Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 6: Engaging in Cross- Border Collaboration Managing.

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 6:Engaging in Cross-

Border Collaboration

Managing across Corporate Boundaries

and

Reading 6-1:The Design and Management

of International Joint Ventures

What is a Strategic Alliance?

• A formal and mutually agreed commercial collaboration between companies

• The partners pool, exchange or integrate specific business resources

• Yet they remain separate businesses, making alliances distinct from mergers and acquisitions

6-2

Strategic Alliances

• One of innumerable forms of commercial interaction• One of four forms/modes of investment

Partially Owned

Wholly Owned

Existing Capital Participation

Acquisition

New Joint Venture

Greenfield

6-3

6-4

Range of Strategic Alliances

Joint Venture(Equity Participation)

Co-production/Buyback

R & DConsortia

CrossLicensing

Franchising

PatentLicensing

CooperationAgreement

High

Low

Competition Cooperation

Lev

el o

f In

tera

ctio

n

Type of Arrangement

StrategicAlliances

6-5

In the 1960s and 1970s Alliances were Primarily used in Peripheral Markets and Technologies

Peripheral

Critical

MarketsPeripheralCritical

Tec

hn

olo

gie

s

Alliance

Alliance

Alliance

Alliance Frontier

6-6

In the 1980s the Alliance Frontier Moved toEncompass More Important Markets and Technologies

Alliance

Alliance

Alliance

Peripheral

Critical

MarketsPeripheralCritical

Tec

hn

olo

gie

s

Alliance Frontier

Examples• Ford - Mazda• Philips - Siemens• Rolls Royce + Japanese

6-7

In the 1990s New Alliance Frontiers were Crossed

Alliance

Alliance

Alliance

Equity

NonEquity

Duration of AgreementLong or UnspecifiedShort

Ow

ner

ship

Alliance Frontier

6-8

And Now We Are In The Age ofInternational + Alliance Capitalism…

StrategicAllianceEmphasis

Geographic Scope

Equity JV

Non-Equity

Do ItYourself

Domestic Regional International

TIME

6-9

…Where Alliances are Occurring Between Entrepreneurial Start-ups and Large Firms,

and Speed of Establishment is Increasing

EntrepreneurialFirms

LargeFirms

Time-Frame YearsMonthsL

inka

ges

Bet

wee

n

Alliance Frontier

Popular View Says JVs are:

• A transitional organization form.• Less profitable.• Impossible to manage.• A sure way to lose one’s technology.• Only undertaken as a last resort.

6-10

Why Strategic Alliances

1-11

•Technology Exchange

•Global Competition

•Industry Convergence

•Economies of Scale

•Reduction of Risk

•Alliances as an Alternative to Mergers

Objective Reality

• Average age of international JVs nearly 10 years (similar to greenfield startups; longer than acquisitions).

• Profitability identical with other organizational alternatives.

• Managing has become easier, so usage up. 40% of all investments in Asia Pacific are JVs.

6-12

Objective Reality (cont’d)

• Some companies which possess strong technology often prefer to use JVs. (i.e., Japanese firms with a Kyousei - group coordination - philosophy)

• The days of government regulation forcing the use of JVs are behind us.

6-13

6-14

Effect of Foreign Equity Holdingon Subsidiary Mortality Risk?

Stability Similar to Wholly-owned Subsidiaries Except with Small Equity Holdings

1:1 = equivalent to wholly owned subsidiary

Source: Dhanaraj, Charles and Paul W. Beamish, 2004. “Effect of Equity Ownership on the Survival of International Joint Ventures”, Strategic Management Journal, 25(3): 295-305.

Mo

rta

lity

Ris

k

4:1

3:1

2:1

1:1

0

Foreign equity in the subsidiary (%)

0 20 40 8060 100

Strategic Alliance Advantages and Disadvantages

1-15

On the PLUS side….

•Reduce costs & risks•Gain access to complimentary assets and new markets•Opportunities to learn from partner•Possibilities to use alliances and networks as an operational (real) option rather than a financial option.

On the DOWN side…•Risk of choosing the wrong partner•Costs of negotiation, coordination•Partner opportunism•Learning race (tacit vs. explicit knowledge)

Selection: Resource Based Considerations

1-16

VALUE: The creation of value means generating economies of scale for cost reduction, or complimentary skills for tapping new opportunities.

Alliances might reduce costs, risks and uncertainties.Alliances allow partners to tap into complimentary assets.Alliances facilitate opportunities to learn.

RARITY: Good alliances represent unique situations.

Capability rarity.Partner rarity & First Mover Advantage

IMITIBILITY: The alliance’s benefits to the partners should be hard for others to imitate.

At the firm level (ex. McDonalds in Moscow).At the alliance level.

ORGANIZATION: Do the alliance partners provide resources to manage the partnership?

Joint Venture Checklist

• Test the strategic logic.• Do you really need a partner? For how long?

Does your 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.

6-17

Joint Venture Checklist (cont’d)

• Partnership and fit.• 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?• Can you arrange an “engagement period”?• Is there a comfort versus competence trade-off?

6-18

6-19

What Do You Want From Your Partner?

Parent A

WANTS ACCESS

TO PARTNER’S KNOWLEDGE

WANTS ACQUISITION OF

PARTNER’S KNOWLEDGE

WANTS ACCESS

TO PARTNER’S KNOWLEDGE

The Classic “Joint” Venture A cooperative alliance

(very stable)

Mixed Motive A pseudo alliance

(eventually unstable)

Par

ent

B

WANTS ACQUISITION

OF PARTNER’S KNOWLEDGE

Mixed Motive A pseudo alliance

(eventually unstable)

“Race to Learn” A competitive

alliance (very unstable)

6-20

Partner Selection:Comfort vs. Competence

Unstable Target

Non-Starter Unstable

Lower Higher

Partner Competence

Lower

Higher

PartnerComfort

Joint Venture Checklist (cont’d)

• Shape and design.• Define the venture’s scope of activity and its

strategic freedom vis-à-vis 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.

6-21

6-22

Scope of Activity

Narrow vs. Wide

Single, Geographic Market vs. Multi-Country

Single Function vs. Complete Value Chain

Single Industry/Customer Group

vs. Multi Industry

Modest Investment vs. Large Scale

Existing Business vs. New Business

Limited Term vs. Forever

Control in Joint Ventures

• One parent dominates the venture’s decision making (…but is this a “joint” venture?)

• Parents are both involved in decision making• shared• split

6-23

Two types:

6-24

Shared Control

JV Boardof Directors

A B

Parent A Parent B

R&D OPS FIN MKT

6-25

Split Control

JV Boardof Directors

A B

Parent A Parent B

R&D OPS FIN MKT

Limiting Opportunism:Contracts Vs. Trust

1-26

•Contractual controls limit opportunism by specifying the exact role and performance criteria of the strategic partners. GOOD FOR SITUATIONS REQUIRING ECONOMIES OF SCALE.

•Trust takes longer, relationships and informal interdependence. GOOD FOR SITUATIONS REQUIRING FLEXIBILITY AND TAKING ADVANTAGE OF UNFOLDING OPPORTUNITIES.

Joint Venture Checklist (cont’d)

• Doing the deal.• How much paperwork is enough? Trust versus

legal considerations?• Agree on an endgame.

6-27

Joint Venture Checklist (cont’d)

• Making the venture work.• Give the venture continuing top management

attention.• Manage cultural differences.• Watch out for inequities.• Be flexible.

6-28

6-29

In Summary, a True AllianceDiffers from a Pseudo Alliance

The True AllianceThe Pseudo

Alliance

Planned level ofparent input and

involvementContinuing One-time

Distribution ofrisks/rewards

Roughly even Uneven

Parent attitudetoward the JV

A unique organization

with unique needs

One moresubsidiary

The formal agreement

Flexibleguideline

Frequentlyreferenced rulebook

Performanceobjectives

Clearly specifiedand congruent

Partially overlapping/ambiguous