ALLIANCES AND JOINT VENTURES

INTER-FIRM RELATIONSHIPS
Inter-firm relationships are paths to value
enhancement along with internal growth,
M&As, etc.
Analysis of relationships should be done within
the context of firm’s overall strategic
planning
Alliances and other arrangements between
firms have become more important since
1985 legislation eased antitrust barriers

JOINT VENTURES
JV characteristics
Combination of assets from 2 or more parent
firms place into a separate business entity
Limited scope and duration
May not affect competitive relationships
Examples: R&D, joint production of single
product
JVs and business strategy
JVs a part of multiple paths to value growth
(Geis & Geis, 2001)
Microsoft used over 782 JVs and alliances to:
Develop new product markets
Cable TV – NBC alliance: MSNCNBC
Online gaming – JV with Dreamworks to
produce games: Dreamworks
Interactive
Expand into new geographic areas (e.g.
deals to expand in Japan)
Participate in new technologies (e.g.
wireless deals with Qualcomm, Ericsson)

JVs and restructuring

JVs can be used as transitional mechanism in
broad restructuring (Nanda & Williamson,
1995)
Buyer can better determine value of seller's
brands, personnel, etc.
Risk of making mistakes is reduced through
direct involvement with business
Customers moved to buyer over a period of
time in which both firms are involved in JV
 Buyer builds up expertise in JV
Seller is able to realize higher value from sale
following JV due to increased buyer
knowledge of assets

Other benefits of JVs

Knowledge acquisition is goal of at least 50%
of JVs – best for “learning by doing” with
complex processes
Risk reduction – expansion of activities with
smaller required investment
Tax aspects – contribution of patent or
technology may be more tax effective than
licensing (depreciation may offset
revenues)
International aspects – reduces risk of foreign
expansion (some nations require firms to
take a local partner)

Reasons for failure of JVs (70% disbanded

early)
Technology never developed
Inadequate preplanning
Disagreement over basic objectives
 Managers refuse to share expertise with
counterparts from other firm
Requirements for success
Participants have something of value to JV
JV should be carefully preplanned
Agreement should provide flexibility
Should include provisions for termination
Key executives involved in implementation

Empirical tests
Business and economic patterns (Berg et al,
1982)
Industry JV participation increases with: firm
size, capex, profitability
Technologically oriented JVs: substitute for
long-term R&D more often than short-term
JVs and R&D are complements at industry
level
Event returns (McConnell & Nantell, 1985)
Value of gains evenly divided between firms
No change of management – gains must be
from synergy
STRATEGIC ALLIANCES
Informal or formal agreement between two
or more firms to cooperate in some way
Created due to industry uncertainty and
ambiguity – value chains, new technology,
etc.
Need not create new entity
Relative size of firms may be highly unequal
Difficult to anticipate consequences –
relationships evolve, firm boundaries blur
Firms pool resources and expertise hoping
for synergy from learning capabilities, etc.
Allow firms much flexibility

Examples
Motorola, AT&T and Lucent Technologies
Cooperation on system for voice commands
United States Postal Service and DHL
Joint offering of international 2-day delivery
Goodyear and Sumitomo Rubber
Combined research and purchasing in 6 JVs
AOL, Walmart and Electronic Arts
Partnerships with brick & mortar retailers
Deals with software developers
2.6% of SAs result in M&As – more likely
in mature industries (Hagedorn,
Sadowski, 1999)

Types of alliances (Bleeke & Ernst, 1995)

Collisions between competitors – tensions
cause failure
Alliances of the weak – weak grow weaker
Disguised sales – strong competitor buys
weak
Bootstrap alliances – weak firm improved by
strong until alliance becomes on equal
footing
Evolution to a sale – successful SA becomes
sale when tension emerges
Alliances of complementary equals – SA
succeeds due to compatibility

Requirements for success

Well defined strategic themes
Organization relationships should facilitate
communication to share decision making
SAs viewed in real options framework – allows
portfolio of potential growth opportunities
High level management should be involved
Must be positive incentive to overcome
tension
SA governance must adapt to different types
of alliances
SAs must seek out growth opportunities to
augment core capabilities

RELATIVE ROLES
Acquisitions
Rapid augmentation of firm capabilities
Consequences are long lasting
Often costly due to takeover premium
Challenges of combining organizations

Joint ventures
Reduce relative size of investments and risks
Create new entities and relationships
Can develop learning and new opportunities

Strategic alliances
Broaden range of potential opportunities
Relationships are more ambiguous – greater
need for communication
MINORITY EQUITY INVESTMENTS
Actively employed by successful high
technology firms with substantial cash
balances

Rationale for investor

Investments in promising startups can yield
high returns and substantial long term
benefits
Information source about growth
opportunities
Method for learning about industries and
firms
Identification of new managerial talent
May expand markets for investor’s products

Rational for recipient

May gain knowledge from investing firm
Increases financing resources
May bring visibility
TECHNOLOGICAL AND MARKETING
AGREEMENTS
1) Exclusive agreements
Enable firms to combine complementary
strengths more quickly and at lower costs
May develop into other forms of
interdependence between firms

2) Licensing agreements
Licensee may use the knowledge or processes
of licensor for a fee
Method of expanding market for firm’s
product, or gaining acceptance for new
product
Licensee may gain by adding successful
product
High immediate returns for licensor in
market, but may create future competitor
FRANCHISING
Contracts between franchiser (parent) and
franchisee that grant rights to use name,
brand, etc. within specific area
Widely used in geographically dispersed
industries (McDonald’s)
Reduces monitoring costs – franchisees returns
are tied to performance
Potential conflicts
Franchiser has risk of franchisee not
conforming to standards
Franchisee may prefer to use different
vendors
Disagreements with respect to size of
franchisee’s exclusive area exclusive