holdings in their alliance partners.

Example: Toyota owns between 5 and 49 percent of the equity of its 10 largest Japanese suppliers, who all work very closely with Toyota in the development and
production of its automobiles

Question 13

Joint Venture

Answer 13

An alliance in which collaborating firms create and jointly own a legally independent company

The new company is created from resources and assets contributed by the parent firms

Example: In similar fashion, when GM wanted to enter the Chinese market, it teamed up with SAIC,
a Shanghai-based automobile company, to create Shanghai-GM, a joint venture that brings
together GM’s expertise and technology for making cars with Shanghai’s knowledge about the
Chinese market and experience managing a Chinese workforce

Question 14

Joint ventures are preferred when firms need to

Answer 14

combine their resources and capabilities
in order to create a competitive advantage that is substantially different from any they possess
individually.

Question 15

Vertical alliance

Answer 15

An alliance between firms that are positioned at different stages along the value chain, such as a supplier and a buyer.

Example: Toyota’s relationships with its top 10 suppliers are considered vertical alliances—the output of one of the firms in the relationship is the input of the other

Question 16

Vertical alliances are usually formed to

Answer 16

combine unique resources, create
new alliance-specific resources, or lower transaction costs between two companies that are
already transacting

Question 17

Horizontal alliance

Answer 17

An alliance between two firms that do not have a supplier–buyer relationship and are typically positioned at a common stage of the value chain (can be competitors)

Example: Horizontal alliances can also occur between
companies that don’t do the same activities but do complementary ones, such as Electronic Arts
developing games for the Sony PlayStation

Question 18

Horizontal alliances are often created to

Answer 18

pool similar resources, or to combine complementary knowledge

Question 19

Ways to Create Value in Alliances

Answer 19

1. Combine unique resources
2. Pool similar resources
3. Create new alliance-specific resources
4. Lower transaction costs

Question 20

Combine Unique Resources

Answer 20

Example: This is what Pixar and Disney did to dominate
computer-animated films

Companies typically combine unique resources to create new products, enter new
markets, or avoid the costs of entering different stages of the value chain

Question 21

Pool Similar Resources

Answer 21

A second way that alliances create value is by pooling similar resources to achieve economies
of scale that neither firm could achieve on its own.

Example: Intel and Micron wanted to get into manufacturing flash memory—a business that required billions of dollars of investment in a plant and equipment

Question 22

Create New, Alliance-Specific Resources

Answer 22

Are those that are created specifically to help the partners achieve the alliance objectives.

Alliance-specific resources can be owned by one partner or jointly held.

Firms typically create alliance-specific resources to increase the efficiency of doing business together or to
expand the available resources of all the partners

Question 23

Lower Transaction Costs

Answer 23

Alliances that create value through lower transaction costs are primarily trying to increase efficiency and lower the costs between transactors in the value chain: buyers and suppliers.

By transaction costs, we mean all of the costs associated with making a transaction happen.

Question 24

The Risks of Alliances

Answer 24

1) hold-up
2) Misrepresentation
3) Building Trust to Lower the Risks of Alliances
4)

Question 25

Hold-up

Answer 25

When one partner tries to exploit the alliance specific

investments made by another partner.

Question 26

Building Trust to Lower the Risks of Alliances

Answer 26

Alliances cause independent firms to become
interdependent, which means they must work effectively together to succeed.

This might explain why some studies of alliances have found that trust between partners
is the most important ingredient for alliance success

Question 27

Personal Trust

Answer 27

The first way to prevent against opportunism by a partner is to initiate partnerships only with people who you know to be trustworthy. These would likely be individuals you have known for a long time, such as family, friends, classmates, or others within
your social network.

sometimes called goodwill trust, because you are relying on the goodwill of the other party to protect
your interests.

Question 28

Legal Contracts

Answer 28

In most cases, when firms initiate a partnership, they write a legal contract to protect their interests. Legal contracts are usually used to help protect the
interests of alliance partners and to spell out the obligations and expectations of the partners

Question 29

Most contracts have clauses

that clarify three categories of issues:

Answer 29

1. Governance issues, such as how decisions will be made, how profits will be split and how
   disputes will be resolved
2. Operating issues, such as what performance is expected, and how intellectual property will
   be shared and protected
3. Exit/termination issues, including the conditions under which partners can exit the alliance
   or the contract can be terminated

Question 30

Shared Ownership/Financial Collateral Bonds

Answer 30

When one partner owns a financial stake in another partner it has an incentive to cooperatively help the partner be as financially successful as possible because it shares in the partner’s profits.

Question 31

Are strategic alliances profitable?

Answer 31

One study found that a company’s
stock price jumped roughly 1 percent, on average, with each announcement of a new
alliance, which translated into an average increase in market value of $54 million per alliance

Question 32

Do alliances fail?

Answer 32

Yet, as we’ve seen, alliances are fraught with risks. Indeed, almost half of them fail.

Question 33

The research showed that an effective dedicated alliance function develops a firm’s capability
to perform four key functions:

Answer 33

1) It improves knowledge management efforts,
2) Increases external visibility
3) Provides internal coordination
4) Eliminates accountability and intervention
problems

Question 34

Improves Knowledge Management

Answer 34

A dedicated function acts as a focal point for learning, helping the company leverage lessons
and feedback from prior and ongoing alliances.

It systematically establishes a series of routine
processes to articulate, document, codify, and share know-how about the key phases of the alliance
lifecycle

Question 35

Increases External Visibility

Answer 35

A dedicated alliance function can keep the market apprised of new alliances and about
successful events in ongoing alliances.

Such external visibility can enhance the reputation of
the company in the marketplace and create the perception that alliances are adding value.

Question 36

Provides Internal Coordination

Answer 36

One reason alliances fail is because of the inability of one partner or another to mobilize internal
resources to support the alliance initiative

Visionary alliance leaders might lack the power
or organizational authority to access key resources that might be necessary to ensure alliance
success.

Question 37

Facilitates Intervention and Accountability

Answer 37

If alliances are adequately monitored, the alliance function can step in and intervene appropriately—much like a marriage counselor