session 7 (iii)

8/12/2019 Session 7 (III)

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International StrategicAlliances

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Session Objectives

Compare joint ventures and other forms ofstrategic alliances.

Characterize the benefits of strategicalliances.

Describe the scope of strategic alliances.

Discuss the forms of management used forstrategic alliances.

Identify the limitations of strategic alliances.


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International Corporate

Cooperation

Cooperation between international firms cantake many forms, such as cross-licensing ofproprietary technology, sharing of productionfacilities, cofunding of research projects, andmarketing of each others products usingexisting distribution networks. Such forms ofcooperation are known collectively as

strategic alliances, business arrangementswhereby two or more firms choose tocooperate for their mutual benefit.


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Joint Venture

Ajoint ventureis a special type

of strategic alliance in whichtwo or more firms join together

to create a new business entity

that is legally separate anddistinct from its parents.


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The NTPC Example

NTPC -ALSTOM POWER SERVICES PVT.LTD. (NASL)Incorporated in 1999 and formerly known

as NTPC-ABB ALSTOM POWERSERVICES PVT. LTD)

OBJECTIVE:Undertake Renovation &Modernization of power stations in India and

other SAARC countries. PROMOTERS' EQUITY:NTPC: 50%ALSTHOM Power Generation AG : 50%


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Joint Ventures Abroad From

India Under Fast Track and Normal

Schemes.

Approvals only from RBI under fast

track scheme.

FIPB, Ministry of Finance,MEA,DCA &

other relevant bodies including the RBI

for Normal Schemes.

Visit iic.nic.in


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Benefits of Strategic Alliances

Firms that enter into strategic alliances

usually expect to benefit in one or more ways.

International business may realize fourbenefits from strategic alliances:

Ease of market entry

Shared risk

Shared knowledge and expertise

Synergy and competitive advantage


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The Korean Life Insurance Sector

Prior to 1980 only six companies. The number increased to 33 in 97 and

then went down to 21 by 2001.

Seven Jt. Ventures started operations in1989 (50-50 and 49-51).

None of these exist as a partner post

1997.Either one has exited or has beenacquired.


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Current Company/Acquired Company

South Korea /Doowon; Samshin; Hyundai (= Hankuk and Josun)

Allianz First/ Coryo

Samsung/ Kukje

Hungkuk /Taeyang Kyobo/ BYC

Daishin

Shinhan

Dongbu

Tongyang Pacific

Metropolitan Youngpoong (now acquired by Prudential (UK))

New York

Lucky

Kumho/ Dong-ah

SK /Kookmin; Handuk

Hanil Prudential (US)

ING

France (to become Allianz-Hana)

LINA (Cigna)

AIG


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Shared Risk

Strategic alliances can be used to either

reduce or control individual firms risks.

Even though Boeing has enjoyed muchsuccess as a manufacturer of commercial

aircraft, it wanted to reduce its financial

exposure of the 777 project. Thus, it

collaborated with three Japanese partnersFuji, Mitsubishi, and Kawasakiagreeing to

let them build 20 percent of the 777 airframe.


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Shared Knowledge and

Expertise

Reasons for strategic alliance:

To gain knowledge and expertise that itlacks.

To learn more about how to producesomething,

To acquire certain resources,

To deal with local governments regulations,

To learn to manage in a differentenvironmentinformation that a partner oftencan offer.


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Scope of Strategic Alliances

Comprehensive Alliances

Comprehensive alliances arise when the

participating firms agree to perform togethermultiple stages of the process by which goods or

services are brought to the market: R&D, design,

production, marketing, and distribution.

By fully integrating their efforts, participating firms

in a comprehensive alliance are able to achieve

greater synergy through sheer size and total

resources.


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Scope of Strategic Alliances

(cont.)

Functional Alliances

Strategic alliances may also be narrow inscope, involving only a single functional

area of the business. In such cases,integrating the needs of the parent firms isless complex.

Types of functional alliances include:

Production alliances

Marketing alliances

Financial alliances

R&D alliances


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Production Alliances

A production allianceis a functional

alliance in which two or more firms each

manufacture products or provideservices in a shared or common facility.

A production alliance may utilize a

facility one partner already owns.


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Marketing Alliances

A marketing allianceis a functional alliance in

which two or more firms share marketing

services or expertise. In most cases, onepartner introduces its products or services

into a market in which the other partner

already has a presence. The established firm

helps the newcomer by promoting,advertising, and/or distributing its products or

services.


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Financial Alliances

A financial allianceis a functionalalliance of firms that want to reduce thefinancial risks associated with a project.Partners may share equally incontributing financial resources to theproject, or one partner may contribute

the bulk of the financing while the otherpartner (or partners) provides specialexpertise or makes other kinds ofcontributions to partially offset its lack of

financial investment.


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Research and Development

Alliances

In an R&D alliance, the partners agreeto undertake joint research to develop

new products or services. Such alliances are usually not formed

as joint ventures, since scientificknowledge can be transmitted amongpartners through private researchconferences, the exchange of scientificpapers, and laboratory visits.


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Implementation of Strategic

Alliances

A firm contemplating a strategic alliance

should consider at least four factors in

selecting a partner (or partners): Compatibility

The nature of the potential partners

products or services The relative safeness of the alliance

The learning potential of the alliance


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Form of Ownership

A joint venture almost always takes the formof a corporation, usually incorporated in thecountry in which it will be doing business.

The corporate form enables the partners toarrange a beneficial tax structure, implementnovel ownership arrangements, and betterprotect their other assets.

In isolated cases, incorporating a jointventure may not be possible or desirable.The partners in these cases usually chooseto operate under a limited partnership

arrangement.


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Public-Private Venture

A special form of joint venture, a public-privateventure, is one that involves a partnership between aprivately owned firm and a government. Such an

arrangement may be created under any of severalcircumstances: When the government of a country controls a resource it

wants developed, it may enlist the assistance of a firm thathas expertise related to that resource.

A firm may pursue a public-private venture if a particularcountry does not allow wholly owned foreign operations.

A firm entering a centrally planned economy may have nochoice but to enlist governmental support, because thesegovernments often limit the freedom of both domestic andforeign firms.


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Shared Management

Agreement

Under a shared management agreement,

each partner fully and actively participates in

managing the alliance. The partners run thealliance, and their managers regularly pass

on instructions and details to the alliances

managers. The alliance managers have

limited authority of their own and must defermost decisions to managers from the parent

firms.


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Assigned Arrangement

Under an assigned arrangement, one

partner assumes primary responsibility

for the operations of the strategicalliance.


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Delegated Arrangement

Under a delegated arrangement, whichis reserved for joint ventures, the

partners agree not to get involved inongoing operations and so delegatemanagement control to the executivesof the joint venture itself. These

executives may be specifically hired torun the new operation or may betransferred from the participating firms.


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Pitfalls of Strategic Alliances

Regardless of the care and deliberation a firmputs into constructing a strategic alliance, itstill must consider limitations and pitfalls.There are five fundamental sources ofproblems that often threaten the viability ofstrategic alliances: Incompatibility of partners

Access to information

Conflicts over distributing earnings

Loss of autonomy

Changing circumstances

session 7 (iii)

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