Download - Module 7 - Strategic Alliances
Strategic Alliances
K. Praveen Parboteeah
Objectives
� What is a strategic alliance?
� Why do companies form strategic alliances?
� What are some guidelines for successful strategic alliances?
� Why do strategic alliances fail?
� Learning from strategic alliances
� Other crucial issues
Case Study: Daewoo and GM
� Formed an alliance in 1984 to manufacture small cars in South Korea
� Both invested $100m in a 50/50 JV
� Day-to-day management left to South Koreans
� Both sides saw the JV very positively –
� GM doubted that they could manufacture a small car for cheaper in the US
� Daewoo was getting access to engineering skills of GM and US market
Evolution of Events
� 1987 – South Korea had become a democracy – workers were asking for wage increases
� Frequent halt in the LeMans production
� Daewoo responded by doubling wages
� Suddenly cheaper to build Opels LeMans in Germany
� Problems with quality
� GM was very frustrated with Daewoo
Other Events
� Daewoo was however equally frustrated with GM� Daewoo Group Chairman Mr. Kim complained that he was treated shabbily and that GM execs were arrogant
� GM did not allow Daewoo to expand their market in the US or Eastern Europe
� Did not want to allow Daewoo to double capacity
� Alliance was dissolved and Daewoo bought GM’s interest in 1992
� In 2002, GM bought Daewoo
Strategic Alliances
� Strategic alliances – partnerships between two or more firms for the attainment of mutually defined goals
� Stability and risk
� Failure rate of 30 to 60 percent
� Even profitable alliances can be torn by conflict
Motivation: Why Strategic Alliances?
� To gain access to specific markets
� Ex – Chrysler and Benz – to gain access to EU where regulations favor local companies
� Strategic alliances with Eastern European companies
� To increase market share
� To avoid import barriers, licensing requirements, and other protectionist legislation
� GM-Toyota venture – to avoid import quotas
Why Strategic Alliances?
� Often represents the only legal way to do business in a country
� Many governments mandate that foreign investors can operate within their borders only in combination with local equity with management authority
� Ex: China, Mexico, Brazil, India, Indonesia, and Saudi Arabia
Benefits
� To share the cost and risks of R&D� Ex: semiconductor industry – each new generation of memory chips cost $1b – Intel & Samsung (DRAM tech development); Sun Microsystems with Fujitsu, TI, & Phillips
� To reduce political risks while making inroads in a new market� Ex: Maytag and JV with RSD, a Chinese appliance manufacturer – Maytag stayed on the right side of the Chinese government
� To gain access to economies of scale and synergy� Ex: MCI-World Com, Cable Industry, HP-Compaq
What To Expect?
� Collaboration is another form of competition
� Harmonious relationship is only one form of success
� Cooperation has limits
� The goal is to learn from partners
� Strategic alliances have important implications for the firm’s overall strategy
Guidelines for Successful Alliances
� Choose the right partner – MOST IMPORTANT
� Strategic/objectives complementarity
� Skill/strengths complementarity
� compatible management styles
� Commensurate risks
Issues to Consider
� The level of mutual dependency
� The "anchor" partner
� The "elephant and the ant" complex
� Operating policy differences
� Difficulties of cross-cultural communication
Other Guidelines
� Seek alliances where complementary skills, products and markets will result
� Work out a plan how to deal with proprietary technology and competitively sensitive information� “Pre-nuptial” agreement
� Recognize that alliances last only a few years
Partner Selection Criteria: Comparison of Korean and U.S Executives
5. Unique competencies5. Capability to provide quality products
4. Complementarity of capabilities
4. Willingness to share expertise
3. Capability to provide quality products/services
3. Special skills we can learn from partner
2. Managerial capabilities2. Industry attractiveness
1. Financial assets1. Technical capabilities
American ExecutivesKorean Executives
Volvo & Renault alliance in 1990-Failure
� Culture/language – Anglo-Saxon/English; Latin/French
� Ownership – Public/Government owned
� Size – Small/niche player, heavy in trucks; Large and broad, weak in heavy trucks
� Core competencies – Safety, Styling
� Management Structure –Decentralized/informal, Centralized/formal flow of information
Other Reasons Why Alliances Fail
� JV develops its own identity –difficult problems of integration/coordination
� Lack of clarity regarding responsibilities
� Corporate amnesia because of turnover of expatriates
� No plan if the venture ends
Other Success Issues: The Alliance Structure
�� Dominant ParentDominant Parent� One parent controls strategic and operational decision making
� dominant parent often has majority ownership
� Shared management� Both parents contribute approximately the same number of managers to the board of directors, the top management team, and functional area management
The Strategic Alliance Structure
� Split control - Partners usually share strategic decision making and split functional decision making
� Independent management � IJV managers act like managers from a separate company
� IJVs often recruit managers from outside the parent companies
� Rotating management� Key positions rotate among partners
� popular in developing countries
� trains management talent and transfers expertise
If The Alliance Does Not Work
� Negotiate an end or improve implementation
� Know when to quit/invest more
� Avoid “escalation of commitment”
� Plan end - “prenuptial agreements”
� Death not always failure
Considerations for the end of the alliance
� Importance of the joint venture
� Pricing the venture – how to determine the value of the venture and how to reallocate resources
� Transferring resources – have systems in place to transfer funds, physical assets, personnel etc.
� Creating and sharing value
Successful Lessons from GE
� Careful planning and execution – from every stage starting with negotiations to implementation, both partners plan and are committed
� Assignment of key personnel –
� Adopt an evolutionary perspective – start on a small scale (e.g., distribution agreement) and progressively grow in other areas
Other Key Lessons
� Need to try to learn from partners
� Research has shown that Japanese companies have benefited greatly from strategic alliances with US companies� Ex: GM and Toyota
� Toyota has learned a lot from the alliance
� GM more reluctant to apply learning
Conclusion
� The importance of international strategic alliances
� Most important decision: picking the right partner
� No set structure in ownership, decision making control, or management control
� Have to work very hard to make it work