Riddle of the Sphinx: Who is my customer in the morning, my rival in the afternoon, and my supplier in the evening?

Jack Welch, former Chairman of G.E.

STRATEGIC ALLIANCES Module III

Contents
Strategic Alliances Types of Strategic Alliances Reasons for Strategic Alliances Risks of Strategic Alliances Stages of Alliance Formation Examples Major strategic alliances of Samsung electronics LG Electronics alliance portfolios Sun Microsystems alliance portfolios Philips Alliances

Strategic Alliance is a significant long/term partnership and collaborative agreement entered into by two or more companies to pursue a set of agreed upon critical goals while remaining (legally) independent organizations. These collaborations can come in many shapes and sizes, including contractual and equity forms. It normally is a synergistic arrangement whereby the participating organizations each brings different strengths and capabilities to the alliance.

The whole is greater than sum of parts

 Partners

may provide the strate gic alliance with resources such as products, distribution channe ls, manufacturing capability, pro ject funding, capital equipment, knowledge, expertise, or intelle ctual property. Ex : Star Alliance

Strategic alliance

Firm A Partnerships between firms where their Firm B

Resources
Capabilities are combined to pursue mutual interests to
Develop
Manufacture Distribute Services Goods

Core Competencies

Strategic Alliance
e.g.: 1. GMs components division supplies components to Toyota
2. Canon produces medium volume copiers for sale in Kodaks name

3. Alliances of major US airlines with smaller carriers in Europe

4. IBM, Siemens & Toshiba working together to create new generation memory chips

5. Du Pont & Sony developing optical memory storage products

6. GM & Hitachi collaborating to produce electronic components for automobiles

PROS/CONS of Strategic Alliance

PROS
Sharing costs/risks Developing new technologies Capturing economies of scale Access to new markets/technologies Organizational learning Overcoming governmental barriers

CONS

Possible opportunistic behavior of partners Searching costs Coordination costs Monitoring costs Technology/information leakage

Types of Strategic Alliances

Joint Venture Independent firm is created by the joining assets fro m two other firms where each contributes 50% of the total Example: Dow Corning from Dow Chemical and Corning Inc.

Equity Strategic Alliance

Partnership where the two partners do not own equal s hares Example: Chrysler and Mitsubishi Automotive

Non-Equity Strategic Alliance

Contract is given to supply, produce or distribute a firms goods or services (without equity sharing) Example: Chryslers supplier network

Types of Strategic Alliances

Global Strategic Alliances
working partnerships between companies (often more than two) across national boundaries and increasingly across industries. Sometimes formed between company and a foreign government, or among companies and governments

Reasons of Strategic Alliances

STRATEGIC ALLIANCE MOTIVES

> Sharing costs and risks > Formulating technical standards and designs > Preempting key competitors

> Combining complementary skills > Accessing new markets and technologies > Reserving learning opportunities

STRATEGIC ALLIANCES
13 CRITICAL COMMITMENTS FOR STRATEGIC ALLIANCES If you are considering a strategic alliance, it is essential that you make at least the following thirteen critically important co mmitments.

1- Commit to having clear purposes, objectives and metrics for the alliance, with Key Result Areas ( KRAs) by functional department. 2- Commit to becoming conversant with at least the basic language, history, culture, customs, and h olidays in the country where the strategic alliance is located.

3- Commit to having the strategic alliance managed well using a governance structure that makes it clear how decisions will be made and by whom.
4- Commit to clearly understanding how the alliance will be financed, how losses and profits will be determined and allocated, and how future financial contributions will be addressed. 5- Commit to articulating what you will consider success or failure (so you know when to hold and w hen to fold) and within stated time frames. 6- Commit to managing risk by monitoring compliance with applicable regulatory, legal, and other re quirements. 7- Commit to considering a code of conduct that is enforced so that everyone understands and is h eld accountable to the business values of the alliance.

STRATEGIC ALLIANCES
13 CRITICAL COMMITMENTS FOR STRATEGIC ALLIANCES

8 - Commit to being actively engaged in the operation of the alliance and to having re gularly scheduled, face to face, on site operational reviews, and to having excellent in ternal controls including segregation of duties 9 - Commit to using alternative dispute resolution when the inevitable disagreements arise. 10 - Commit to building and managing the alliances relationship capital through con tinuous communication and pro-active exchange of information before, during, and af ter the alliance. 11 - Commit to having a clear, written, entrance strategy and strategic plan. 12 - Commit to having a clear, written exit strategy; for everything there is a time and a season and nothing lasts forever. 13 - Commit to having business legal counsel with experience in the area of the allian ce to prepare the alliance document that helps you achieve your business objectives and which reflects your business decisions.

Stages of Alliance Formation

Strategy Development
Strategy Development
studying the alliances feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people.

Partner Assessment

Contract Negotiation

Alliance Operation

Partner Assessment
analyzing a potential partners strengths and weaknesses, creating strategies for accommodating all partners management styles, preparing appropriate partner selection criteria, understanding a partners motives for joining the alliance and addressing resource capability gaps that may exist for a partner.

Stages of Alliance Formation (contd)

Strategy Development Partner Assessment Contract Negotiation Alliance Operation

Contract Negotiation
determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partners contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.

Alliance Operation
addressing senior managements commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, and measuring and rewarding alliance performance.

Success factor of Strategic Alliance

Compatibility
Existing Networks, Corporate Culture of Partner

3C
Capability
Resources and Core Competence of Partner

Commitment
Passion, Longing of Partner for the Alliance

Risks of Strategic Alliances

Strategic alliances can lead to competition rather than cooperation, to loss of competitive knowledge, to conflicts resulting from incompatible cultures and objectives, and to reduced management control .
A study of almost 900 joint ventures found that less than half were mutually agreed to have been successful by all parties (Harrigan, 1986; Dacin et al , 1997 Spekman et al, 1996).

Reasons for Failure

60% of partnerships fail!
Lack of partnership experience Cultural mismatch Misunderstood operating principles Lack of financial commitment Slow results or payback Lack of shared benefits Poor communications Overly optimistic 0 50 20 Caution 28 31 32 Critical 42

49
54 73 100

Source: Alliance Analyst Survey of 455 CEOs

An alliance can fail for many reasons

failure to understand and adapt to a new style of management failure to learn and understand cultural differences between the organizations lack of commitment to succeed strategic goal divergence insufficient trust operational and geographical overlap unrealistic expectations

Examples

Major strategic alliances of Samsung electronics

Partners
KDDI Bang & Olufsen Kent State University Qualcomm Toshiba (TSST)

Areas of Cooperation
Supply CDMA2000 1xEV-DO network equipment in Eastern Japan Partner in home theater business Co-develop display technologies Cooperation in MDDI (Mobile Display Data Interface) technology Develop and market optical storage devices

Sony (S-LCD) IBM Dell Hewlett-Packard

Disney Napster Sony NEC Matsushita Best Buy Microsoft

Establish joint venture for 7th generation LCD (1870 x 2200 mm) line Co-develop nano-logic process technologies Supply multi-functional laser printers Share technology for ink-jet printers
Supply "Movie Beam" set-top box for VOD Co-develop and market Samsung-Napster player Expand and consolidate memory stick business Cooperate in high-end business computer systems Standardize technology, co-produce and jointly market DVD recorders Sell side-by-side refrigerators through a network of more than 500 re tailers Co-develop digital household electronics
Source : http://www.samsung.com/us/aboutsamsung/companyprofile/

LG Electronics alliance portfolios

Sun Microsystems alliance portfolios

Competitor (16%)

Suppliers ( 20.2%)

Sun micro systems

Customers ( 5.8%)

Complementors (54.5%)

Others (2.9%)

Sun Microsystems business and alliance strategy

Business Strategy
Highly vertical: ownership of technology (operating system plus CPU), provide services Use of shared software and hardware components among different vendors to create industry standards Belief in open systems to allow computers to talk to one another

Alliance Strategy
Align with partners to provide services (e.g., IBM, EDS, Andersen Consulting) Licensing of technology (e.g., Java, Solaris, SPARC) to develop industry standards Align with resellers to sell into indirect channels Outsource manufacturing of SPARC chips to Texas Instruments Internet alliances (e.g., Netscape/AOL) to deliver applications and services

Internet/e-commerce specialist

Dell computers alliance portfolios

Competitor (10.7%)

Suppliers ( 41.7%)

Dell computers

Customers ( 3.9%)

Complementors (38.8%)

Others (4.9%)

Dell computers business and alliance strategy

Business Strategy
Virtual integration: control flow of information from suppliers to customers Assembler versus owner of technology Direct model (with both suppliers and customers) offers competitive advantage (low cost, first-to-market with latest technology) Desire to move into the enterprise computer market

Alliance Strategy
OEM alliances with key component suppliers such as Intel Service alliances with Decision One, IBM, EDS, Andersen Consulting Generate revenue outside the box by aligning with Internet service providers (e.g., AOL) Streamline logistics with suppliers by implementing valuechain.com Distribution alliances with valueadded resellers and retailers to gain international presence Technology transfer agreements (e.g., IBM) to move into enterprise market

Asiana airlines alliances with competitiors (Star alliances)

Codeshare agreements of airline industry First truly global airline alliance

PRODUCTS PORTFOLIO
Advanced Micro Devices (AMD) and Beijing University Founder Group -- in an effort t o increase its market share in China AMD recently formed an alliance with the Founder Group. The latter will make and sell computers based on AMD's 64-bit microprocessors; while AMD sees this move as a way to make a new start to its business in China. Founder Group sees the alliance as a response t to increased competition from Intel, which has dominated the local market. Initially, they will target the publishing sector, of which the Group has a more than 80).
Yahoo

and Sina Sina (the leading mainland internet portal) and Yahoo have teamed up to offer auction servic es in China. The co-branded website will provide services for small- and medium-sized busin esses in China and offer auctions and fixed-price sales. The partnership will leverage the two companies' respective user bases. Sina has 83 million registered users; Yahoos China traffic figures are estimated to be 78 million. The alliance also combines Yahoos expertise and tech nology in the auction platform with Sinas market reach and brand in China The venture follows eBay's purchase of the remaining stake in Shanghai-based Eachnet.com and the rec ent launch of free auction services in Hong Kong. It is expected to help Yahoo improve its ma rket position on the mainland.

Nortel and Microsoft

Nortel and Microsoft Form Strategic Alliance to Accelerate Transformation of Business Communications

Microsoft CEO Steve Ballmer (R) and Nortel President and CEO Mike Zafirovski today announced a strategic alliance between the two companies at Microsoft headquarters in Redmond, Wash.

Philips Alliances

What is FlexRay? (Philips)

FlexRay Industry Standard Development

Joint Ventures

A union of two or more parties who contractually agree to contribute to a specific venture which is usually limited to a specific task for a specific period of time A joint venture is a separate legal entity generally governed under partnership lawwhich varies from state to state The JV parties can be individuals, partnerships or corporations that continue to operate independently from the other except for activities related to the Joint Venture.

e.g.:
Maruti Udyog Jt. venture between Govt of India & Suzuki TVS-Suzuki - joint venture between TVS and Suzuki Joint venture of Samsung & Texas Instruments to manufacture semiconductors in Portugal Samsung-HP joint venture to market HPs products in Korea

Pros and cons of Joint Ventures

Advantages

Allows for sharing of risk (both financial and political) Provides opportunity to learn new environment Provides opportunity to achieve synergy by combining strengths of partners May be the only way to enter market given barriers to entry

Disadvantages
Requires more investment than a licensing agreement Must share rewards as well as risks Requires strong coordination Potential for conflict among partners Partner may become a competitor

Components of a JV Agreement

The Union The contract can be viewed as a pre-nuptial agreement The alliance is the union The new legal entity can be viewed as the child. The Separation Separation is inevitable because JVs generally have a limited life and purpose.
To operate under a JV, all parties have decided to keep core business separate and limit interaction to joint operations.

JV vs. Strategic Alliance

Joint Venture

Strategic Alliance

Contractual Separate legal entity Significant matters of operating and financial policy are predetermined and owned by the JV

May or may not be contractual Generally, not a separate legal entity Significant matters of operating and financial policy may or may not be predetermined but are owned by the individual participants

JV vs. Strategic Alliance (contd)

Joint Venture

Strategic Alliance

Exist for a specific time Exist for a specific project or purpose Limited with respect to future expectations

Indefinite life or a specific time Fluid and allows for greater amounts of ambiguity

Joint Venture
C

Strategic Alliance
A
A B B

Companies A and B combine to form a new company C

Companies remain independent

Motives for IJV Formation

New Markets To take existing products to new markets To strengthen the existing business To diversify into a new business To bring foreign products to local markets

Existing Markets

Existing Products

New Products