Transcript MGMT 451 - INTRODUCTION

CSS– Making Strategic Alliances
and Networks Work
Classes 07_08
Pedro Coelhoso
Thought for the Day
What do you know?
Vs.
What do you think you know?
Dave Hall
Outline for Today
 Where are we in the course?
 Strategic Alliances and Networks
 Foundations of Selection and Formation
 Measurement and Implementation
 Danone andWahaha:
 (1) Why do you believe the problem arose?
 (2) How could the problems have been avoided?
 (3) What do you think of the different approaches used to resolve the
problem?
 (4) Was this alliance a success or failure for Danone?
 Set-up for next class
Applying Perspectives on
International Strategy
These impact how
firms behave.
Industry-based
Competition
Firm-specific
Resources &
capabilities
Institutional
Conditions:
- Formal
- Informal
Acquisitions/Restructuring
Global Competitive Dynamics
Learning/Alliances
Structure
International
Strategy
Entering Foreign Mkts
Country Selection
Local Competition
Locating activities across
countries
Strategic
Decisions
Implementation/
Performance
Institutions and Foreign Market Entry
 Assumption: Institutions influence mode of foreign market entry and
firms adjust accordingly.
 Reality I: Firms often are ‘path dependent’ regarding their foreign
market entry approach. They will continue to do what has worked, even
if conditions change.
 Assumption: Focus on characteristics of target market.
 Reality: Home country with high power distance favored acquisitions;
home country with high uncertainty avoidance favors non-equity modes
of entry.
The Choice of Entry Modes: A Hierarchical
Model
Source: Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market
entry modes (p. 538), Journal of International Business Studies, 31: 535–554.
Figure 6.3
Defining Strategic Alliances
 Strategic Alliances
 A compromise between short-term, pure market transactions and
long-term, pure organizational solutions such as acquisitions.
The Variety of Strategic Alliances
Figure 7.1
Alliances and Networks
 Strategic alliances:
 Voluntary agreements between firms involving exchange, sharing, or co-
developing of products, technologies, or services.
 As globalization increases, strategic alliances and networks have proliferated
globally.
 In 1990, 7% of the revenues of the top 1,000 U.S. firms were generated
through alliances and networks.
 By 2000, alliances and networks produced 25% of the revenues of these
firms.
 30-70% of alliances and networks reportedly fail (e.g., Opening Case).
Franchising: A special alliance
 Company sells a ‘business model’ to a franchisee.
 Company provides system, training, and maybe a loan. Also
provides some marketing assistance.
 Firm provides an initial fee and royalties from amount sold (i.e.,
revenue).
Extending the Example
Hotel Company A
Hotel Company B
Number of Hotels
500
400
Average Size
80 rooms
80 rooms
Total Revenue
200 million USD
500 million USD
A Three-Stage Decision Model of Strategic
Alliance and Network Formation
Source: Adapted from S. Tallman & O. Shenkar, 1994, A managerial decision model of international
cooperative venture formation (p. 101), Journal of International Business Studies, 25 (1): 91–113.
Figure 7.3
Stage Zero – What do I need?
Why and Where to Enter?
Location-Specific Advantages (cont’d)
Why
Where
Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises
and the Global Economy (pp. 82–83), Reading, MA: Addison-Wesley.
Table 6.2
Stage One: Cooperate or Not
 How to find partners? (SIA 7.3: Local firms)
 Informally, managers translate their interpersonal ties with executives at
other firms (at the micro, individual level) into interfirm alliances (at the
macro, firm level)—a micro-macro link
 Rely on successful previous business dealings
 Formal systematic scanning
 Strategic fit: Focus on complementary “hard” skills and resources
 Organizational fit: Focus on “soft” organizational attributes (such as
goals, experiences, and behaviors)
 These three methods are not mutually exclusive
Multi-Stage Issue: Rarity
 Skill rarity: Do both sides have minimum capabilities?
 Managers involved in alliances and networks require relationship skills
seldom taught in the traditional business school curriculum, which
emphasizes competition as opposed to collaboration.
 Partner rarity: Are the partners out there?
 Industry structure: The number of potential partners may be limited in an
industry (e.g., Chinese auto)
 Network position: Centrally located firms are rare.
Stage One: Considering Suppliers
 Upstream Vertical Alliances
 Strategic alliances with suppliers (e.g., keiretsu networks) transform
an adversarial relationship centered on hard bargaining to a
collaborative one based on knowledge sharing and mutual assistance.
 Strategic supply alliances rely on a smaller number of key suppliers
who are awarded longer term contracts.
 Bargaining power of key suppliers actually increases
 Bargaining power is still relevant, but the mentality is to transform a
zero-sum game to a win-win proposition.
Stage One: Considering Buyers
 Downstream Vertical Alliances
 Strategic distribution alliances that avoid treating buyers and
distributors as possible threats.
 Alliances that bind the focal firm and buyers and distributors
together.
 Example:
 Hotels, publishers, airlines, and car rental companies find that alliances with
leading Internet distributors such as Amazon, Expedia, Priceline, and
Travelocity enable them to reach more customers.
Multi-Stage Issue: Creating Value
 Strategic alliances and networks must create value.
 Advantages must outweigh disadvantages
 SIA 7.2: Sendo vs. Microsoft: Whose fault?
Table 7.1
Stage One: Cooperate or Not due to
Formal Institutions: Dealmakers and
Dealbreakers
 Strategic alliances and networks function within a set of formal legal
and regulatory framework
 Collusion (antitrust) concerns: Cooperation among rivals may be driven
by tacit or explicit collusion (more in Ch 8).
 American Airlines and British Airways were not allowed to merge, but
were allowed to form an alliance, One World (which later added other
members)
 Entry mode requirements: Governments may discourage or ban WOS,
making alliances with local firms the only entry choice for FDI.
 These regulations are loosening, but not disappearing
Stage Two: Equity or Contract (Nonequity)
Table 7.2
Stage Three - Evolution:
Strong Ties to Weak Ties
 Strong ties: Good for exploiting current resources
 Weak ties: Good for exploring new opportunities
 Like individuals, firms always have a combination of both strong and weak ties.
 However, the emphasis during different periods is different
 Amazon: From strong ties with a few key publishing and distributing firms to
more weak ties with a variety of retail suppliers, small merchants, auction
houses, etc
 International JVs (strong ties) often convert to WOS
 WOS: Not necessarily “no ties,” flexible for maintaining more weak ties
with a large number of players
What Would You Do?
General Mills
Nestle
Industries
Cereal, Food products,
Restaurants
Food products, Baby Food
Geography
Primarily U.S.
European centered, weak in U.S.
Brand
Strong in Home Market
Strong Globally, esp for certain
products
Position in home market #2
for cereal
Varied by country; No
commanding lead
Previous Entry
Acquisitions were successful
Internal Development
What Happened
 Arrangement
 Nestle and General Mills created a 50/50 joint venture “Cereal Partners
Worldwide”
 10 yr agreement; $1 billion each
 5 members each assigned to the board
 Use Gen Mills cereal expertise (products and production) and Nestle name
brand (only Nestle logo) and distribution expertise
 Results
 Started with France, Spain, Portugal
 CPW 2004 revenue ~ $1.100 billion
 25%+ intl market share; 130 international markets
 Acquired UK and Polish cereal firms
 Also – launched cereal bar in several European countries
Why Is this Complicated for CrossBorder Alliances?
Partner Strategic Alliance Criteria
(Hitt et al., 2000, AMJ)
Developed Market Firms
Emerging Market Firms
Unique Competencies
Financial Assets
Industry Attractiveness
Intangible Assets
Cost of Alternatives
Capability for Quality
Market Knowledge
Willingness to Share Expertise
Previous alliance experience
Technical Capabilities
Special skills to learn from partner
Developed = Canada, France, U.S.
Emerging = Poland, Romania, Mexico
Success and Failure Considerations of
Alliances
 Firm level: Some firms are better organized to take advantage of
alliance and network opportunities.
 HP: Systematic, 300-page manual guiding strategic alliance/network
decisions, contracting, and implementation
 Alliance/network level:
 “All happy families are like one another; each unhappy family is unhappy
in its own way” (Opening statement in Tolstoy’s Anna Karenina).
 If you are stuck in an unhappy family (or alliance), how can you organize
it better?
Alliance- and Network-Related
Performance Measures
Table 7.3
What Influences the Performance
of Alliances and Networks?
 Equity levels and investment amount
 Learning and experience
 Nationality
 National cultures and institutional differences (Chinese-Canadian
JVs vs. Hong Kong-Canadian JVs)
 Soft, relational capabilities
 None of the above is a single determining factor: it is a package deal.
Lessons for Managers in
Strategic Alliances and Networks
Source: Based on text in M. W. Peng & O. Shenkar, 2002, Joint venture dissolution as
corporate divorce (pp. 101–102), Academy of Management Executive, 16 (2): 92–105.
Table 7.4
What Influences the Performance
of Parent Firms?
 In theory, if strategic alliances and networks create value (as they
should), parent firms’ performance should benefit from these
activities
 Academic event studies of “abnormal” returns show:
 Complementary resources (+)
 Previous alliance experience (+)
 Ability to manage political risk (+)
 Partner buyouts (mixed)
Debate 1: Learning Race versus
Cooperative Specialization
 1. Learning race view: Very influential
 Assumption 1: Acquiring partner know-how is cost effective
 Assumption 2: Other partners are passively being exploited
 2. Cooperative specialization view: More realistic?
 Learning races exist, but they represent the exceptions than the norms
 Mutual hostage taking can reduce such risks
 Preventing spillovers can also reduce problems
Debate 2:
Alliances versus Acquisitions
 Problems with Mergers and Acquisitions
 Too final: hard to undo
 Too expensive*
 Extensive problems with post-merger integration
 Why tie up capital for non-needed resources?
 Can alliances and acquisitions be coordinated better?
 Suggestion: Combined “mergers, acquisitions, and alliances” function
Alliances versus Acquisitions
Source: Based on text in J. Dyer, P. Kale, & H. Singh, 2003, Do you know when to ally or acquire?
Choosing between acquisitions and alliances, Working paper, Brigham Young University.
Table 7.5
Set-Up for Next Class
 Multinational Strategies, Structure, Innovation and Knowledge
Management
 Reading: Peng Text, Chapter 10
 Other Preparation: Read three articles on IBM, FedEx, and Multiple
Headquarters. Determine what international strategy and structure IBM
and FedEx may be using
 Learning Objectives: We will link strategies to different organizational
structures. We will consider how the challenges for matching
international strategy-structure-knowledge management change over time
for a firm as it expands within its industry and across countries.