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