STRATEGIC ALLIANCES

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Four Basic Ways to Ensure Tasks Are Completed

Internal activities

Activities that are core strengths may be the best way to perform the activity. Gives the acquiring firm full control over the way the particular business function is performed Can be difficult and expensive. (Culture/Competitors) Most business transactions are of this type. Short-term arrangement that fulfills a particular business need but doesnt lead to long-term strategic advantages. Multifaceted, goal-oriented, long-term partnerships between two companies Both risks and rewards are shared. Typically lead to long-term strategic benefits for both partners.
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Acquisitions

Arms-length transactions

Strategic alliances

Framework for Strategic Alliances: When to Go for a Strategic Alliance?

Adding value to products Improving market access Strengthening operations Adding technological strength Enhancing strategic growth Enhancing organizational skills Building financial strength

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Downsides
Core competencies should not be compromised Competitive advantages should not be compromised

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Benefits of Strategic Alliances

Potential Benefits of Strategic Alliances

Ease of Market Entry

Shared Risk

Shared Knowledge and Expertise

Synergy and Competitive Advantage

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Types of Alliances
Comprehensive Functional

Production Marketing Financial Research and Development

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Comprehensive Alliances
Participating firms agree to perform together multiple stages of the process by which goods or services are brought to the market Functional areas are intertwined between firms Organized as joint ventures Achieves greater synergy through sheer size and total resources

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Functional Alliances
Involve only a single functional area of the business Integration is less complex Does not typically take the form of a joint venture

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The Scope of Strategic Alliances

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Implementation of Strategic Alliances

Selection of partners Compatibility Nature of potential partners products or services Relative safeness of the alliance Learning potential of the alliance

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Asahi Video Products Company:

A Joint Venture between Corning and Asahi Glass

Asahi Glasss expertise in large television bulb technology complemented Cornings strength in other bulb sizes Joint venture would benefit from Asahi Glasss ongoing business connections Combined strength of the two firms would help both stay abreast of technological innovations

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Asahi Video Products Company:

A Joint Venture between Corning and Asahi Glass

Asahi Glass would benefit from Cornings technology and marketing clout in U.S. Corning had successfully operated another joint venture with Asahi Glass

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Form of Ownership
Corporation Limited partnership Public-private venture

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Joint Management Considerations

Shared management agreements Assigned arrangements Delegated arrangements

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Shared Management Agreement

Partner 1

Both partners participate actively

Partner 2

Alliance

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Assigned Arrangement

Partner 1

One partner takes primary responsibility

Partner 2

Alliance

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Delegated Arrangement

Partner 1

Both partners delegate management to the joint ventures executives

Partner 2

Joint Venture

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2004 Prentice Hall

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Pitfalls of Strategic Alliances

Pitfalls of Strategic Alliances

Incompatibility of partners

Access to Information

Distribution of Earnings

Loss of Autonomy

Changing Circumstances

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2004 Prentice Hall

8-18

Three Types of Strategic Alliances

Third Party Logistics (3PL) RetailerSupplier Partnerships (RSP) Distributor Integration (DI)

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Third Party Logistics (3PL)

Use of 3PL providers to take over a companys logistics functions Almost a $85billion industry by 2004 8% of all logistics costs attributed to 3PL

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What Is 3PL?
Strategic partnership Long term commitment Multi-function arrangement Process integration Large range of 3PL companies

Non-asset owning 3PL companies called 4PL

Provide

services but not trucks, warehouses

Prevalent usage with larger companies

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3PL Advantages

Focus on Core Strengths

Allows a company to focus on its core competencies Logistics expertise left to the logistics experts

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3PL Advantages

Provides Technological Flexibility

Technology advances adopted by better 3PL providers Adoption possible by 3PLs in a quicker, more cost-effective way 3PLs may have the capability to meet the needs of a firms potential customers

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3PL Advantages

Provides Other Flexibilities

Flexibility in geographic locations. Flexibility in service offerings Flexibility in resource and workforce size

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3PL Disadvantages

Loss of control inherent in outsourcing a particular function.

Outbound logistics 3PLs interact with a firms customers. Many third-party logistics firms work very hard to address these concerns.

Painting company logos on the sides of trucks, dressing 3PL employees in the uniforms of the hiring company, and providing extensive reporting on each customer interaction.

Logistics is one of the core competencies of a firm

Makes no sense to outsource these activities to a supplier who may not be as capable as the firms inhouse expertise

Wal-Mart, pharmaceutical companies

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3PL Issues Costs and Customer Orientation

Know your own costs

Compare with the cost of using an outsourcing firm. Use activity-based costing techniques Ability of provider to understand the needs of the hiring firm and to adapt its services to the special requirements of that firm. Reliability. Flexibility of the provider

Customer orientation of the 3PL

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3PL Issues Specialization of the 3PL

Consider firms whose roots lie in the particular area of logistics that is most relevant to the logistics requirements in question. Firms may have even more specialized requirements Firms can use one of its trusted core carriers as its third-party logistics provider.

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3PL Issues
Asset-Owning vs Non-Asset-Owning 3PL

Asset-owning companies

Significant size, human resources, customer base, economies of scope and scale, and systems May be bureaucratic with a long decision-making cycle.
May have limited resources and bargaining power May be more flexible Able to tailor services and have the freedom to mix and match providers. May have low overhead costs and specialized industry expertise at the same time
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Non-asset-owning companies

3PL Implementation Issues

Buying company
Should devote enough time to start-up considerations (First 6-12 months most critical) Must identify exactly what it needs for the relationship to be successful Be able to provide specific performance measures and requirements to the 3PL firm.

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3PL Implementation Issues

3PL company:

Must consider and discuss requirements honestly and completely, including their realism and relevance

Both parties:
Must dedicate time and effort for the relationship Treat as a mutually beneficial alliance No transaction pricing mentality

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Other Issues

The third party and its service providers must respect the confidentiality of the data. Specific performance measures must be agreed upon. Specific criteria regarding subcontractors should be discussed. Arbitration issues should be considered before entering into a contract. Escape clauses should be negotiated into the contract. Methods of ensuring that performance goals are being met should be discussed

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Retailer-Supplier Relationships
Cooperative relationship between suppliers and retailers to use one anothers knowledge Suppliers have better knowledge of lead times and production capacities Retailers have better knowledge of demands

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Types of RSP Quick Response Strategy

Suppliers receive POS data from retailers Suppliers use this information to synchronize their production and inventory activities with actual sales at the retailer. Retailers still prepare individual orders POS data are used by suppliers to improve forecasting and scheduling and to reduce lead time

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Types of RSP Continuous Replenishment Strategy

Also called rapid replenishment Suppliers receive POS data Suppliers use these data to prepare shipments at previously agreed-upon intervals to maintain specific levels of inventory. Advanced form of continuous replenishment

Suppliers may gradually decrease inventory levels at the retail store or distribution center as long as service levels are met.

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Types of RSP Vendor Managed System (VMI)

Also called vendor-managed replenishment (VMR) system Supplier decides on the appropriate inventory levels and the appropriate inventory policies to maintain these levels. Supplier suggestions initially approved by retailer Goal of many VMI programs is to eliminate retailer oversight on specific orders. Wal-Mart and Procter & Gamble VMI

Partnership, begun in 1985 Has improved P&Gs on-time deliveries to Wal-Mart while increasing inventory turns

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RSP Requirements
Presence of advanced information systems Top management commitment

Especially because information will be shared across companies

A level of trust among partners

Supplier manages retailers inventory Retailer provides sales information to supplier Reduced inventory leads to space savings

Should

not be given to competitors

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RSP Inventory Ownership

Who makes the replenishment decisions? Who owns the inventory until it is sold?

Consignment relationship in VMI programs

Supplier owns the inventory until it is sold

Issues with consignment relationship:

Retailer lowers inventory cost Supplier can manage inventory more effectively Supplier can move as much inventory as contract allows Higher costs to supplier because of longer inventory holding Power relationship between supplier and retailer may move the supply contract to consider higher system savings rather than savings from one party only (Global v. Local)
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RSP Implementation

Performance measurement criteria must also be agreed to.

Non-financial measures as well as the traditional financial measures.

Initial problems can be worked out through communication and cooperation. Manufacturing technology or capacity at supplier may need to be modified/enhanced to respond to specifics in the contract:

Fast response to emergencies Situational changes at the retailer

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Steps in RSP Implementation

Initially, the contractual terms of the agreement must be negotiated on the following:

Inventory ownership Credit terms Ordering responsibilities Performance measures such as service or inventory levels, when appropriate.

The following three additional steps need to be executed:

Development of integrated information systems Development of effective forecasting techniques Establishment of a tactical decision support tool to assist in coordinating inventory management and transportation policies
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Advantages of RSP

Better knowledge the supplier has about order quantities

an ability to control the bullwhip effect

provides a good opportunity for the reengineering of the retailersupplier relationship.
eliminate

A variety of side benefits

redundant order entries automate manual tasks can be automated reassign tasks for better efficiency Eliminate unnecessary control steps
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Necessary to employ advanced technology, which is often expensive. Essential to develop trust in what once may have been an adversarial supplier retailer relationship. Supplier often has much more responsibility than formerly.

Disadvantages of RSP

May force the supplier to add personnel to meet this responsibility.

Expenses at the supplier often increase as managerial responsibilities increase. Consignment arrangement may increase inventory costs for the supplier. Float

Retailers accustomed to waiting 30 to 90 days to pay for goods may now have to pay upon delivery
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Distributor Integration (DI)

Distributors an important partner in the supply chain Distributors have a wealth of information about customer needs and wants

Successful manufacturers use this information when developing new products and product lines.

Distributors typically rely on manufacturers to supply the necessary parts and expertise
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Changing View Regarding Distributors

Strong and effective distribution network cannot always meet challenges

Rush order might be impossible to meet from inventory Customer might require some specialized technical expertise that the distributor does not have.

In the past, issues were addressed by adding inventory and personnel Modern information technology leads to a third solution

Distributor Integration

Expertise and inventory located at one distributor is available to the others.

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Types of DI

Addresses both inventory-related and service-related issues

Inventory pooling across the entire distributor network Each distributor checks inventories of other distributors to locate a needed product or part. Dealers are contractually bound to exchange the part under certain conditions and for agreed-upon remuneration.

lowers total inventory costs increases service levels.

Can meet a customers specialized technical service requests

Steer special requests to the distributors best suited to address them Centers of Excellence for Otra, a large Dutch holding company 70 electrical wholesale subsidiaries some designated as centers of excellence Other subsidiaries, as well as customers, are directed to these centers of excellence to meet particular requests
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Issues in DI

Distributors may be skeptical of the rewards of participating in such a system Participating distributors will be forced to rely upon other distributors, some of whom they may not know, to help them provide good customer service. Tends to take certain responsibilities and areas of expertise away from certain distributors, and concentrate them on a few distributors. It is not surprising that distributors might be nervous about losing these skills and abilities. DI relationship requires:

a large commitment of resources and effort for the manufacturer a long-term alliance. trust among the participants. pledges and guarantees from the manufacturer to ensure distributor commitment.
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How Strategic Alliances Create Value

Improve Current Operations

Value Creation

Shaping the Competitive Environment

Facilitating Entry and Exit

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Improving Current Operations

Exploiting economies of scale a partner brings increased market share and/or manufacturing capacity Learning from partners a partner brings technology and/or market knowledge Risk and cost sharing a partner bears a portion of the risk and/or cost of the alliance
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Shaping the Competitive Environment

Facilitating technology standards partners may agree on a standard and avoid a market battle for the standard
Facilitating tacit collusion partners may communicate within an alliance in subtle, legal ways whereas the same communication between competitors outside an alliance would be illegal
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Facilitating Entry and Exit

Low-cost entry into new industries a partner provides instant access and legitimacy

Low-cost exit from industries a partner is an informed buyer

Managing uncertainty alliances may serve as real options Low-cost entry into new geographic markets partners provide local market knowledge, access, and legitimacy with governments and customers
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Challenges to Value Creation and Allocation

Incentives to Misappropriate Value (Cheat)

An alliance is an exchange context in which: partner inputs may be difficult to monitor actual value creation may be difficult to monitor value appropriation (allocating the value) may be: difficult to monitor

subject to power dynamics

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Challenges to Value Creation and Allocation

Three Forms of Misappropriating Value
Adverse Selection

misrepresenting the value of inputs

Moral Hazard
Holdup

providing inputs of lesser value than promised

exploiting the transactionspecific investment of partners

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Sustained Competitive Advantage

Are strategic alliances rare?

As a form of organizing economic exchange, NO!

However,

The sources of value creation within alliances may be rare. firms may form a combination of complementary resources within an alliance that is rare the stock of such complementary resources may be limited so that first movers have a rare combination
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Sustained Competitive Advantage

Are strategic alliances costly to imitate?

As a form of organizing economic exchange, NO! the organizational form per se is easily duplicated
However,

The resource combinations that create value in alliances may be very costly: the value creating combination depends on social complexity (trust), causal ambiguity, and/or historical uniqueness
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Sustained Competitive Advantage

Are strategic alliances substitutable?

Internal Development

Mergers & Acquisitions

If: no partner is available

Substitutes for Strategic Alliances

If:
there are no anti-trust issues low uncertainty about the investment firms can be integrated easily value of combined firms is not tied to independence
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transaction-specific investment is high low uncertainty about the investment