PUTTING STRATEGY BEFORE STRATEGY

Topics

→ Business strategy must set goals

→ Partners selection

→ Criteria for selecting partners

→ Structure must maximize cooperation

→ Incentives for cooperation

→ Governance

→ The alliance must evolve

Setting Strategy Before Structure

• Company should concern more about “linking the strategy

to alliance” than tying internal growth to the strategy

• To be successful in alliance, alliance practitioners must

think carefully about strategy alliance before worrying

about the details of the deal. This is because strategy will

help to secure partners and get the deal done.

Factors influencing the success of business alliance

• Have a clear strategic purpose

• Find a fitting partner

• Specialize

• Create incentives for

cooperation

• Minimize conflicts between

partners

• Share Information

• Exchange personnel

• Operate with long time-

horizons

• Develop multiple joint

projects

• Be flexible

There are three main elements to form a alliance

1. Strategy

2. Partner Selection

3. Deal structure

Business Strategy Must Set Goals

• Prior to partner selection and alliance structure

company should develop and implement an alliance

strategy, an assessment of the firm’s external

competitive environment, internal capabilities, and

business goal must be put into operation.

Partner Selection • In order to form an alliance, partner selection

plays an important role. Typically there are three ways in selecting partner:

Company responding to unsolicited proposal Executives select close industry contacts Evaluation of the market leader in a business

• However, these ways are insufficient to select partner.

• After partnership, managers should take consideration to take reaction towards new alignment in the industry.

Partner Selection• Second-order or Third-order connections: This

strategy talks about connections between a partner and a third party firm. The case can fall into two categories which are:

• Your partner may be tied up with your competitors and it may lead to conflicts.

“OR”• Your partner could be competing vigorously with your

friends or allies that tying up with them too much can lead to changing friendly firms into enemies.

Concerns in Partnership

•Can we get along with a particular company?

•What is its management like?•Do our culture fit?•Have we had a successful relationship in

the past?

Criteria for selecting partners

• On the process of choosing partners, manager should

take into account the concerns of partner selection.

Different companies may follow different criteria.

However, the criteria need to be adjusted according

to situations.

Criteria for selecting partners

Complementary Capabilities

• Product and market• Technology and capital• Global network and

partners

Conflicts of interest• Overlapping geographic

market• Competing sources of

production• Transfer pricing across

company

Target and mission• Common rivals• New market, new

technology• Time horizons• Value

Compatible Goals• Market access > product

access• Local knowledge >

technology• Time saving > cash

generation

Structure Must Maximize Cooperation

• Managers are often associated alliance structure with legal and financial arrangement.▫ For example: value-sharing mechanisms, valuation of

partner contributions, exclusivity, transfer pricing, product and market scope, length of contract, and exit provisions.

• 3 elements that lead to success:▫ Incentive alignment▫ Decision processes▫ Evolution

Incentives for Cooperation

• Incentives for cooperation comes from the value that a partner obtains from an alliance such as▫ Cash to product▫ Supply to competitive positioning in the market to learning

• Many companies commonly interested in and good at measuring returns of short-term cash flows.

• More over they also have a good understanding about the value if products that partner is supplying to the company.

• Market positioning and learning are often ignored by many companies in the long-run.

Incentives for Cooperation

• Without proper measures it leads to difficulty in pursue alliance’s progress▫ it will create difficulty to stakeholders whether they are

employees, shareholders or customers etc. ▫ It leads to unmotivated which will make it harder for the

company to achieve its goals.

• Nonconventional performance metrics such as Eli Lilly’s survey of partner satisfaction

• Qualitative, quantitative and metric method is significant

Incentives for Cooperation• To measure performance we have to look at the

fundamental strategic question:

• What is the alliance trying to achieve? ▫ For example, improvement of R&D cycle times, rights of

discovery, minimization of knowledge leakage

• The performance metrics must: ▫ be measurable ▫ be well communicated▫ be tied to the alliance’s strategic intent

Governance: The Soul of an Alliance

• The governance between companies is very important.

• Looking at the meaning of alliance first, it is the way that two or more companies are able to share and make the decision in the same direction in the future. However, it can be changed by the time or, to be said, it is a long term relationship

. • It is rarely to be partners in alliances just in a short

term by buying some specialized abilities from one firm to fulfill another in order to reach the goal. Therefore, the long term relationship is actually called the open-ended agreement.

Governance: The Soul of an Alliance• To make both firms work well, they have to make the

open-ended agreement well organized.

• If there are too many alliances, there will be too loose in control. Then the firm needs to make the structure suitable with itself.

• Also, incentives are very important because it can attract the partners to work together with the firm.

The alliance must evolve• The structure of alliance can be changed when time

passes by. So, it is very simple that the change will support one firm more than another.

• However, the ways to avoid this pitfall are concentrating on your own strategy, evaluating what the firm actually gains from the alliance, and keeping invest the firm itself.

• Alliances sometimes are useful when facing uncertainty and instability.

• In conclusion, strategy must be included in every step of forming alliances because it is the key to success.

Example: GM vs. ToyotaToyota brought manufacturing process

and design; whereas, GM provides market knowledge, labor knowledge, and plant.

The balance of power shift towards Toyota, over the life of alliance

When value does not equal contribution..It’s either restructuring the alliance so

that both parties benefit or cancel the alliance.

THANK YOU