Ch08 Solutions

Chapter 8: Strategic Alliances
Multiple Choice Questions
1. Zeal Inc., a software firm, decides to enter the publishing industry. While it has the financial
resources required to enter the new market, it lacks the expertise and technical knowledge
required to establish itself in the new industry. So, Zeal Inc. enters into strategic alliance with
Chrome Corp., a leading e-publisher. Which of the following is likely to be true in this case?
A. Chrome is likely to lose its relational advantage through this alliance.
B. Zeal and Chrome are likely to cooperate even at the stage of research and development.
C. Zeal’s vision is likely to contradict that of Chrome.
D. Chrome is likely to provide its expertise only at the marketing stage.
Answer: B
Level of Difficulty: Hard
Section reference: What Is a Strategic Alliance?
Learning Objective: 8.1
Bloom’s: Application
AACSB: Application of Knowledge
2. Which of the following statements is true about strategic alliances?

A. Strategic alliances exclude functions that are bought through bidding.
B. In strategic alliances, the power to make decisions is always evenly distributed amidst the
firms.
C. In strategic alliances, companies may choose to cooperate at any stage along the value chain.
D. Strategic alliances usually lead to one of the firms losing their relational advantage.
Answer: C
Level of Difficulty: Moderate
Bloom’s: Comprehension
AACSB: Analytical thinking
3. Which of the following statements is true about firms that establish strategic alliances?
A. Firms that collaborate at the sales stage are not considered strategic partners.
B. Firms that produce different products cannot enter a strategic alliance.
C. Firms can collaborate to improve their performance at any stage along the value chain.
Copyright ©2016 John Wiley & Sons, Inc.

D. Firms often enter strategic alliances at the cost of losing their relational advantage.
Answer: C
4. Drew’s Cafe Inc. and Cuppa Corp., two local coffee chains, combine resources to enter the
global market. They retain their individual ownership; however, they agree to share production
facilities and manpower, and they also decide to market their products through combined
promotional tools. The arrangement made by the two retail chains to combine resources and
collaborate for a common objective refers to a _____.
A. strategic alliance
B. mass-customization strategy
C. standardization venture
D. product-differentiation strategy
Answer: A
5. Which of the following statements is true about how an arm’s-length relationship is used in
strategic alliance?
A. Firms cannot buy inputs from multiple sources using the arm’s-length relationship.
B. Firms typically use the arm’s-length relationship between internal departments.
C. Firms that use the arm’s-length relationship acquire the production facilities of other firms.
D. Firms use the arm’s-length relationship to purchase inputs at the lowest price.
Answer: D

6. Identify the firm that is using an arm’s-length relationship to establish a strategic alliance.
A. Ochre Inc. manufactures all the components required for production within the firm.
B. Sapphire Inc. acquires the production facility of Brick Corp. to enter a foreign market.
C. Jade Corp. sends out a bid to suppliers for raw materials required for production.
D. Leo Corp. forms a twenty-year contract with a wholesaler to sell its goods.
Answer: C
7. Timber Inc. enters an exclusive partnership to ally with Teal Corp. in order to enter a foreign
market. Which of the following statements is likely to be true in this case?
A. Timber and Teal are unlikely to receive inputs or activity from each other.
B. Timber is likely to buy an activity from Teal using an arm’s-length relationship.
C. Timber is likely to send a bid to Teal along with other suppliers for the lowest price.
D. Timber is likely to acquire an activity or input from Teal to create a new value.
Answer: D
8. Redwood Inc., has an arm’s-length relationship with Blue Ink Corp. Which of the following is
likely to be true in this case?
A. Redwood is likely to conduct all functions within the firm.
B. Redwood is likely to choose another firm over Blue Ink for lower costs.
C. Blue Ink is unlikely to have made the deal through a bid.
D. Blue Ink’s manufacturing units are likely to have been acquired by Redwood.
Answer: B
9. Victor Corp., a high-end mobile manufacturer that targets business people, decides to increase
its customer base. It forms a strategic alliance with Gray Inc. to produce new instruments
designed to attract students. Gray helps design products that change how Victor is perceived by
young customers. Which of the following is the primary objective of this strategic alliance?
A. To source inputs or activities that create more productivity
B. To source inputs or activities that influence the brand
C. To source inputs or activities that reduce the total costs
D. To source inputs or activities that increase productivity of existing products
Answer: B
10. An air conditioner manufacturer, Hues Corp., decides to form a strategic alliance with a firm
to source components that make up the highest percentage of total costs. Which of the following
suppliers is it most likely to choose as a partner?
A. Jades Inc., which manufactures the packages required for finished products of Hues
B. Black Corp., which prints Hues logo on the air conditioners
C. Fin Inc., which produces the compressors used in Hues air conditioners
D. Den Corp., which produces the designer vents for Hues that come in different colors
Answer: C
11. Crimson Corp., a painting unit, collaborates with a car manufacturing company. They sign a
contract that specifies the tasks of each party in alliance. Which of the following is being
exemplified in this scenario?

A. A nonequity alliance
B. An equity alliance
C. A coordination alliance
D. A vertical alliance
Answer: A
Section reference: Types of Alliances
12. Marcel, the CEO of an automobile company, considers extending his research and
development facility by collaborating with a multinational company. He believes that a
contractual alliance will be ideal for this collaboration, but other senior members of the
management oppose a contractual alliance. Which of the following statements is likely to
strengthen Marcel’s argument?
A. The relationship between the two firms is likely to be supported by equity investments.
B. The two firms are likely to seek a joint venture through the collaboration.
C. Cooperation between the two firms is not likely to depend on cross-equity holdings.
D. Interdependence between the two firms is not likely to be low.
Answer: C
Bloom’s: Analyze
AACSB: Reflective thinking
13. Sepia Inc., a fertilizer company, needs permission to test its new products on plantations
owned by an agro-based industry. In return, the company is willing to pay a percentage of
revenue to the agro-based industry. In this case, which of the following contractual alliances
should be adopted by Sepia?
A. A licensing agreement
B. A supply agreement
C. A distribution agreement
D. An input agreement

Answer: A
14. John requires 500 shirts of a particular fabric and quality. He partners with Loumang Inc., a
fabric manufacturing company, to develop certain customized inputs. Which of the following is
being exemplified in this scenario?
B. A supply agreement
D. A profit agreement
Answer: B
15. Velara Inc., a healthcare company, owns 35% stake in the firm that supplies most of its raw
materials. This encourages the supplier to align its incentives with Velara’s needs. Which of the
following is being exemplified in this case?
D. A contractual alliance
Answer: B
16. Borpon Inc. and Biocolog Corp. are well-established biotechnology companies. They enter
into a strategic alliance in which they create and own a legally independent company. The new
company is created from resources and assets contributed by the parent firms. Revenues,
expenses, and profits are equally shared by both firms. Which of the following strategic alliances
is adopted by Borpon and Biocolog?
A. A contractual alliance
D. A joint venture
Answer: D
17. Sands Inc., a financial firm, partners with another organization that is at a similar stage along
the value chain. The parent organizations create a legally independent firm. However, Sands
brings more resources to the new firm than the other partner. Which of the following is being
exemplified in this case?
D. A joint venture
Answer: D
18. Which of the following statements is true about firms in a joint venture?
A. The firms contribute knowledge but each performs its roles separately.
B. The contributions made by individual firms are easy to measure.
C. The parent firms share revenues and expenses in a particular ratio.
D. The dependency level between partners is low.
Answer: C
19. An organization wants to form a strategic alliance with another firm. The second firm is at
the same level along the value chain. It cannot contribute the same level of financial resources,
although it can contribute an extensive level of knowledge. In order to accommodate these
factors, they decide to start a legally independent firm. Which of the following alliances will be
best suited for the organization?
D. A joint venture
Answer: D
20. An organization enters into an alliance with a firm that is positioned at a different stage along
the value chain. The alliance is formed to combine unique resources and lower transaction costs.
In this case, which of the following alliances has been adopted by the organization?
A. A profit alliance
B. A selling alliance
C. A vertical alliance
D. A horizontal alliance
Answer: C

21. Two organizations, Purple Inc. and Spring Corp., are positioned at a common stage of the
value chain. However, they do not have a supplier-buyer relationship. They form an alliance to
benefit from complementary activities. Which of the following is exemplified in this scenario?
A. A horizontal alliance
B. A vertical alliance
C. A joint venture
D. A supply agreement
Answer: A
22. A U.S.-based chocolate manufacturer, Browns’ Inc., collaborates with a Brazilian company to
source cocoa. The cocoa sourced from Brazil along with Browns’ unique recipe creates products
that are differentiated based on taste and quality. The alliance between the two firms is an
example of _____.
A. a joint venture
B. a vertical alliance
C. a horizontal alliance
D. a distribution agreement
Answer: B
23. Green Dye Inc., a manufacturing firm that produces organic products, is approached by Zoe,
a leading clothes designer owning her own label. Together, they create a line of clothes using
organic dye and fabric made from pure cotton. Which of the following is likely to be the primary
value created by this alliance?
A. Combining unique resources along different stages of the value chain
B. Lowering distribution costs at all stages of the value chain
C. Lowering the transaction costs at all stages of the value chain
D. Offering customized retail benefits to increase the sale of the products
Answer: A
Section reference: Ways to Create Value in Alliances
24. Two firms that produce industrial machinery decide to form a strategic alliance. The
objective of this collaboration is to combine their manufacturing facilities to achieve economies
of scale during production. Which of the following is the primary value they aim to create
through this alliance?
A. Combining unique skills
B. Pooling similar resources
C. Lowering distribution costs
D. Creating product differentiation
Answer: B
Section reference: Ways to Create Value in Alliances
25. _____ occurs when one partner tries to exploit the alliance-specific investments made by
another partner.
A. Hold-up
B. Misrepresentation
C. Bondage
D. Battery
Answer: A
Level of Difficulty: Easy
Section reference: The Risks of Alliances
Bloom’s: Knowledge

26. Stylink Inc. and Plateus Inc. formed an alliance to create and own a legally independent
company. However, Stylink tried to exploit the alliance-specific investments made by Plateus.
Which of the following is being exemplified in this case?
A. Hold-up
C. Bondage
D. Battery
Answer: A
27. _____ occurs when one partner in an alliance creates false expectations about the resources it
brings to the relationship or fails to deliver what it originally promised.
A. Hold-up
C. Bondage
D. Profit stealing
Answer: B
28. The research and development department of a pharmaceutical company is in the process of
developing a new drug to cure Parkinson’s disease. It requires additional resources to complete
the process. To convince another pharmaceutical company to provide the necessary resources, it
gives false information about how long the drug has been in the developmental pipeline and the
guidelines followed in the production process. Which of the following is being exemplified in
this case?
A. Hold-up
C. Bondage
D. Profit stealing
Answer: B
29. Pearltech Inc., an information technology company, decides to establish a business alliance in
order to differentiate its products. The manager of research and development, Sanah, is willing to
form an alliance only with individuals she has known for a long time or a company within
Pearltech’s business network. Nate, the operations head, suggests extending the prospects by
looking outside their usual network. Which of the following statements strengthens Sanah’s
argument?
A. Firms within the network could result in inbreeding of ideas.
B. Firms within the network prevent against opportunism.
C. Firms outside the network widen the scope of research solutions.
D. New partners bring in unique skills that add value to the product.
Answer: B
Bloom’s: Analyze
AACSB: Reflective thinking
30. An alliance is likely to rely most on relationships between individuals when it is based on
_____.
A. legal contracts
B. collateral bonds
C. goodwill trust
D. shared ownership
Answer: C
31. _____ are governance clauses in which parties often specify how profits or assets created
from alliances are to be split among partners.
A. Residual rights clauses
B. Voting rights clauses
C. Dispute resolution clauses
D. Noncompete clauses
Answer: A
32. _____ are governance clauses in which joint ventures must specify what percentage of
equity is owned by each of the partners.
A. Residual rights clauses

C. Equity clauses
D. Dispute clauses
Answer: C
33. An organization forms an alliance contract. It specifies in detail the duties and obligations of
each of the partners, how the profits are to be split by the partners, and the process by which
disputes will be resolved. Which of the following clauses is likely to cover the duties and
obligations of the partners, including warranties and minimum output levels required to satisfy
the contract?
A. Residual rights clause
B. Voting rights clause
C. Performance clause
D. Dispute clause

Answer: C
34. Teal Inc., forms a strategic alliance with White Corp. In their contract, they specify how
governance issues, operating issues, and termination issues would be resolved. Which of the
following is likely to be covered under the clause that deals with governance issues?
A. What performance is expected by Teal and White from each other
B. How intellectual property will be shared by Teal and White
C. Under which circumstances Teal or White can exit the alliance
D. How profits will be split between Teal and White
Answer: D
35. A graphic design firm and an advertising firm form a contractual alliance. In the first clause,
they specify how decisions will be made, how profits will be split, and how disputes will be
resolved. In the second clause, they specify how intellectual property will be shared and
protected. Which category of issues does the second clause address?
A. Governance issues
B. Operating issues
C. Exit issues
D. Termination issues
Answer: B

36. Two organizations that are positioned at different stages along the value chain form an
alliance. The contract includes the conditions under which the contract will be closed and the
consequences of closure for each partner. Which of the following clauses specifies the above
conditions?
A. Preemption rights clauses
C. Termination clauses
D. Noncompete clauses
Answer: C
Learning Objective: 8.4 Discuss the two potential dangers of strategic alliances and three ways
that firms can protect themselves against these dangers.
37. Spade Investments Corp. owns a financial stake in Loisa Inc., a manufacturing company.
Spade’s resources help the organization increase productivity, which results in increased sales
and profits. These profits are shared among the partners in a particular ratio. In this case, the
relationship between the two firms is based primarily on _____.
A. personal trust
B. legal contracts
C. shared equity
D. reputation
Answer: C
38. J.L. Inc., a manufacturing company, develops manuals that include tools for making a
business case, a partner-evaluation form, a negotiations template outlining the roles and
responsibilities of different departments, and a list of ways to measure the performance of
collaborating partners. Through this measure, J.L. primarily seeks to achieve _____.
A. organized alliance-management knowledge
B. increased external visibility
C. low transaction costs
D. increased profits
Answer: A
Section reference: Building an Alliance Management Capability
39. Plateus Inc., a software company, has a website that gives detailed information about
partnering processes for firms that seek collaboration with Plateus. Plateus describes the terms
and conditions of different grades of partnership on its website, allowing potential partners to
choose which level fits them best. Through this measure, Plateus seeks to primarily achieve
_____.
C. low transaction costs
Answer: B
40. Pharmax Inc., a pharmaceutical firm, holds annual surveys for its employees and the alliance
partners’ employees. After the survey, the management discusses the issues brought up by the
employees and their suggestions. Conflicts are avoided by regular interaction, and any dispute
that arises is resolved at an early stage. Through these measures, Pharmax seeks to primarily
achieve _____.
C. intervention and accountability
Answer: C
Fill in the blanks
41. A(n) _____ is a cooperative arrangement in which two or more firms combine their
resources and capabilities to create new value.
Answer: strategic alliance

Section reference: What Is a strategic alliance?
42. A(n) _____ is a type of strategic alliance in which cooperation between firms is managed
directly through contracts, without cross-equity holdings, or an independent firm being created.
Answer: nonequity OR contractual alliance

43. A(n) _____ is a type of contractual alliance in which a retailer may agree to provide certain
customized services in order to help sell a product.
Answer: distribution agreement


44. With respect to categories of issues, _____ issues deal with how decisions will be made, how
profits will be split, and how disputes will be resolved.
Answer: governance
Short answers
45. What are the ways in which strategic partners can build trust in alliance relationships?
Answer: There are four primary ways that partners build trust in alliance relationships: (1)
personal trust, (2) legal contracts, (3) shared equity/financial collateral bonds, or (4) reputation.
Essay Questions
46. Companies have three choices—make, buy, or ally—when it comes to conducting any
particular activity that needs to be done to offer a product or service to a customer. Explain the
three choices and the process involved in each.
Answer: First, firms can make, or conduct the activity themselves within the firm. Second, they
can buy, or purchase, the activity or input from another firm, using an arm’s-length relationship,
in which the buyer purchases an input with no obligation to have a long-term relationship with
the supplier. Companies that send out a bid to numerous suppliers and then buy from the supplier
that offers the lowest price have an arm’s-length relationship with those suppliers. The winner of
the bid this month may lose next month. Finally, they can ally, or acquire, the activity or input
from another firm, using an exclusive partnership relationship with that firm.
47. What are the four kinds of inputs and activities that might qualify as strategic inputs, which
merit forming an alliance relationship? Explain the four inputs with suitable examples.
Answer: Students’ examples may vary. However, the answer must include the following four
types of inputs.
i) Inputs that can differentiate a firm’s product in the minds of customers. Automakers are much
more likely to want to partner with a supplier that provides important engine or drivetrain
components that influence engine performance or reliability than one that provides fasteners. For
example, truck manufacturers often partner with Cummins, a respected maker of truck engines
and components, in the manufacture of their trucks.
ii) Inputs that influence a firm’s brand or reputation. Volvo, a Swedish manufacturer of cars and
trucks, has tried to develop a reputation on the safety of its cars. Consequently, it has worked
closely with key suppliers, including Autoliv, a Swedish supplier of seat belts and airbags, to put
pioneering safety technology into its vehicles.
iii) High value inputs or activities that make up a high percentage of a firm’s total costs.
Companies that make refrigerators are more likely to partner with the supplier who provides the
compressor—the component that costs the most and cools the refrigerator—than with the
suppliers of plastic trays or fixtures.
iv) Inputs or activities that require significant coordination in order to achieve the desired fit,
quality, or performance. Whenever one needs to coordinate closely with another firm to get the
desired performance from their input or activity, he or she probably want a partnership
relationship.
48. What are the three types of strategic alliances based on governance arrangement? Also,
briefly explain how alliances can also be categorized based on the stages of the value chain.
Answer: The following are the three types of strategic alliance based on governance
arrangement.

i) A contractual or nonequity alliance: This is a type of strategic alliance in which two or more
firms write a contract to govern their relationship. There is ownership shared between the
companies.
ii) An equity alliance: In this type of alliance, the collaborating firms often supplement contracts
with equity holdings in their alliance partners.
iii) A joint venture: This is an alliance in which collaborating firms create and jointly own a
legally independent company. The new company is created from resources and assets contributed
by the parent firms.
In addition to distinguishing alliances by the type of governance arrangement (e.g., nonequity,
equity, joint venture), alliances are sometimes categorized as either vertical alliances or
horizontal alliances. A vertical alliance is an alliance between firms who are positioned at
different stages along the value chain, such as a supplier and a buyer. A horizontal alliance is
between two firms that do not have a supplier-buyer relationship and are typically positioned at a
common stage of the value chain.
49. What are the different types of nonequity alliances?
Answer: Different types of nonequity alliances include:

i) Licensing agreement: It is an alliance in which one firm receives a license, or permission to
use a resource, such as a brand or a patent, from another firm in return for a percentage of the
revenues or profits.
ii) Supply agreement: It is a type of alliance in which a supplier may agree to develop certain
customized inputs for a customer.
iii) Distribution agreement: It is the agreement in which a distributor or retailer may agree to
provide certain customized services in order to help sell a product.
50. Explain the different ways through which a firm can create value in an alliance. Support your
answer with suitable examples.

Answer: Students’ examples may vary. However, the answer must include the following
concepts.
i) Combine unique resources: Pixar contributed computer-generated animation (CGA) and story-
writing skills that brought to life unique stories in films such as Toy Story, Finding Nemo, Cars,
and The Incredibles. Disney contributed worldwide film distribution to the partnership and sold
products involving Pixar’s movie characters—such as Woody and Buzz Lightyear—at its Disney
stores and theme parks.
ii) Pool similar resources: Intel and Micron wanted to manufacture flash memory—a business
that required billions of dollars of investment in plant and equipment. So they decided to create
IMFlash, a joint venture designed to produce flash memory products. By splitting the cost of the
plant and equipment, the two companies were able to build a much larger plant and, through
economies of scale, produce flash memory at a lower cost per unit.
iii) Create new alliance-specific resources: The alliance between Toyota Boshoku and Toyota is
an example of building new resources in order to improve efficiency, the ability of the partners to
coordinate their joint work. Toyota Boshoku, which supplies automobile seats to Toyota, built its
factory next door to Toyota’s assembly factory. Because seats are bulky and costly to ship,
building the plant nearby lowered Toyota Boshoku’s costs of inventory and shipping to Toyota.
Then, to further reduce shipping costs, Boshoku decided to build a conveyer belt to take seats
directly from its factory into Toyota’s. The factory plant and the conveyor belt were both new
resources that were created to support Boshoku’s transactions with Toyota. These investments
substantially lowered transportation costs, inventory costs, and the costs associated with having
face-to-face meetings.
iv) Lower transaction costs: General Motors and its suppliers had higher transaction costs
because they did not trust each other; so they spent a lot of time negotiating agreements and
writing legal contracts. In contrast, Toyota had developed relationships with its supplier partners
that were based on mutual trust. One thing that Toyota did to build trusting relationships with
some suppliers was to purchase a minority stock ownership stake in the supplier. Because Toyota
owned part of the suppliers’ stock, suppliers felt that Toyota would behave in a trustworthy
manner.

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Chapter 8: Strategic Alliances

Multiple Choice Questions

2. Which of the following statements is true about strategic alliances?

Copyright ©2016 John Wiley & Sons, Inc.

Copyright ©2016 John Wiley & Sons, Inc.

Copyright ©2016 John Wiley & Sons, Inc.

Copyright ©2016 John Wiley & Sons, Inc.

Copyright ©2016 John Wiley & Sons, Inc.

Copyright ©2016 John Wiley & Sons, Inc.

A. Residual rights clauses

Copyright ©2016 John Wiley & Sons, Inc.

Copyright ©2016 John Wiley & Sons, Inc.

Fill in the blanks

Answer: strategic alliance

Answer: nonequity OR contractual alliance

Answer: distribution agreement

Copyright ©2016 John Wiley & Sons, Inc.

Copyright ©2016 John Wiley & Sons, Inc.

49. What are the different types of nonequity alliances?

Answer: Different types of nonequity alliances include:

Copyright ©2016 John Wiley & Sons, Inc.

Copyright ©2016 John Wiley & Sons, Inc.

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