Chapter 6: Engaging in CrossBorder Collaboration

Managing across Corporate Boundaries

and

Reading 6-1: The Design and Management of International Joint Ventures

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

What is a Strategic Alliance?

A formal and mutually agreed commercial collaboration between companies The partners pool, exchange or integrate specific business resources Yet they remain separate businesses, making alliances distinct from mergers and acquisitions

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Strategic Alliances

One of innumerable forms of commercial interaction One of four forms/modes of investment

Partially Owned Existing Capital Participation Joint Venture Wholly Owned Acquisition

New

Greenfield
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Range of Strategic Alliances

Joint Venture

High

(Equity Participation)

Co-production/ Buyback

Level of Interaction

R&D Consortia Cross Licensing Franchising Patent Licensing Cooperation Agreement Strategic Alliances

Low

Competition

Type of Arrangement

Cooperation
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In the 1960s and 1970s Alliances were Primarily used in Peripheral Markets and Technologies
Critical Markets Peripheral
Alliance

Critical
Technologies

Alliance Frontier

Alliance Alliance

Peripheral
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In the 1980s the Alliance Frontier Moved to Encompass More Important Markets and Technologies
Critical Critical
Alliance

Markets

Peripheral

Technologies

Alliance Frontier

Alliance Alliance

Peripheral

Examples Ford - Mazda Philips - Siemens Rolls Royce + Japanese

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In the 1990s New Alliance Frontiers were Crossed

Duration of Agreement Short Long or Unspecified Non Equity Ownership
Alliance

Alliance Frontier

Alliance

Equity

Alliance

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And Now We Are In The Age of International + Alliance Capitalism

Equity JV

Strategic Alliance Emphasis

Non-Equity

Do It Yourself

Domestic

Regional

International
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Geographic Scope

Where Alliances are Occurring Between Entrepreneurial Start-ups and Large Firms, and Speed of Establishment is Increasing
Months Large Firms

Time-Frame

Years

Linkages Between

Alliance Frontier

Entrepreneurial Firms
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Popular View Says JVs are:

A transitional organization form. Less profitable. Impossible to manage. A sure way to lose ones technology. Only undertaken as a last resort.

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Why Strategic Alliances

Technology Exchange
Global Competition Industry Convergence Economies of Scale Reduction of Risk Alliances as an Alternative to Mergers
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Objective Reality
Average age of international JVs nearly 10 years (similar to greenfield startups; longer than acquisitions). Profitability identical with other organizational alternatives. Managing has become easier, so usage up. 40% of all investments in Asia Pacific are JVs.

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Objective Reality (contd)

Some companies which possess strong technology often prefer to use JVs. (i.e., Japanese firms with a Kyousei - group coordination - philosophy) The days of government regulation forcing the use of JVs are behind us.

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Effect of Foreign Equity Holding on Subsidiary Mortality Risk?

Stability Similar to Wholly-owned Subsidiaries Except with Small Equity Holdings
4:1 Mortality Risk 3:1 2:1

1:1

20

40

60

80

100

Foreign equity in the subsidiary (%)

1:1 = equivalent to wholly owned subsidiary

Source: Dhanaraj, Charles and Paul W. Beamish, 2004. Effect of Equity Ownership on the Survival of International Joint Ventures, Strategic Management Journal, 25(3): 295-305.

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Strategic Alliance Advantages and Disadvantages

On the PLUS side. Reduce costs & risks Gain access to complimentary assets and new markets Opportunities to learn from partner Possibilities to use alliances and networks as an operational (real) option rather than a financial option. On the DOWN side Risk of choosing the wrong partner Costs of negotiation, coordination Partner opportunism Learning race (tacit vs. explicit knowledge)

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Selection: Resource Based Considerations

VALUE: The creation of value means generating economies of scale for cost reduction, or complimentary skills for tapping new opportunities. Alliances might reduce costs, risks and uncertainties. Alliances allow partners to tap into complimentary assets. Alliances facilitate opportunities to learn.

RARITY: Good alliances represent unique situations.

Capability rarity. Partner rarity & First Mover Advantage IMITIBILITY: The alliances benefits to the partners should be hard for others to imitate. At the firm level (ex. McDonalds in Moscow). At the alliance level. ORGANIZATION: Do the alliance partners provide resources to manage the partnership?
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Joint Venture Checklist

Test the strategic logic. Do you really need a partner? For how long? Does your partner? How big is the payoff for both parties? How likely is success? Is a joint venture the best option? Ensure congruent performance measures exist.

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Joint Venture Checklist (contd)

Partnership and fit.
Does the partner share your objectives for the venture? Does the partner have the necessary skills and resources? Will you get access to them? Will you be compatible? Can you arrange an engagement period? Is there a comfort versus competence trade-off?

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What Do You Want From Your Partner?

Parent A WANTS ACCESS TO PARTNERS KNOWLEDGE WANTS ACCESS TO PARTNERS KNOWLEDGE WANTS ACQUISITION OF PARTNERS KNOWLEDGE WANTS ACQUISITION OF PARTNERS KNOWLEDGE

Parent B

The Classic Joint Venture Mixed Motive A cooperative alliance A pseudo alliance (very stable) (eventually unstable)

Mixed Motive A pseudo alliance (eventually unstable)

Race to Learn A competitive alliance (very unstable)

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Partner Selection: Comfort vs. Competence

Higher

Unstable

Target

Partner Comfort
Non-Starter
Lower Lower Higher
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Unstable

Partner Competence

Joint Venture Checklist (contd)

Shape and design.
Define the ventures scope of activity and its strategic freedom vis--vis its parents. Lay out each parents duties and payoffs to create a win-win situation. Ensure that there are comparable contributions over time. Establish the managerial role of each partner.

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Scope of Activity
Narrow Single, Geographic Market Single Function Single Industry/Customer Group Modest Investment Existing Business Limited Term vs. vs. vs. vs. Wide Multi-Country Complete Value Chain Multi Industry

vs. vs. vs.

Large Scale New Business Forever

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Control in Joint Ventures

Two types: One parent dominates the ventures decision making (but is this a joint venture?) Parents are both involved in decision making
shared split

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Shared Control
Parent A Parent B

JV Board of Directors

R&D OPS

FIN

MKT
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Split Control
Parent A Parent B

JV Board of Directors

R&D OPS

FIN

MKT
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Limiting Opportunism: Contracts Vs. Trust

Contractual controls limit opportunism by specifying the exact role and performance criteria of the strategic partners. GOOD FOR SITUATIONS REQUIRING ECONOMIES OF SCALE.
Trust takes longer, relationships and informal interdependence. GOOD FOR SITUATIONS REQUIRING FLEXIBILITY AND TAKING ADVANTAGE OF UNFOLDING OPPORTUNITIES.

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Joint Venture Checklist (contd)

Doing the deal.
How much paperwork is enough? Trust versus legal considerations? Agree on an endgame.

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Joint Venture Checklist (contd)

Making the venture work.
Give the venture continuing top management attention. Manage cultural differences. Watch out for inequities. Be flexible.

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In Summary, a True Alliance Differs from a Pseudo Alliance

The True Alliance
Planned level of parent input and involvement Distribution of risks/rewards Parent attitude toward the JV The Pseudo Alliance One-time

Continuing

Roughly even A unique organization with unique needs

Uneven One more subsidiary

The formal agreement

Performance objectives

Flexible guideline
Clearly specified and congruent

Frequently referenced rulebook

Partially overlapping/ ambiguous

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