Companies form global strategic allianceslicensing arrangements, joint ventares, and consorda to help them outflank compedtors, but

t for the unwary such partnerships may backfire.

Global Strategic Alliances: Payoffs and Pitfalls

DAVID LEI JOHN W. SLOCUM, JR.
ver the past ten years, we have witnessed a tremendous surge in the number and types of strategic alliances formed between multinational corporations across many industries. Consider the following examples of how firms use different types of strategic alliances to compete globally: In the pharmaceutical industry, Merck, Eli Lilly, Fujisawa, and Bayer aggressively cross-license their newest drugs to one another not only to support industrywide innovation, but also to amortize the high fixed costs of R&D and distribution. Corning Incorporated aggressively uses its 23 joint ventures with such foreign partners as Siemens of West Germany, Samsung of South Korea, Asahi Chemical of Japan, and CIBA-GEICY of Switzerland to penetrate and thrive in a growing number of related high-technology markets.

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Airbus Industrie, the European consortium backed by four governments to produce commercial aircraft, is slowly but steadily gaining market share and experience in competing in this highly lucrative but risky industry. This article focuses on three broad types of strategic alliances that global competitors may adopt. All strategic alliances may be thought of as transition mechanisms that propel the partners' strategy forward in a turbulent environmentor, more important, in an environment that top management perceives as highly uncertain. These are shown in Exhibit 1 as licensing arrangements, joint ventures, and consortia. (Consortia are broadly defined to include large, interlocking relationships between business entities of a corporate family, such as the keiretsu of Japan and the chaebol of South Korea.) Exhibit 1 highlights the managerial impli-

cations for organization design and the associated human resources manag;ement requirements in effectively implementing each strategic alliance. In separate sections for each form of alliance, we will examine: The underlying strategic rationale for its fornfiation. The benefits and costs associated with the strategy. The critical success factors required for its implementation. The role of strategic human resources management.

LICENSING ARRANGEMENTS

Licensing arrangements have become more prominent worldwide, both in manufacturing and in service/franchise industries. These represent the least sophisticated form of strateigic alliance because the companies involved do not take an equity position in one another^ Strategies for licensing in manufacturing differ from those for services and franchises. In manufacturing firms, licensing frequently creates a new competitor because it is tantamount to the firm's sale of its technology. In service firms, the items sold are distribution systems that aren't protected by patents or other safeguards.

In Manufacturing Firms In most manufacturing industries, licensing agreements represent a purchase of technology in exchange for market entry into a new region or coujitry. Predisposing factors for consideration by companies interested in licensing their technologies to other firms include: Ah inability to capitalize on the technology by itself. A desire to preempt the competition by setting industrywide standards early in a product's life cycle.

A need to maintain industrywide dtecipline and high levels of innovation in fastchanging, technology-driven environment^. The prospect of lucrative sales and ssjrvice contracts that are (1) associated with proprietary production processes and/or (2) djesigned to conform to government requiremenjts for technology transfers. In many cases, firms have entered info licensing agreements with foreign firms biecause they are unable to develop their technological innovations to the fullest extent. F(j)r example. Sun Microsystems has decided io license its most powerful microprocessor designs to N.V. Philips. The Dutch giant has tljie production and distribution clout to market Sun's newest RISC (Reduced Instruction Set Computer) chips in ways unavailable to tlte U.S. firm. ; Sun Microsystems is hoping that tlje RISC chips, which are used primarily in workstation and desktop computers, will firJd their way into other consumer electronicjrs products, such as televisions, telephones, anld automobile engine controls (all of which Philips also manufactures). Equally important. Sun benefits from licensing the chips t^ Philips because it gains a secure foothold i|n the consolidating European market where Iqcal production requirements are forecast ib become more restrictive in the future. Licensees can disseminate the technology^ faster across the industry than could the pioneering firm alone. The desire to preemj^^t competitors in setting industry standards is k powerful inducement to license new and eveii unproven technologies early on. Standardijjing a technology early in its life cycle cod4 give the licensing firm considerable marke^ breadth. Within the computer industry, for examjple, many firms are racing to license theif technologies to potential users in an attempt to set an industrywide standard. MIPS Coml puter Systems licensed its newest micropror 45

cessor designs to Siemens of West Germany in an attempt to preempt the Sun Microsystems-Philips designs from penetrating the market too quickly. In addition to its deal with Siemens, MIPS has signed licensing agreements with Digital Equipment Corporation, Texas Instruments, Cypress Semiconductor, and Bipolar Integrated Technology of the United States, and with Fujitsu, NEC, and Kubota of Japan to produce its chips and market new computers that are based on its designs.
David Lei is an assistant professor of business policy at ttie Edwin L. Cox Schooi of Business at Souttiern Methodist University. He received his B.A. from Swarthmore College and his iVl.A. and Ph.D. from the Graduate School of Business at Columbia University. Before joining S.M.U., he was a faculty member at the University of Texas at Dallas. His teaching and research interests lie in giobai strategy, strategic planning, and manufacturing technologies. He is currently examining the impact of diversification and global strategies on organizational competitiveness and performance.

Cross-licensing agreements are often found in industries in which R&D and other fixed costs are exorbitant, but where aggressive competition is needed to maintain industrywide discipline and innovation. The pharmaceutical and chemical industries are replete with cross-licensing agreements between global firms. Firms willingly license their newest technological breakthroughs to one another in order to amortize R&D costs and to promote specialization of different research-based competencies. Finally, consumer nondurables, industrial equipment, and defense firms often engage in licensing and cross-marketing agreements to ensure a steady supply of service contracts and equipment upgrades to the licensee. Aerospace and defense contractors have found licensing a necessity in selling their equipment abroad. For McDonnellDouglas and Genera] Dynamics, licensing arrangements with different Japanese and European governments to produce jet fighters are routine business.

In Service and Franchise-Based Firms Service and franchise-based firms have long engaged in licensing arrangements with foreign distributors. The products/services involved include beverages (Anheuser-Busch), fast-food restaurants (McDonald's), car rentals (Avis, Inc.), and numerous hotel chains

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(e.g., Hilton and Hyatt) throughout the world. Mature,; domestic, service-based industries consider licensing particularly attractive because it: Establishes a fast market presence with relatively little direct investment. Employs a fairly standardized marketing approach to creating and controlling a global image. Anheuser-Busch and Coca-Cola have entered into licensing and franchise agreements with foreign distributors because such agreements afford a way of entering new markets relatively quickly with little capital outlay. Licensing to franchisees not only produces fees, royalties, and other compensation, but also helps firms confront and outflank their domestic rivals. With its licensed distributors, AnheuserBusch concentrates on developing the marketing programs that fit each national market. Coca-Cola's licensing arrangements with its numerous partners worldwide give it a formidable edge over archrival PepsiCo. In both cases, these U.S. giants have been able to build a substantial global market presence by building up a strong cadre of loyal licensees. Licensing and franchising are also useful strategies for firms that desire to standardize and control global marketing activities. Avis, Hilton Hotels, Holiday Inns, Kentucky Fried Chicken, and McDonald's are some of the most prominent U.S. firms engaging in franchising abroad. Each of these firms has developed a distinctive brand image an image that has been cultivated and standardized over considerable time. Avis has franchises throughout the world. Using the Avis logo and specific company-developed procedures, franchisees get a total business system for renting cars in return for royalty fees. To ensure high levels of performance. Avis maintains tight financial and marketing control over franchisees' activities.

John W. Slocum, Jr. holds the O. Paul Corley Chair in management at the Edwin L. Cox School of Business at Southern Methodist University. He teaches organizational behavior, organization design, and management. He has written more than 90 articles and five books on leadership motivation, career management, and the way corporate strategy impacts human resources practices in organizations. Slocum received his B.B.A. from Westminster College, his M.B.A. from Kent State University, and his Ph.D. from the University of Washington. Before joining the faculty at S.M.U., he was a member of the faculties at Ohio State and Penn State. He served as the 39th president of The Academy of Management, the editor of The Academy of Management Journal, and associate editor of The Academy of Management Executive. He is a fellow in The Academy of Management and the Decision Science Institute, and he has served as a consultant to numerous organizations in the area of human resources management.

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Exhibit 1
GLOBAL STRATEGIC ALLIANCES

Strategy Licensing Manufacturing Industries

Organization Design

Benefits

Costs

Critical Success Factors

Strategic Human Resources Management

Technologies Early standardization of design Ability to capitalize on innovations Access to new technologies Ability to control pace of industry evolution Geography Fast market entry Low capita] cost

New compet- Selection of licensee Technical knowledge itors created that is unlikely to Training of local Possible even- become competitor managers on-site tual exit from Enforcement of paindustry tents and licensing Possible deagreements pendence on licensee

Licensing Servicing and Franchises

Quality control Trademark protection

Partners compatible Socialization of in philosophies/ franchisees and values licensees with Tight performance core values standards Tight and specific Management deperformance criteria velopment and Entering a venture as training "student" rather than Negotiation skills "teacher" to learn Managerial rotation skills from partner Recognizing that collaboration is another form of competition to learn new skills

Joint Function Ventures Specialization Across Partners

Learning a partner's skills Economics of scale Quasi-vertical integration Faster learning

Excessive de- pendence on partner for skills Deterrent to internal ininvestment

Joint Ventures Product or line of Shared Valuebusiness Adding

Strengths of both partners pooled Faster learning along value chain Fast upgrading of of technological skills Shared risks and costs Building a critical mass in process technologies Fast resource flows and skill transfers

High Decentralization and Team-building switching autonomy from cor- Acculturation Flexible skills costs porate parents Inability to Long "courtship" for implicit communication limit partner's period Harmonization of access to information management styles Skills and technologies that have no real market worth Bureaucracy Hierarchy "Clan" cultures Government Fraternal encouragement relationships Shared values among managers Extensive mentoring to provide a Personal relationships to ensure cocommon vision and mission across ordination and member companies priorities Close monitoring of member-company performance

Consortia, Keiretsus, and Chaebols

Firm and industry

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Benefits and Costs In manufacturing industries, some firms use licensing as a way to quickly disseminate their technologies worldwide and thereby control the pace of industry evolution. Japanese manufacturers have successfully crosslicensed VHS-formatted video recorders to one another as well as to foreign firms that produce them under license. Aggressive cross-licensing to both competitors and partners helped the VHS standard become dominant worldwide and displace the competing Sony and Philips' versions. Licensing is a significant avenue for gaining access to new technologies that could transform the industry. IBM and Texas Instruments are moving toward greater use of crosslicensing agreements to help develop new generations of factory automation software. The benefits of licensing another firm's technology become even more important when one considers the nature of technological evolution in that industry. When technological breakthroughs occur discontinuously, rather than along a continuous path, licensing helps firms ayoid bearing the costs of plant and product obsolescence. Domestically, IBM is linking up with Motorola Communications and Electronics, Inc. to further advance the state of X-ray lithography for making superdense chips. The costs of liransing can be disproportionate to their benefits for manufacturing firms. As technology becomes a greater source of competitive advantage, licensing decisions can often radically shift the firm's competitive posture in that industry. RCA licensed its color television technologies to Japanese firms during the 1960s, only to face mounting pressure from licensees that were then able to utilize and even leapfrog over RCA into new related technologies. When licensing involves transferring the firm's core competencies, the firm's risk in that industry is even greater. Future competitors have direct and cheap access

to new technologies that are often produced by the licensee rather than the licensor. Tliis is what happened to RCA. In service-based businesses, the benefits of licensing appear to outweigh the costs. In consumer nondurables and service businesses that involve little capital investment and specialized skills, licensing and franchising help domestic firms rapidly build market share and global presence. The greatest benefit accrues to firms whose products or services have reached maturity in domestic markets (e.g., the fast-food and beverage industries), but where the market potential abroad remains unexploited. Potential costs to licensing and franchising abroad include the misuse of trademarks and lack of direct quality control over franchisees' operations. Licensing and franchising are viable strategic alliances when local regulations or laws prevent direct investment in the country by foreign firms such as McDonald's in Russia, for example. Although many U.S. firms have led tlie world in building global franchises in restaiirants, hotels, car rentals, and other service industries, there are pitfalls associated with licensing and franchises. Such pitfalls occur when the services involved require extensive training and high managerial skill levels. In such businesses as accounting, management consulting, banking, insurance, and other financial services, the specialized professional training required may preclude licensing and franchising as viable alternatives.

Critical Success Factors Licensing by manufacturing firms oftert turns out to be little more than a sale of technology. There are few critical success factors for protecting one's own proprietary processes, but firms can take two steps to minimize the risks involved. First, firms should not enter into licensing 49

arrangements with any firm that is likely to become a real competitor in the foreseeable future. For one thing, the terms of licensing agreements are often difficult to enforce in foreign courts, and many become meaningless as the evolution of technology accelerates. For another, licensing arrangements inherently benefit the licensee, so stringent controls over technology are required: constant

agers must invest considerable amounts of time and resources to ensure that prospective licensees/franchisees are likely to stay for the long haul. Once the selection process is complete, the next step is to socialize local managers and personnel to the franchising firm's values, methods, and mission. Because the licensor is geographically distant from the individual

(^During [a two-week training session] Russian employees learned both the McDonald philosophy and the McDonald way of addressing customers and maintaining quality standards."
management, monitoring, and scrutiny, for example. In service industries, critical success factors include working with the licensee/franchisee to build the product's brand image in that region. Licensing and franchising firms also need to ensure that they have trademark protection in regions where they operate. Services and franchises require coordination of buying and promotion practices within geographical areas. Franchise agreements can become very complex. Defining compensation practices and setting standards for performance and quality control early on are integral to successful operations. Human Resources Management Careful selection and evaluation of the prospective licensee/franchisee are vital to effective operations. It's important to select licensees and franchisees who appear to share the same values, working styles, and philosophies as those of the licensing firm. Since franchisee loyalty is key to profitability, manlicensee's operations, socialization is the only real long-term mechanism for guiding independent action. Before opening its first restaurant in Russia, McDonald's flew all key employees to its Hamburger University for a two-week training session. During these sessions, Russian employees learned both the McDonald philosophy and the McDonald way of addressing customers and maintaining quality standards. JOINT VENTURES The number of joint ventures started in the past few years heralds a recognition that global strategic alliances are becoming a necessity for firms that want to compete in many capital-intensive industries. Unlike licensing agreements, joint ventures involve creating a new entity in which the originating partners take active roles in formulating strategy and making decisions. Generally, joint ventures are either specialized ventixres or shared value-adding ventures. Although these kinds of ventures differ

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from each other in the way they are implemented and operated, both strategic alliances are formed because the partners need to: Share and lower the costs of high-risk, technology-intensive development projects. Gain economies of scale and scope in value-adding activities that can be justified only on a global basis.

risks inherent in many technology-intensive projects are making simultaneous partners out of competitors. Building economies of scale is an important incentive to form joint ventures. The need to amortize large fixed-cost investments for world-scale plants in relatively mature industries, such as steel, has spawned a flurry of joint-venture activity between U.S. and

CC[E]ven [former] rivals have joined forces. . . . Thus the escalating costs and risks inherent in many technology-intensive projects are making simultaneous partners out of competitors."
Seek access to a partner's technology, accumulated learning, proprietary processes, or protected market position. Shape a basis for future competition in the industry involved. Joint-venture activity is increasing in such high-technology industries as aerospace, telecomrinunications, computers, and factory automation. The costs and risks of developing successive generations of new products and procjesses have become too onerous for a single firjm to bear. Moreover, the complexities and ijisks of technology development have greatly faised the fixed costs of each new project, i The jcosts are so enormous that even firms which w|ere once fiercely competitive rivals, such as 'Jexas Instruments and Hitachi, have now joir^ed forces in this case to design and produce | the next-generation, 16-megabit chip. Sinjvilarly, IBM has recently teamed up with SierKens to design an even more sophisticated 64-megabit chip that cannot be manufactured with existing process designs and equipment. Thus the escalating costs and Asian companies. For example, the USX poration has invested $400 million in a 50-;;|0 venture with Pohang Iron and Steel Company of South Korea to update and build a moderil, integrated facility to produce metal sheet^, coils, and rolled steel for the automotive, hardware, and appliance markets. In Europe, Philips and Siemens havje teamed up in a venture to produce state-oithe-art semiconductors and chips in a plaiit designed to meet the needs of both comp?^nies. The sea^rch for maximum scale econdmies has led Whirlpool and Philips to ptjt their domestic appliances business into combined venture that attempts to global-scale economies in the consolidating appliance market. Firms may also enter into joint ventures tJ) build economies of scope. For example, For(| Motor Company has linked up with Nissaili and Volkswagen to fill out its product linej Ford believes that a global presence require! it to meet all levels of product varietal demanded by many different markets. Simulj taneously meeting the demands for high vari-i 51

ety and low cost may be too much for many companies to manage on their own. AT&T's recent separate ventures with NEC and Mitsubishi of Japan are designed to help it acquire production skills in manufacturing the custom-designed computer chips that are needed to maintain global scale and breadth. In the consumer nondurable industries, companies typically enter into a series of cross-market licensing agreements and small-scale ventures

Siemens, (3) color television tubes with Samsung and Asahi, and (4) ceramics for catalytic convertors with NGK Insulators of Japan. In each of these ventures. Coming's underlying motive was to help shape the industry's evolution in each of these growing sectors. Although all joint ventures are motivated by some combination of these four reasons, the way the venture's organization is designed will depend on the relative strength of the

Cf[M]any firms enter into Joint ventures . . . to learn about anotherfirm's technology andproprietary processes or to gain access to its distribution channels.. . ."
to fill out their respective product needs in different markets (e.g.. General Foods and Nestle). A powerful motive leading many firms to enter into joint ventures is the desire to learn about another firm's technology and proprietary processes or to gain access to its distribution channels in a particular market. Many foreign firms have entered into a wide series of joint ventures with their American competitors to learn the marketing skills and technologies U.S. firms use in developing new products and processes. In fact, many of these foreign firms enter into such ventures to gain access to proprietary technologies and innovations that would otherwise be inaccessible to them. Finally, many ventures occur because the partnering firms want to shape the evolution of competitive activity in the industry. Corning Incorporated has numerous global venturesto produce (1) medical diagnostic equipment with CIBA-GEIGY, (2) fiber optics with Cie. Financiere des Fibres Optiques and with partners involved as well as the venture's mission. As mentioned previously, there are generally two types of ventures: specialization ventures and shared value-adding ventures. Let's look more closely at each. Specialization Ventures Specialization ventures are those to which each partner brings and contributes a distinctive competency in a particular valueadding activity (e.g., one produces, the other markets). A combination in which one partner excels in manufacturing while the other controls market access is likely to result in a venture characterized by specialization and division of labor. Consequently, these ventures are likely to be organized around functionsmanufacturing, marketing, etc. One specialization venture is composed of Thomson (of France) with JVC (of Japan). Thomson hopes to learn from the Japanese partner skills vital to competing in the consumer electronics industryskills such as

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those central to manufacturing technologies involved in producing optical and compact disks, computers, and semiconductors. JVC hopes tp learn from Thomson the specific marketing skills needed to compete in such fragmented markets as Europe. Within the United States, the entire spectrum of joint ventures between GM, Ford, and Chrysler with their Japanese counterparts may be considered specialization ventures.

ness. Joint ventures in which partners shajre in building added value include that of IBM with Siemens. These two electronics giants will jointly design, produce, and market n w generations of chips in Europe and North America. In the imaging and reprographics industry, Fuji-Xerox exemplifies the shared vahieadding approach across the design, production, and marketing skills of both firms. Despite

CCWithin the United States, the entire spectrum of joint ventures between GM, Ford, and Chrysler with their Japanese counterparts may be considered specialization ventures."
General Motors' recent introductions of new Geo and: other models exemplify the way Japanese production strengths are matched with GM's access to the American market. In Chrysler's Diamond-Star joint venture with Mitsubishi Motors, the Japanese manufacturer sujpplies low-cost engines, transmissions, ar^d accelerators; Chrysler provides the styling and distribution base. Ford's reengineered I Escort line of cars was designed in conjunction with Mazda, which provided many design and production capabilities that Ford was able to learn. some initial difficulties, this venture leads tlie world in designing and producing high-quality optical and imaging products that are useH in different photocopying and other applications. Under a 50-50 arrangement, Fuji-Xerdx produces all the copiers used in Japan, Asi,i and much of Europe. Benefits and Costs All joint ventures, regardless of type, bring with them a set of strategic benefits and costs. Clearly the benefits for all involved include an opportunity to share risks, to learn about a partner's skills and proprietary pro cesses, and to gain access to new distribution channels. The cost reduction and risk reduc tion that are associated with high-technolog-^ projects are the most frequently sought-afte benefits. Joint ventures carry risks as well. AE mentioned previously, some venture partnerdeliberately enter into such arrangements to learn about and/or to gain access to another 53

Shared V^lue-Adding Ventures In the shared value-adding ventures, partners participate and share in the value-adding activities together (e.g., both design and produce joinMy). Participative and sharing types of ventures usually result when both parties have strohg but related skills in the same value-adding activity. These ventures are often organized around products or lines of busi-

firm's research or proprietary technology. The single biggest cost may be one partner's loss of skills and other sources of competitive advantage to a partner that then becomes a more direct and more potent competitor. This occurred when GE entered into a specialized joint venture with Samsung to produce microwave ovens. Now Samsumg competes with GE in its full line of household appliances. Other costs include coordination costs within the venture that compromise trust, the loss of flexibility resulting from a poor blending of corporate cultures, difficulty in transferring organizational learning from the entity to the parent, and assimilating the venture's value-adding activity with that of the parent. The particular benefit associated with the specialization venture is that both partners get a form of quasi-vertical integration without having to make a huge investment in fixed costs. Specializing the value-adding activities helps increase learning and enhance economies of scale. Most ventures of this form are designed to compensate for an existing weakness through a partner's strength. Such a venture helps the weaker partner learn without incurring the risks associated with high capital intensity and large investments. Thomson of France, for example, is gaining valuable production experience and expertise from its numerous joint ventures with JVC and Siemens in different applications of microelectronics technology. Canon of Japan has benefited extensively from its link-up with Eastman Kodak in learning about new imaging and optical technologies for use in different industries. Ford is improving its competitive position in the small-car market with Mazda. The main cost of the specialization venture is that all too often a partner is relegated to a position of permanent weakness. Although U.S. auto manufacturers potentially have the opportunity to learn about new

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manufacturing and design skills from their Asian counterparts, GM and Chrysler are becoming highly dependent upon Daewoo, Hyundai, Mitsubishi, and Toyota for critical core competencies in engines, transmissions, and power systems, for example. Managers should note that a frequent result of such joint ventures is that the domestic partner doesn't learn enough to become independent. Instead, it becomes a distributor for the foreign partner. The two joint ventures that perhaps best epitomize the risks of the "division of labor" venture are Fujitsu Fanuc's ventures with General Motors and General Electric. The GM-Fanuc venture was originally intended to co-design and co-produce robots and flexible automation systems used in the automobile industry. But GM was unable to learn the critical skills needed from its Japanese partner, so it now functions as little more than a distributor of the robots. GE's venture with Fanuc produced a similar result. The original intent of the venture was for GE to learn about automation and industrial controls. Instead, the company has decided to abandon the entire factory automation business because of pressure from Japanese rivals, including Fanuc itself. In both cases, American firms exited a promising business because they could not control the transfer of skills that occurred within the venture. Shared value-adding ventures pose their own set of benefits and risks. The primary benefits for both partners is that each can provide the strength and skills needed to achieve economies of scale and faster learning. Corning's extensive color-tube ventures with Asahi Glass and Samsung give both sides the opportunity to constantly upgrade their technology and market positions. The biggest costs and risks associated with the shared value-adding venture are that partners can lose their sources of competitive

advantage to their partners very rapidly if they are not careful. Because managers and skilled personnel are likely to be in daily contact, limiting the spread of information and setting boundaries for organizational learning are impossible. Moreover, "switching" costs in these ventures the costs involved in selecting another partnerare much higher than they are in specialization ventiu-es. It is difficult to

ing formed its venture with CIBA-GEIGY, On the other hand, rushing into a venture can destroy it, as AT&T and Olivetti of Italy discovered when they formed a joint venture to produce personal computers. The venture was eventually dissolved because of wide differences in management styles, corporate cultures, and missions that the companies failed to explore before they created it. Coijipanies with comparable size, budgets, mls-

CCSome of the most successful joint ventures are those that have an extended courtship period before the venture is created. It took over two years of planning before Coming formed its venture with CIBA-GEIGY."
switch partners because of the extensive administrative networks that have been established to make these joint ventures successful. Critical Success Factors Altljiough each joint-venture form has its own set pf critical success factors, some overriding o^es affect both types of joint venture. The most important ones are to: Avoid an early rush into the venture. Uhderstand that collaboration is a distinct form of competition. Lejarn from partners (an essential objective) Vvhile limiting unintended information floA^s. Establish specific rules and requirements f^r venture performance early on. Son^e of the most successful joint ventures are those that have an extended courtship period before the venture is created. It took ovejr two years of planning before Comsions, and organizational cultures often malte the best partners. One of the most difficult things for managers to remember is that joint ventures actually represent another form of competition: Venture partners are simultaneouslj/^ competitors and collaborators. Many Japanese firms enter into joint ventures with paxtners they intend to compete fully with in othJr products and services. Competitors as partners must always bie cognizant of the fact that ventures are sometimes designed as an indirect way of gradually "de-skilling" the other side or pushing it into a position of permanent inferiority or weakness. Although many firms have used joint ventures to improve their existing skills, G1^4 and GE (among others) have found that theiir Japanese counterparts are as intent as ever ciii competing with them in the same and related fields. Essential to the success of any joint veiij- 55

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ture is the ability to learn from another partner's strength while preserving one's own sources of competitive advantage. This is particularly difficult for American firms, since many of their weaknesses are based in manufacturing activities. Learning about Asian or European core competencies in systems, microelectronics, miniaturization, and other related fields requires constant monitoring of the venture's progress. Unfortunately, many U.S.firms enter into ventures in the mistaken belief that the other partner is the student rather than the teacher. Many high-technology skills are increasingly people-embodied rather than machine-based. This is particularly true in such science-driven industries as biotechnology, chemicals, software, and computers, where patent laws and physical means of protecting the technology are lacking. Providing the necessary mechanisms for successful organizational learning, retention of personnel, and transfer of management skills becomes essential to the venture. Companies must carefully design ventures to prevent them from becoming "windows" through which the other partner can learn about every other technology or core competency within the firm. Rotating different managers through the venture may be one way to prevent a foreign partner from gaining too much information from any one person. It is critical to delineate specific performance requirements for ventures early on. For example. Motorola's transfer of microprocessor technology to Toshiba is contingent on how much market share Motorola gains in Japan. Texas Instruments' deal with Hitachi depends on specific skill transfers and demarcates what will be jointly developed and owned and what won't be. For the shared value-adding venture, another critical success factor is sufficient autonomy. Decentralization of decision making and sufficient autonomy from both corporate

parents gave Fuji-Xerox the leeway it needed for establishing the kind of give-and-take relationships that formal contracts cannot specify. Among global shared value-adding ventures, it is no accident that some of the most successful, such as Fuji-Xerox and Nippon-Otis, also are the most autonomous. Most managers attribute Coming's numerous venture successes to a decentralized structure combined with the provision of strong, dedicated managers to staff the ventures. Staffing a venture with truly autonomous managers from headquarters is likely to limit excessive interference from corporate parents. Not only are these ventures strong competitors in their respective industries, but they h^ve b^en instrumental in helping their corporate parents understand and leam new technologies in embryonic industries.

Human Resources Management These ventures are new entities that bring together managers from two or more global firms. Thus extensive training and team building are critical to their effective implementation. The role of human resources management is vital to both forms of ventures in three ways. First, it needs to develop and train managers in negotiation and conflict-resolution skills. A foreign partner is likely to enter any new venture with a trail of unexpected issues and problems, so learning how to effectively resolve these and turn them into win-win situations is important. Such techniques as thirdparty consultation and integrative negotiations can be used to defuse conflict-laden situations. Second, managers need to become acculturated to working with a foreign partner. Particularly for American firms, managers need to understand the role of "implicit communication," in which foreign managers are well-versed. "Implicit communication" means

conveying messages, intentions, and ideas through gestures, facial expressions, and other nonverbal messages. The context of the message is quite often as important as its content. Third, harmonization of management styles is essential. Ensuring that one's own managers know and understand the other side's corporate culture, systems, and managemerjt styles helps keep the venture success-

and Corning ventures is that a strong management team from both parents runs the venture in its own way. A management team forms its own distinctive corporate culture that allows it to simultaneously (1) meet the requiremei^its of parent firms and (2) respond to problems in its own industry. As the team members become familicir with each other, a basis for compromise and working together becomes ingrained over

(CStaffing the joint venture with managers who are flexible in terms of different management styles and philosophies is probably the single most important task facing the human resources function at this critical time."
ful. Th^ Japanese believe that "binding roots" is as iniportant as binding technologies and producljs. Staffing the joint venture with managers wiho are flexible in terms of different management styles and philosophies is probably th0 single most important task facing the human resources function at this critical time. In specialization ventures, managers need constant training to learn and refine the vital skills that the venture makes available over time, ^s technology-based skills become more people-embodied over time, training and developing managers for the venture are critical ways to help them gain experience with n e ^ technologies and production skills. Career-|)athing managers through the venture may be one means by which managers and technical persormel can speed up the benefits I of learning new skills. In shared value-adding ventures, team building is essential if they are to be effective. A key fdature in the success of the Fuji-Xerox time. Because the venture creates both longand short-term interdependence across mafiagers, team structure must be flexible enough to accommodate problems that constantly surface in day-to-day operations.

CONSORTIA, KEIRETSUS, AND CHAEBOLS

Although discussion has taken place i^n the United States and Europe concerning tHe formation of consortia to meet challenges ip electronics and computers, little has actual!^' materialized. American efforts to build cros$industry consortia (e.g., MCC, SematecH) have largely sputtered because of the gre4t difficulties involved in getting firms to poil their resources into an integrative organization design. The most recent U.S. attempt It0 revitalize the nation's semiconductor indu>itry, U.S. Memories, failed before it even started. i

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In Europe, such programs as EUREKA (a formal joint program formed by a number of European countries to bring together scientists and engineers to engage in research projects), ESPRIT (European Strategic Program for Research and Development in Information Technologies), and JESSI (Junior Engineers' and Scientists' Summer Institute) are continentwide attempts to restore European competitiveness in semiconductors, microelec-

financing from group banks and are largely run by professional managers. South Korean chaebols rely on the government for capital and are managed by family members who have been groomed for the job. Lucky Goldstar, Samsung, Daewoo, and Sunkyong are some of the most prominent chaebols. Formed originally by merchant and industrialist families, the company keeps its stock in family hands. Blood relationships of-

CCWith the exception ofAirbus Industrie of Westem Europe, endeavors to build long-term, viable consortia across different industries in Europe remain at an embryonic stage."
tronics, and miniaturization. With the exception of Airbus Industrie of Western Europe, endeavors to build long-term, viable consortia across different industries in Europe remain at an embryonic stage. In the Far East, on the other hand. Westerners are becoming familiar with the previously mentioned Japanese keiretsu and South Korean chaebol. The Japanese keiretsu is a combination of 25 to 50 different industrial companies centered around a large trading company or bank. These companies are integrated through interlocking directorates, bank holdings of member company stock shares, and close personal ties between the senior managers. Group members of a keiretsu typically agree not to sell their holdings. Some familiar keiretsus are Sumitomo, Mitsubishi, Mitsui, and Sanwa, South Korean chaebols are similar agglomerations of large companies centered around either a bank or a holding company that is usually dominated by founding families. Unlike Japanese keiretsus, which get their ten dominate the pattern of wealth distribution and management across the chaebol. In both the Japanese and the South Korean examples, clusters of companies spearhead these nations' efforts to modernize their industries and to invest in new technologies for the future. Western consortia and their Far Eastern equivalents are a more sophisticated form of strategic alliance than that of licensing or joint ventures. Unlike the other two vehicles, the keiretsu/chaebol structures are designed to maximize all of the potential benefits of joint ventures risk sharing, cost reduction, economies of scale while allowing for industry specialization, Keiretsu and chaebol organizations are specially designed for industrywide coordination. Joint ventures coordinate activities associated with function, product line, or business, but not industry.

Strategic Rationale Resource scarcity and the need to share

risks arid costs are the primary emphases in consortia formation. In the United States, attempts by such companies as IBM, Motorola, and others to free themselves from being held hostage to Japanese chip manufacturers has led these firms to pool their resources. They have begun to set up shared-research programs and to harmonize product and process standards. The formation of Airbus Industrie and

of scale, and technological critical mass. Keiretsus and chaebols are uniquely pc sitioned to share the risks of investing in hij^h fixed-cost projects that are needed to stay }n the forefront of high-technology industries. Member companies' stock holdings are distributed across group companies. There is little external financial pressure from stockholders to adopt a short-term planning horizon that could compromise projects that

of the most important benefits of the keiretsu and chaebol organization designs are long-term focus, economies of scale, and technological critical mass."
other European consortia resulted from Western European governments' awareness that competitiveness in commercial aircraft, electronics, and computers was vital to maintaining high living standards. In japan, the government encouraged keiretsu formation after World War II to direct scarpe resources into promising industries while reducing risk through diversification and go\^ernment backing. Korean chaebols also resiilted from government encouragement and lon^-term economic planning designed to direcj: scarce resources into fast-growth industries. Benefits and Costs Sinc^ most U.S. and European consortia are relatively new, little information is available on their operations and performance. Out fociis, therefore, will be on keiretsus and chaebols! Some of the most important benefits (j)f the keiretsu and chaebol organization designs are long-term focus, economies combine high risk with long-term profit potential. ; Because the group companies are i^ivolved in many different industries, risk iis diversified. Resources are directed in|o growth industries that are deemed vital to f i|iture global competitiveness. This long-terjii risk management approach encourages majssive investments in such volatile industries is satellites, biotechnology, microelectronicjs, and aerospace industries in which conveijitional financial analyses would generally discourage investment because of the risk. ! Strong buyer-supplier relationships witHin the group help provide the necessary economies of scale for building world-class plan is and quality. Many of Sumitomo's group conipanies continue to use computers produced by NEC, a member company within the keiretsi^. Extensive resource sharing of components ariji end products among the keiretsu or chaebql firms helps provide both minimum efficienjt scale as well as fast response to changes iii the market. Since each group company com^ 59

petes in its own particular designated industry, awareness of the external environment provided by each member is balanced with internal resotirce flows and investments that can be shared by all. In comparison with other strategic alliances, keiretsus and chaebols encourage faster learning and retention of technological expertise gained from competing in many different industries. The organization design of keiretsus and chaebols provides for constant refinement of managerial skills and core competencies that are then translated into future product opportunities. Technological competencies gained from competing in one industry are often shared across group companies that face similar constraints in their particular industry. This sharing reduces duplication of effort and increases specialization. Horizontal integration and technical coordination with suppliers have led to new sources of competitive advantage. The benefits of keiretsus and chaebols far

outweigh their costs to their respective organizations. However, individual member companies within the group may be relegated to secondary status if their industry appears to be declining or lacking growth. Businesses such as cement, shipbuilding, and basic chemicals receive an investment priority lower than that of heavy machinery, electronics, and other high-technology sectors. Clearly, a hierarchy of corporate membership is involved one based on considerations of long-term economic promise and financial viability. A potential cost of this organization design is that captive supplier-buyer relationships could foster inefficiency, though keiretsus and chaebols have been known to terminate noncompetitive suppliers.

Critical Success Factors Perhaps the single most important critical success factor in forming keiretsus and chaebols is government encouragement and

60

"Witherspoon, I'm afraid you've swallowed your last company."

direction. Unlike governments in the United States and Europe, Japanese and particularly Korean governments engage in a significant amount of "indicative" economic planning. Preferential interest rates and capital allocation are given to promising sectors and withheld from less attractive ones. The formation of both keiretsus and chaebols depends on low-cost capital that, over the long run, only a managed economy can deliver, A less tangible but equally important factor lies in the close personal relationships between senior managers of the member-group companies. Close ties and shared values lead to mutual understanding and sacrifices that open markets cannot effectively duplicate. These personal relationships, built up over many years of cooperation, lead to an implicit understanding of priorities that make for efficient investment in new industries. Another critical factor is that of active personnel rotation and sharing. Middle managers and key technical personnel are encouraged to learn new skills in different member companies. More important, these people begin tp learn how each industry differs and where significant commonalities may lie for future cooperative efforts. Finally, subsidized internal capital for R&D and other e>cpenditures is closely tied to member companies' performance. Although there ig no strict market in the kiissez-faire sense, keiretsus and chaebols assess the performance of their member companies both by measuring their financial results and by comparing them with the domestic competitors in other keiretsus/chaebols and with foreign global competitors, A company that has failed to produce competitive products is likely to be excluded in the next generation of projects, A significant control mechanism in keiretsus and chaebols is the fear of "losing face" within the group. That fear stimulates constant effort and productivity even when there are few formal market mechanisms.

Human Resources Management The single most important task facing human resoiarces managers in keiretsus and chaebols is that of providing constant training, development, and socialization of managers in the organization's values, mission, and philosophies. The essence of the human resources function lies in building a corporate culture that not only rewards (1) long-tenn subordinate-superior relationships and (2) a de-emphasis on purely financial, quantitative results, but also encourages managerial interaction and rotation. Because member compjtnies are linked together through personal contracts and relationships, a corporate culture that simultaneously displaj^ hierarchical properties and horizontal coordination is essential to effective implementation. Employees in keiretsus and chaebols generally do not pursue specific jobs or technically driven tasks. Instead, they are rotated through the companies to gain wide exposvire to many different industries and processes. Promotions, for which individuals are infarmally reviewed by senior management, are based on individual promise, dedication, and achievement and an understanding of the member company's mission. Seniority and title are respected by employees throughout the organization. Bonuses are often tied to group or corporatewide results rather than individual results. Fraternal relationships, mutual longterm commitment, pride in membership, and long socialization processes are the hallmairk of human resources management in keiretsus and chaebols. The biggest tasks facing human resources management are management development and training designed to provide a consistent set of shared values. It is perhaps the unique human resources practices of keiretsus and chaebols that make their adoption in the United States and Europe most difficult. Unlike their Far Eastern 61

counterparts, U.S. managers tend to be selected, trained, and rewarded to produce for individual satisfaction and results rather than for a larger, corporatewide purpose. In addition, though senior managers of different competing companies tend to know each other rather well, their relationships in many cases are viewed as adversarial. This severely constrains the level of trust and commitment needed for building viable, long-term consortia.

ACKNOWLEDGMENT Support for this research was given by (1) the Halliburton Foundation in cooperation with the Center for Research, Cox School of Business, Southern Methodist University (Dallas, Texas) and (2) the U. S. Army Research Institute for Behavioral and Social Sciences. The authors are indebted to Robin Pinkley and Dileep Hurry for their helpful suggestions on earlier versions of this paper.

SELECTED BIBLIOGRAPHY

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A complete discussion of the implications of different licensing arrangements is found in Franklin Root's Entry Strategies for Intemational Markets (Lexington Books, 1987). Pitfalls of licensing agreements are discussed in Michael Porter's Competitive Advantage (Free Press, 1985). The licensing travails of RCA and General Electric in competing abroad may be found in the Harvard Business School case "General Electric: Consumer Electronics Group" (#9-359-048). Joint ventures have been the subject of extensive research. The more notable books on the topic include Kathryn Harrigan's Strategies for Joint Ventures (Lexington Books, 1983); Kenichi Ohmae's Triad Power (Free Press, 1985); and Susan Goldenberg's Hands Across the Ocean (Harvard Business School Press, 1986), which details the specific problems facing U.S. ventures with Asian partners. Some excellent articles on different forms of joint ventures include Gary Hamel, Yves L. Doz, and C. K. Prahalad's "Collaborate with Your Competitors and Win," (Harvard Business Review, January-February 1959) and a series of articles in Michael Porter's Competition in Global Industries (HBS Press, 1986). The dangers of losing core tech-

nologies and skills through joint ventures are examined in Robert Reich and Eric Mankin's "Joint Ventures with Japan Give Away Our Future," (Harvard Business Review, March-April 1986). A look at how Japanese keiretsus work is featured in Charles H. Ferguson's excellent article "Computers and the Coming of the U.S. Keiretsu" (Harvard Business Review, July-August 1990), which examines just how the member companies in a Japanese keiretsu are interlocked. For insights into the workings of chaebols in South Korea, see Sangjin Yoo and Sang M. Lee's "Management Style and Practice of Korean Chaebols" (Caiifomia Management Review, Summer 1957) and Richard M. Steers, Yoo Keun Shin, and Gerardo R. Ungson's The Chaebol: Koreas New Industrial Might (Harper Business, 1959).

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