Strategic Alliances MBA 693R Strategic Management Mark Hansen Paul Godfrey.

Strategic Alliances

MBA 693R Strategic Management

Mark HansenPaul Godfrey

Strategic Alliances

MBA 693R Strategic Management 2

Definition: any agreement or effort to cooperate withanother firm (e.g., joint ventures, licensing, franchising,long term contracts, distribution agreements,R&D agreements, etc.)

Motivation:

• technology

• markets

• production

• finance

• distribution

• R & D

1) access to resources and capabilities

2) leverage internal resources & capabilities

Strategic Alliance

Strategic Alliances

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Three Critical Factors:

Compatibility of Intent

Complementary Resources

Trust

synergism

gains from trade

complementary & similar

simultaneous satisfaction of interests

competence character

Strategic Alliances

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Canada Mexico

Wheatbushels/hr.

Bananaslbs./hr.

6

4

1

5

ExchangeRate:

1 bu. = 1 lbs.

Canada: 2 hrs. = 6 bu. Wheat and 4 lbs. Banana2 hrs. = 12 bu. Wheat

By trading Canada can get: 6 bu. Wheat and 6 lbs. Bananas(a ½ hour gain from trade)

Gains from Trade

Strategic Alliances

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Canada Mexico

Wheatbushels/hr.

Bananaslbs./hr.

6

4

1

5

ExchangeRate:

1 bu. = 1 lb.

Mexico: 2 hrs. = 5 lbs. Bananas and 1 bu. Wheat2 hrs. = 10 lbs. Bananas

By trading Mexico can get: 5 bu. Wheat and 5 lbs. Bananas(a 4 hour gain from trade)

Gains from Trade

Strategic Alliances

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Trust

Character Trust

Strong Form Trust

Semi-Strong From Trust

confidence in the quality of moral development

you won’t cheat because your moral developmentwould impose an internal cost

confidence in the quality of rationality

you won’t cheat because the contract we have inplace would impose an external cost

Strategic Alliances

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Two competing objective functions in alliances:

1 - maximize the gains from trade

2 - minimize the threat of opportunism

Alliance Management Approaches

How the relationship is governed influencesthe value created by the relationship

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(the trade-off is not absolute, both matter, but one is generallyemphasized compared to the other)

These objectives suggest two extremes in the approachto alliance management:

OpportunismMinimization

OpportunityMaximization

Alliance Management Approaches

Strategic Alliances

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Opportunity Maximizing Approach

1 – complementary resources exist

2 – strategic intent of partners is endogenously compatible

Characteristics:

• potential gains from trade exist

• there is usually an intent to create something new

• the deal itself binds partners together

• partners recognize their interdependence

Strategic Alliances

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3 – based on strong form trust (character-based trust)

4 – cooperative capabilities lie in relational contracting

Opportunity Maximizing Approach

• all partners perceive all other partners to bestrong-form trustworthy

Characteristics:

• written contracts remain in the background forclarification

• issues are resolved based on trusting relationships

Strategic Alliances

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Opportunity Maximizing Approach

Sources of Rents from the Approach

1 - Governance Cost Reduction-management effort focused on the business-expensive governance not necessary

2 - Expanded Opportunity Sets-opportunities that would not be available in the absence of strong form trustworthiness-opportunities may arise which were unanticipated at the formation of the alliance-distribution of rents not a problem due to alignment of partner interests

Strategic Alliances

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Opportunism Minimizing Approach

1 – complementary resources exist

2 – strategic intent of partners is made compatiblethrough written contract

Characteristics:

• potential gains from trade exist• gain is based on exchange of existing resources

• contracts are used to constrain behavior

Strategic Alliances

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3 – based on semi-strong form trust (contract-based trust)

4 – cooperative capabilities lie in legal (written) contracting

Opportunism Minimizing Approach

• all parties must perceive all other parties to berational

Characteristics:

• written contracts guide the operations of the relationship

• issues are resolved based on contract

Strategic Alliances

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Opportunism Minimizing Approach

Sources of Rents from the Approach

1 - Governance Cost Reduction-contracts prevent opportunism by creating incentives not to cheat

Strategic Alliances

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Trust and Competitive Advantage

Strong Form Trust may lead toCompetitive Advantage because of:

lower governance costs

increased revenues

expanded opportunity sets

the ability to pursue alliances that would be irrational without strong form trust

Strategic Alliances

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Summary

Successful alliances depend on…

compatibility of intent

complementary resources

trust

Alliances happen because we want to…

access to resources and capabilities

leverage internal resources & capabilities