Strategic alliances

Question 1

Strategic alliance

Answer 1

A strategic alliance exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services. The strategic alliance can be grouped in three different categories.

Question 2

Nonequity alliance

Answer 2

Cooperation between two firms is managed directly through contracts, without cross-equity holdings or an independent firm being created.

Question 3

Joint venture

Answer 3

Cooperating firms form an independent firm in which they invest. Profits from this independent firm compensate partners for this investment.

Question 4

Equity alliance

Answer 4

Cooperative contracts are supplemented by equity investments by one partner in the other partner. Sometimes these investments are reciprocated.

Question 5

Strategic alliance opportunities

Answer 5

Opportunities related to strategic alliances fall into three large categories:
1. Alliances that improve the firm’s current performance
2. Alliances that create a competitive environment favorable to superior performance
3. Alliances that facilitate low-cost entry into and exit from industry and industry segments

Question 6

Facilitating technical standards

Answer 6

Technical standards are important in many industries. Until firms agree on these standards, customers may be unwilling to make purchases that commit them to a particular technology when that technology may not be in production in the future.

Question 7

Facilitating tacit collusion

Answer 7

Another incentive for cooperating in strategic alliances is that such activities may facilitate the development of tacit collusion. This reduction in competition usually makes it easier for colluding firms to earn high levels of performance.

Question 8

Facilitating entry

Answer 8

Entry into an industry can require skills, abilities, and products that a potential entrant does not possess. Strategic alliances can help a firm enter a new industry by avoiding the high costs of creating these skills, abilities, and products.

Question 9

Facilitating exit

Answer 9

Some firms use strategic alliances as a mechanism to withdraw from industries or industry segments in a low-cost way. Firms are motivated to withdraw from an industry or industry segment when their level of performance in that business is less than expected and when there are few prospects of it improving.

Question 10

Adverse selection

Answer 10

Exists when an alliance partner promises to bring to an alliance certain resources that it either does not control or does not acquire. Adverse selection is likely only when it’s difficult or costly to observe the resources or capabilities that a partner brings to an alliance. If potential partners can easily see that a firm is misrepresenting the resources and capabilities it possesses, they will not create a strategic alliance with that firm.

Question 11

Moral hazard

Answer 11

A form of cheating where partners in an alliance may possess high-quality resources and capabilities of significant value in an alliance but fail to make those resources and capabilities available to alliance partners. The existence of moral hazard in strategic alliance does not necessarily mean that any of the parties to that alliance are malicious or dishonest. What rather happens is that market conditions change after an alliance is formed, requiring one or more partners to an alliance to change their strategies.

Question 12

Holdup

Answer 12

When one firm makes more transaction-specific investments in a strategic alliance than partner firms make. Holdup occurs when a firm that has not made significant transaction-specific investments demands returns from an alliance that are higher than the partners agreed to when they created the alliance.

Question 13

Direct duplication of strategic alliances

Answer 13

Research suggest that successful strategic alliances are based on socially complex relations among alliance partners. Successful strategic alliances often go beyond simple legal contracts and are characterized by socially complex phenomena such as trust.

Question 14

Substitutions for strategic alliances

Answer 14

An alliance will not generate sustained competitive advantage if low-cost substitutes are available. There are two possible substitutes for strategic alliances: “going it alone” and acquisitions.

Question 15

Going it alone

Answer 15

When a firm attempts to develop all the resources and capabilities, they need to exploit market opportunities and neutralize market threats by themselves. It can create the same or even more value than using alliances to exploit opportunities and neutralize threats.

Going it alone is line with vertical integration. Firms will prefer going it alone over alliances when:
1. The level of transaction-specific investment required to complete an exchange is moderate.
2. An exchange partner possesses valuable, rare, and costly-to-imitate resources and capabilities.
3. There is great uncertainty about the future value of an exchange.

Question 16

Acquisitions

Answer 16

Acquisitions of other firms can also be a substitute for alliances. In this case, a firm seeking to exploit opportunities may simply acquire another firm that already possesses the relevant resources and capabilities.

Question 17

Reasons why strategic alliances may be more attractive to acquisitions

Answer 17

There are four reasons why strategic alliances may be more attractive to acquisitions:
1. There are legal constraints on acquisitions
2. Acquisitions limit a firm’s flexibility under conditions of high uncertainty
3. There is substantial unwanted organizational “baggage” in an acquired firm
4. The value of a firm’s resources and capabilities depends on its independence

Question 18

Closed innovation

Answer 18

Firms hope that they develop everything internally. There is a very strong organizational boundary, and the research projects originate from within the firm, and they bring it from the market to the firm. They don’t collaborate with other companies. They don’t license in or out any technology. Everything happens within the boundary of the firm. It is with the belief that if you develop it yourself, then you have the best product and then you get to the market fastest.

Question 19

Open innovation

Answer 19

In open innovation, boundaries have become transparent. It means that research projects that originate within the firm, but don’t necessarily fit within the strategy of the company are sold to other company. Or it could mean that the firm buys or sells a certain technology from or to a different firm. New ideas flow into the company, but they also as easily flow out of the company. Open innovation agrees with the beliefs that in these days, you cannot develop everything yourself. You need to collaborate with other companies.

Question 20

Outside-In Process

Answer 20

Integrating external knowledge, customers and suppliers

Question 21

Coupled Process

Answer 21

Couple outside-in and inside-out process, working in alliances with complementaries

Question 22

Inside-Out Process

Answer 22

Bringing ideas to market, selling/licensing IP and multiplying technology