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INTERNATIONAL STRATEGIC ALLIANCE FMA3093 INTERNATIONAL BUSINESS MANAGEMENT SEMINAR Cooperative strategy A strategy in which firms work together to achieved a shared objective Increase importance of cooperative strategies as a growth engine – “in a global market tied together by the Internet, corporate partnerships and alliances are proving a more productive way to keep companies growing” Cooperative strategy Increasingly, cooperative strategies are formed by firms competing against one another – Example: FedEx and the US Postal Service (USPS), where FedEx transports roughly 3.5 million pounds of USPS packages daily on its planes and is allowed to place its drop boxes in post offices. Types of cooperative strategies: – Strategic alliances :- widely used – Collusive strategies:- not frequently used Strategic Alliances Increasingly popular – “unprecedented number of strategic alliances between firms are being formed each year. These strategic alliances are a logical and timely response to intense and rapid changes in economic activity, technology, and globalization, all of which have cast many corporations into two competitive races: one for the world and the other for the future” 1998) (Doz & Hamel, Strategic alliance is a cooperative strategy in which firms combine some of their resources and capabilities to create a competitive advantage Strategic Alliances Traditional JVs – Formed bet. a senior MNC in an industrialized country and a junior local partner in a LDC or LIC – Primary goal: gain market access for existing products – Senior partner provides existing products, junior partner provides local marketing expertise, overcomes protectionist barriers, governmental contacts – Both partners benefited:Senior partner achieved increased sales volume, local firm gained access to new products and learn new skills Modern form SA – Increasingly formed between firms in industrialized countries – Primary focus is the creation of new products and technologies rather than the distribution of existing ones – Often forged during industry transition when the competitive positions are shifting and the very basic for building and sustaining competitive advantage is being defined Strategic Alliances - Motivation 4 key motivations that are driving the formation of SA – – – – Technology exchange Global competition Industry convergence Economies of scale and reduction of risk Other motivations – Local partner’s knowledge of the market Normally foreign firms seek partners with similar products who have good knowledge of local buyers and local channels of distribution Strategic Alliances - Motivation – Government requirements Especially in the developing economies, local governments often require joint ventures as a condition of entry into the country – To allow locals have an ownership position – Often government itself a joint venture partner – Low-Cost Raw Materials or Labor Partner from lesser developed country seeks the technology, know-how, or capital investment from the developed countries Partner from the developed country seeks an opportunity to benefit from the comparative advantages of the lesser developed country – which often include cheaper labor and untapped reserves of raw material Technology Exchange Technology transfer or R&D collaboration – major objective of over half the SA in recent years Need to share technology resources – a single most powerful motivating factors Why? Because in recent years, breakthroughs and major innovations increasingly have been based on interdisciplinary and inter-industry advances that blur the formerly discrete boundaries between different industrial sectors and technologies The need to collaborate arises: – The necessary capabilities and resources are often beyond the scope of a single firm – Increasingly short product life cycles that increase both time pressure and risk exposure, while reducing the potential payback of massive R&D investments Global Competition Increase global competition between teams of players aligned in strategic partnerships To level out the global playing field, companies have to find partners Allows coalition of smaller firms to compete more effectively against giant firms Industry Convergence Many high-technology industries are converging and overlapping – Bio and chip technologies – Computers and communication – High density television (HDTV) Economies of scale and reduction of risk Pool resources and concentrate activities to raise the scale of activity Share and leverage the specific strengths and capabilities each of the other participating firms Sharing different complementary resources between companies also result in mutual gains and save each partner the high cost of duplication. General Strategic Considerations Strategic Intent – major goal of all firms – PROFIT – Other goals – new technology, learning the market, etc Company Capabilities – What can a company afford? Capital, human resource, production capabilities, etc. General Strategic Considerations Local Government Regulations – Complexities of legal system and government regulations Need for Control – How much control desired? Control over production, price, advertising, product and process R&D, etc. Where to Link in the value Chain Alliances that combine the same value-chain activities often do so to gain efficient scales of operations, to merge compatible talents, or to share risks. Attractive when no one company is big enough, has the necessary talent, or is willing to take on an enormously risky venture – R&D alliance of IBM, Toshiba, and Siemens – to come up with next generation of computer chips – Operations alliance – General Motors and Renault AS – to reach a profitable volume of activity, producing light commercial truck for European market Where to Link in the value Chain Alliance that combines upstream and downstream components of the value-chain can serve the objectives of low-cost supply or manufacturing; operations/marketing alliance Where to Link in the value Chain COMPANY B COMPANY A RESEARCH & DEVELOPMENT INPUT LOGISTIC Raw material supply and acquisition OPERATIONS Manufacturing, assembly, Facility operations R&D Supply/production RESEARCH & DEVELOPMENT INPUT LOGISTIC Raw material supply and acquisition Operations OPERATIONS Manufacturing, assembly, Facility operations Production/ marketing MARKETING & SALES Promotions & channel relations Marketing MARKETING & SALES Promotions & channel relations OUTPUT LOGISTICS Delivery Delivery OUTPUT LOGISTICS Delivery CHOOSING A PARTNER: THE MOST IMPORTANT CHOICE? Key criteria for picking an appropriate alliance partner: – Seek strategic complementarity Good understanding of each other’s strategic objectives Know what the other hopes to achieve from the venture – Pick a partner with complementary skills More than money – must contribute some skills or resources that complement those of partners CHOOSING A PARTNER: THE MOST IMPORTANT CHOICE? – Seek out companies with compatible management styles Example of failure – alliance of GEC with Siemens; managers simply can not get along – Seek a partner that will provide the ‘right’ level of mutual dependency – Be cautious of the ‘elephant-and-ant’ complex – Assess the difficulty of cross-cultural communication with a likely partner Commitment and Trust: The Soft Side of Alliance Management Commitment – talking care of each other and put forth extra effort to make the venture work – Committed partners are willing to dedicate resources and effort and face the risks to make the venture work Trust:- credibility and benevolent – Credible trust is the confidence that the partner has the intent and ability to meet their obligations and make their promised contributions to the alliance – Benevolent trust – the confidence that the partner will behave with goodwill and with fair exchange. Trust and commitment usually go hand in hand. If Alliance Does Not Work 2 basic choices: – Negotiate an end to the agreement – Improve their implementation Mergers and Acquisitions Corporate restructuring, commonly called the M&A initiatives being undertaken in many parts in the world Many business organizations have gone back to the drawing board in attempting to redefine their corporate and commercial objectives, handle competition and satisfy their customers’ needs Mergers and Acquisitions They see mergers as the chosen path to stay ahead of the competition. Merger is the winning formula In Malaysia, mergers and acquisitions taking place in the banking industry, trading houses, international oil companies, and recently in the plantation industry, which saw the mergers of three large corporations – Guthrie Group, Golden Hope Plantations and Sime Darby Mergers and Acquisitions A merger typically refers to two or more companies coming together (usually through the exchange of shares) to become larger one. An acquisition typically has one company – the buyer – who purchases the assets or shares of the seller, with the form of payment being cash, the securities of the buyer, or other assets of value to the seller. Reasons for M&A Exercises (Sherman, 1998) For strategic reasons, such as the obtaining of additional intellectual capital To obtain a more sound and secure financing To cope with industry trends such as changing technology, to face fierce competitions, changing consumer preferences, to control costs – all these leading towards gains in efficiency Reasons for M&A Exercises (Sherman, 1998) To transform corporate identity following a crisis to spread the risks and cost of developing new technology, research and gaining access to new frontiers To develop an international presence and expanded market share For products and service lines to remain competitive Reasons for M&A Exercises (Sherman, 1998) To buy brand loyalty and customer relationships; and As an alternative to starting a new line of business. Reasons for M&A Exercises (Gaughan, 2002) As a mean for firms to grow quickly; To experience economic gains as a result of economies of scale and scope; The enlarged firm may have better access to capital market with lower cost of capital enabling it to enjoy better financial benefits; and In anticipation of gains which the merged firm may experience when applying its superior management skills to the target business. PNB’s M&A objective The entities should truly enhance shareholder value and “postclosing synergy” – The key premise to synergy is that “the whole will be greater than the sum of its parts” Synergy Can be categorized into 3 aspects: – Operating synergy The efficiency gains or operating economies that are derived in horizontal or vertical mergers. Operating synergy often comes from a reduction in costs that result form a corporate combination. These cost reductions may result from economies of scale or the reductions in unit costs that result from an increase in the size or scale of a company’s operations Synergy – Revenue-enhancing synergy The ability of a combined entity to realize more revenues than what the individual companies would have if they remained independent. What this means is that, after a corporate combination, if the corporation has an increase in its revenues that is beyond what is accomplished by merely adding together the revenues of the merger partners, then perhaps revenue-enhancing synergies explain the gain. Synergy – Financial synergy The possibility that the cost of capital can be lowered by combining one or more companies. In other words, financial synergy is when a target company has certain growth opportunities that it would like to pursue but it is hampered by insufficient access to capital. One way this problem may be alleviated is with a merger with a company that has better access to capital but that may not have the came profit-making opportunities as the target Human Resource Management Issue during Integration In the course of integration, the merging firms have to confront the following issues: – Board level changes May need to be revamped to align directorial expertise with the emerging needs of the postmerger business. The new board should be change leaders so that they can carry out the change process dictated by the merger – Who will do which senior job? The choice of the right person for the right job is important because otherwise the success of the merger will be jeopardized. Equally important, the choice often is a signal about the style, culture and intent of the new management Human Resource Management Issue during Integration Head count reduction/workforce redundancy – In emphasizing on efficiency savings through consolidation of duplicate functions or production sites, head count reduction is perhaps inevitable. Aligning performance measurement and reward systems – Changing the performance evaluation and reward system may be a necessary element in evolving a new culture because of their power to motivate staff and influence their behavior Human Resource Management Issue during Integration Key people retention – Uncertainty during merger often leads senior managers to end it by leaving – Key people retention may be achieved through devices such as ‘golden handcuffs’, i.e. special bonuses or stock options, etc. Managing conflicting expectations – Mergers are characterized by expectational ambiguity and incorrect assumptions about thinking and behavior Common Causes Why Mergers Fail The price being paid is too high – The failure to distinguish the target from the investment. Even the best company can be a poor investment if the price paid exceeds the present value of its anticipated future returns Inadequate risk analysis – Failure to rigorously assess the likelihood of success of a transaction or to consider management discretion in future periods Common Causes Why Mergers Fail Exaggerated synergies – Anticipated revenue enhancements, cost reductions, operating efficiencies or financing benefits are overestimated Failure quickly to integrate operations – With the price for synergies paid up front, they must be achieved on time to yield benefits and create values Common Causes Why Mergers Fail Make-it-happen executive level pressure from the – The executives’ desire to move quickly or to make their mark on the company without adequate analysis of effects of the transaction on value Inadequate due diligence – In a ore-combination phase, ineffective strategic planning or assessment of value drivers and risk drivers or pressure to win negotiations prevail over sound decision making Common Causes Why Mergers Fail Failure to accurately assess customer reaction – The newly combined company may force certain customers to seek a different source of supply to avoid buying from what has become a competitor or to avoid excessive reliance on one source of supply.