Week 7 - Cross-Country Collaboration

Question 1

What is a strategic alliance? Why do companies enter into strategic alliances? What are the advantages and disadvantages?

Answer 1

• A strategic alliance is an arrangement between two companies to undertake a mutually beneficial project while each retains its independence.
• The agreement is less complex and less binding than a joint venture, in which two businesses pool resources to create a separate business entity.
• A company may enter into a strategic alliance to expand into a new market, improve its product line, or develop an edge over a competitor.

Advantages:
o Strategic alliances can be flexible and relieve some of the burdens that a joint venture could include.
o The two firms do not need to merge capital and can remain independent of one another.

Disadvantages:
o While the agreement is usually clear for both companies, there may be differences in how the firms conduct business. Differences can create conflict.
o If the alliance requires the parties to share proprietary information, there must be trust between the two allies.

Question 2

Explain the following key motivation for forming strategic alliances: Technology exchange.

Answer 2

Technological exchange is a very strong driver of alliances because:
o As more and more breakthroughs and major innovations are based on interdisciplinary and inter-industry advances, the formerly clear boundaries between different industrial sectors and technologies become blurred. As a result, the necessary capabilities and resources are often beyond the scope of a single firm, making it increasingly difficult to compete effectively on the strengths of one’s own internal R&D efforts.
o The need to collaborate is further intensified by shorter product life cycles that increase both the time pressure and risk exposures while reducing the potential payback of massive R&D investments.

Question 3

Explain the following key motivation for forming strategic alliances: Global competition

Answer 3

Particularly in industries in which there is a dominant worldwide market leader, joint ventures, strategic alliances, and networks allow coalitions of smaller partner to compete more effectively against a global “common enemy” rather than one another.

Question 4

Explain the following key motivation for forming strategic alliances: Industry convergence

Answer 4

• Many high-technology industries are converging and overlapping in a way that seems destined to create a huge competitive traffic jam – the preferred solution has been to create cross-industry alliances.
• Strategic alliances are sometimes the only way to develop the complex and interdisciplinary skills necessary in the time frame required.
• Alliances become a way of shaping competition by reducing competitive intensity, excluding potential entrants and isolating particular players, and building complex integrated value chains that can act as barriers to those who choose to go it alone.

Question 5

Explain the following key motivation for forming strategic alliances: Economies of scale

Answer 5

• Partners can pool their resources and concentrate their activities not only to raise the scale of activity, but also to raise the rate of learning within the alliance over that of each firm operating separately.
• Alliances enable partners to share and leverage the specific strengths and capabilities of each of the other participating firms.
• Trading different or complementary resources among companies can result in mutual gains and save each partner the high cost of duplication.

Question 6

Explain the following key motivation for forming strategic alliances: Reduction of risk.

Answer 6

One company activity that is particularly motivated by the risk-sharing opportunities of such partnerships is R&D, where product life cycles are shortening and technological complexity is increasing. At the same time, R&D expenses are being driven sharply higher by personnel and capital costs. Because of the participating firms bears the full risk and cost of the joint activity, alliances are often seen as an attractive risk-hedging mechanism.

Question 7

Explain the following key motivation for forming strategic alliances: Alternative to Merger

Answer 7

• There remain industry sectors in which political, regulatory, and legal constraints limit the extent of cross-border mergers and acquisitions. In such cases, companies often create alliances not because they are inherently the most attractive organizational form but because they represent the best available alternative to a merger.
• Example: Many countries still preclude foreign ownership in the airline and telecommunications industries.

Question 8

Explain the following risk of alliancing: risk of competitive collaboration.

Answer 8

Some strategic alliances involve partners who are fierce competitors outside the specific scope of the cooperative venture. Such relationships create the possibility that the collaborative venture might be used by one or both partners to develop a competitive edge over the other, or at least that the benefits from the partnership will be asymmetrical for the two parties, which might change their relative competitive positions. There are several factors that might cause such asymmetry:
o A partnership is often motivated by the desire to join and leverage complementary skills and resources. Such an arrangement for competency pooling inevitably entails the possibility that, in the course of the partnership, one of the partners will learn and internalize the other’s skills while carefully protecting its own, thereby creating the option of discarding the partner and appropriating all the benefits created by the partnership.
o Using the partnership to erode the other’s competitive position – the company ensures that it, rather than the partner, makes and keeps control over the critical investments (i.e., investments in product development, manufacturing, marketing, or wherever the most strategically vital part of the value chain is located).

• While strategic alliances can provide short-term solutions to some strategic problems, they also serve to hide the deeper and more fundamental deficiencies that cause those problems. The short-term solution takes the pressure off the problem without solving it and makes the company highly vulnerable when the problem finally resurfaces, usually in a more extreme and immediate form.
• Because such alliances typically involve task sharing, each company almost inevitably trades off some of the benefits of “learning by doing” the tasks that it externalizes to its partner.
• A successful partnership leads to some benefits for each partner and therefore to some strengthening of a competitor. Possibility that a competitor’s newly acquired strength will be used against its alliance partner in some future competitive battle.
• The risk that collaborating with a competitor might be a precursor to a takeover by one of the firms.

Question 9

Explain the following risk of alliancing: strategic and organizational complexity.

Answer 9

• International partnerships being together companies that are often products of different economic, political, social, and cultural systems. Such differences in the administrative heritages of the partner companies, each of which brings its own strategic mentality and managerial practices to the venture, further exacerbate the organizational challenge.

• Organizational complexity due to the very broad scope of operations typical of many strategic alliances (cover a broad range of activities).
o This requires partners not only to manage the many areas of contact within the alliance but also to coordinate the different alliance-related tasks within their own organizations.

• The goals, tasks, and management processes for the alliance must be constantly monitored and adapted to changing conditions.

Question 10

What are some success factors of international joint ventures?

Answer 10

• TRUST!
• Similarity in organizational cultures
• Product relatedness
• Goal congruency
• Prior collaboration experience

Question 11

Joint venture checklist: What questions should you ask to test the strategic logic of a joint venture?

Answer 11

• Do you really need a partner? For how long?
• Does your partner really need a partner?
• How big is the payoff for both parties? How likely is success?
• Is a joint venture the best option?
• Ensure congruent performance measures exist

Question 12

Joint venture checklist: What questions should you ask to assess the partnership and fit?

Answer 12

• Does the partner share your objectives for the venture?
• Does the partner have the necessary skills and resources? Will you get access to them?
• Will you be compatible?

Question 13

Joint venture checklist: What steps should you take when determining the shape and design of the joint venture?

Answer 13

• Define the venture’s scope of activity and its strategic freedom from its parents
• Lay out each parent’s duties and payoffs to create a win-win situation. Ensure that there are comparable contributions over time
• Establish the managerial role of each partner
• Ultimately, an alliance’s governance structure must include clear rules pertaining to decision-making among the entity’s partners and its general manager

Question 14

Explain the importance of effective partner selection and what things should be considered when selecting a partner.

Answer 14

o Partners should not be selected on the basis of comfort rather than competence (there is no real upside to selecting a partner who is competent but with whom you may not be comfortable working with)
o It is almost impossible to make an effective pre-alliance analysis of how a potential partner’s strategic and organizational capabilities are likely to evolve over time. This challenge may be more pronounced where partnerships are formed between developed market and developing market firms.
o Companies that recognize alliances as a permanent and important part of their future organization have made monitoring their partners an ongoing process.

Question 15

Explain how the availability of information can impede the quality of the partner choice-making process.

Answer 15

• Effective pre-alliance analysis needs data about the partner’s relevant physical assets (e.g., the condition and productivity of plants and equipment), as well as less tangible assets (e.g., strength of brands, quality of customer relationships, level of technological expertise) and organizational capabilities (e.g., managerial competence, employee loyalty, shared values).
• Difficult to obtain such information in short time limits
• Barriers due to cultural and physical distance

Question 16

The very process of alliance planning and negotiations can cause unrealistic expectations and wrong choices. Explain this statement. How can this escalation process be controlled?

Answer 16

• Some managers involved in the process can build up a great deal of personal enthusiasm and expectations in trying to sell the idea of an alliance within their own organization.
• The champions of the idea may not be the operational managers who are later given the responsibility for making the alliance work, and therefore major problems arise when they are confronted with inevitable pitfalls and less visible problems.
• The most effective way to control this escalation process is to ensure that at least the key operating managers likely to be involved in the implementation stage of the alliance are involved in the pre-decision negotiation process (creates continuity between pre- and post-alliance actions).

Question 17

Why should alliances strive for simplicity and flexibility? How can alliances achieve this?

Answer 17

• Alliances that are more complex require more management attention to succeed and tend to be more difficult to manage.
• Many companies have found it preferable to start with a relatively simple and limited partnership whose scope is expanded gradually as both partners develop a better understanding of and greater trust in each other’s motives, capabilities, and expectations.

Question 18

What should companies consider when structuring their cooperative ventures?

Answer 18

• When the alliance’s tasks are characterized by extensive functional interdependencies, there is a need for a high level of integration in the decision-making process related to those shared tasks. In such circumstances, the creation of a separate entity is often the only effective way to manage such dense interlinkages.
• An alliance between two companies with the objective of marketing each other’s existing products in non-competitive markets may need only a few simple rules that govern marketing parameters and financial arrangements, and a single joint committee to review the outcomes periodically.
• Parent companies should strive to focus their participation on the joint venture or alliance’s board to three areas that are directly related to the new entity’s financial performance and the protection of shareholder interests – capital allocation, risk management, and performance management.
• An alliance’s governance structure must include clear rules pertaining to decision making among the entity’s partners and its general manager.

Question 19

What two kinds of tasks are involved in managing the knowledge flows between the participating companies in the joint venture?

Answer 19

1. Must ensure full exploitation of the created learning potential
   - The gatekeepers must have knowledge of and access to the different individuals and management groups within the company that are likely to benefit most from the diverse kinds of information that flow through an alliance boundary.
2. Must prevent the outflow of any information or knowledge they do not wish to share with their alliance partners

Question 20

What can joint ventures do in times of crisis? (7)

Answer 20

1. Raising capital in unconventional ways
   o Some joint ventures will have opportunities to secure low- or interest-free loans or capital from their cash-rich owners
   o To free up cash, improve future liquidity, or open up new markets, joint ventures may also want to bring in new owners
   o Structuring creative commercial arrangements with suppliers, customers, lenders, and other business partners
2. Reducing costs through synergies and new operating models
   o Ventures and owners might make joint purchases, integrate their supply chains, or combine some infrastructure, logistics, warehouses, or other operating assets
   o Joint ventures might also save money by insourcing certain functions (such as legal, HR, IT, or finance) currently being provided by an owner.
3. Re-gearing financial ratios
   o Joint venture boards might also consider authorizing or compelling management to increase external borrowing, especially if the entity is underleveraged
   o If a venture has excess cash, the board might seek to repatriate it to fund other, pressing corporate needs.
4. Assisting owners through buyouts and other means
5. Partial divestments
   o For companies that need more liquidity, a joint venture can be a good alternative to a full divestiture.
   o One approach is to use it as the first step in a planned exit: A seller puts a noncore business into a joint venture with a potential buyer and negotiates to sell the full business over time, typically within three to five years.
   o Another approach is to sell a partial interest in a business unit to a third party, effectively converting the business into a joint venture.
6. Business consolidations
   o Companies consolidate a set of adjacent assets into a single joint venture to align all the parties’ incentives better and save money on infrastructure.
   o Companies can also consolidate similar operations with those of an industry peer or competitor to capture additional scale or cost synergies.
   o Companies might also team up with industry peers to consolidate back-office, sales, or purchasing functions into joint ventures and realize greater economies of scale.
7. Partnerships for capital-light growth
   o Some firms may enter global strategic partnerships with cash rich players to identify and develop a portfolio for opportunities within a sector or a market.
   o Companies might acquire partial stake in troubled business units of their peers operating in attractive markets
   o Invest in or partner with innovative suppliers and technology companies
   o Team up with industry peers and adjacent players to create and commercialize new products

Question 21

Explain the concept of an alliance portfolio.

Answer 21

• Most companies now maintain an alliance portfolio comprising multiple simultaneous alliances with different partners.
o Example: Most airlines maintain broad portfolios of code-sharing alliances with other carriers, which allow them to significantly extend their route networks by offering services to their partners’ destinations.

Question 22

How can companies maximize the benefits earned from their alliance portfolio?

Answer 22

• Formations of alliances that create synergies with other alliances in an existing alliance portfolio have a more positive effect on companies’ stock process than alliances with little or no synergy-creating potential.
• Companies should manage their alliances not as stand-alone arrangements but much more strategically, paying far more attention to how their various partnerships interact with one another.

Question 23

What are some of the pitfalls of alliance portfolio expansion?

Answer 23

• One part of an organization, such as a business unit, will enter into partnerships that serve its own parochial interests, often without realizing or without regard for the impact on other parts of the organization or the company as a whole. (Companies implement patchwork solutions that address problems for parts of a company but may actually create new troubles for other parts.)
• Business-unit managers tend to have clear performance targets that are intrinsically linked to the success of their own units; this naturally leads to the prioritization of local needs over broader corporate needs.
• Because alliance management is shared with a partner and because interpersonal relationships are often crucial in this process, it is difficult for corporate-level management to interfere. As a result, business-unit managers find themselves with a great deal of autonomy in alliance affairs.

Question 24

How can companies ensure that their alliances fit with the organization as a whole?

Answer 24

• Having a corporate-level department that coordinates all alliance-related activity across a company’s multiple units (i.e., an alliance function)
• Even though ideas for alliances have to come from low down in the organization, there must be an overall alliance portfolio compatibility check in order to ensure that value is created not only on the local alliance level but also on the alliance portfolio level.

Question 25

Describe the concept of holistic cost-benefit analysis when it comes to evaluating potential alliances.

Answer 25

Rationally behaving companies will enter into an alliance only when it creates value – that is, when its expected benefits exceed its costs. The construction of a business case for each alliance formation is therefore essential.

Question 26

Viewed on a stand-alone basis, alliances can help companies do four things:

Answer 26

1. Achieve economies of scale by pooling similar assets, knowledge or skills
2. Obtain access to a partner’s complementary assets, knowledge, and skills
3. Obtain access to new skills
4. Reduce competition in the market and increase market power

Question 27

What are some costs that can be created by alliances?

Answer 27

o Start-up costs
o Ongoing coordination costs
o Costs that stem from unexpected leakage, where one partner in the alliance acts opportunistically and appropriates skills or knowledge from the other

Question 28

The benefits that a new alliance can create on the alliance portfolio level mainly stem from ways in which the new alliance and the existing ones can enhance each other. Two types of synergy are:

Answer 28

o Sharing or recombining know-how:

• Assets, knowledge, and skills contributed or developed by a new alliance may be used in another, ongoing alliance.
• A new alliance may help a company develop a technology that may be of use in an existing alliance.
• Assets and knowledge contributed or developed by a new alliance may be combined with those associated with an existing alliance to create a new service or product.

o Reinforcing existing coalitions:

Question 29

What are some of the costs on the alliance portfolio level that a new alliance can create?

Answer 29

The costs on the alliance portfolio level that a new alliance can create mainly stem from conflict resolution in existing alliances.
o Re-establishing trust and good will with an existing alliance partner
o Can arise when a new alliance interferes with the relationship between a company and its existing partners. (Example: the new alliance represents a competitive threat toward the existing partner – perhaps through imitating the other partner’s technology or offering similar products or services.)
o May also have to bear the consequences associated with dissolving the pre-existing alliance (i.e., the loss of valuable resources and particular revenue streams)
o Overlap in scope between a new alliance and an existing one can result in redundancy costs because they will have to staff more people on the alliances than they would if they only had one alliance.