International Strategic Alliances: Design and Management

1. 9 International Strategic Alliances: Design and Management

2. Learning Objectives • Know the steps for implementation of successful international strategic alliances • Understand how to link value chains in international strategic alliances • Understand the importance of choosing the right partners for alliances • Know the important characteristics to look for in potential alliance partners

3. Learning Objectives • Know the differences between equity-based international joint ventures and other types of international cooperative alliances • Know the basic components of an international strategic alliance contract • Understand the control systems and management structures used in alliance organization

4. Learning Objectives • Appreciate the unique problems in human resource management • Realize the importance of interfirm commitment and trust • Understand how companies assess the performance of their international strategic alliances • Know when companies should continue or dissolve their international strategic alliances

5. Strategic Alliances Issues • Increasingly popular strategy to develop new product and to expand into new markets • Offer fast and flexible ways to gain complementary resources • However, strategic alliances are inherently unstable • Failure rate of 30% to 60% • Even profitable alliances can be torn by conflict

6. Exhibit 9.1: Implementing a Strategic-Alliance Strategy

7. Where to Link in the Value Chain • Benefits of strategic alliances • Gain access to local partner’s knowledge of market, meet government requirements, share risks, share technology, economies of scale, access lower cost raw materials or labor. • Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks • Depends on the objective that the firm seeks to achieve

8. Exhibit 9.3: Value-Chain Links in US International Alliances

9. Choosing a Partner: The Most Important Choice? • Key criteria for picking an appropriate alliance partner - Seek strategic complementarity • Understand objectives and seek complementarity - Pick a partner with complementary skills • One that enhances but does not necessarily duplicate an alliance partner’s skills

10. Criteria for Choosing Partners - Seek out companies with compatible management styles - Seek a partner that will provide the “right” level of mutual dependency - Avoid the “anchor” partner • Anchor partner: a partner that holds back the strategic alliance because it cannot or will not provide its share of the funding

11. Criteria for Choosing Partners (cont.) - Be cautious of the “elephant-and-ant” complex • Occurs when two companies are greatly unequal in size - Assess operating-policy differences with potential partners - Assess the difficulty of cross-cultural communication with a likely partner

12. Exhibit 9.4: International Strategic Alliances for Small Multinational Companies

13. Choosing an Alliance Type • Three main types of strategic alliances - Informal international cooperative alliances - Formal international cooperative alliances - International joint venture

14. Informal International Cooperative Alliance • Non-legally binding agreements between companies from two or more countries to cooperate on any value chain activity - Agreements of any kind - Provide links anywhere on their value chains • Limited scope of involvement with other company • May resist revealing proprietary information

15. Formal Cooperative Alliances • Non equity alliance with formal contracts specifying what each company must contribute to the relationship • Calls for high degree of involvement among partners • Formal contract specifying contribution of each • Sharing of proprietary information • Backing out of this alliance more difficult • Popular in high tech industries because of high costs and risks

16. International Joint Ventures (IJV) • Separate legal entity owned by two or more parent companies from different countries • Self standing legal entity • Require formal agreements • No need for equal ownership • Equity based on cash or other contributions • Ex.: One partner brings technology while other partner brings financial contributions

17. Exhibit 9.5: Types of Alliances

18. Negotiating the Agreement • IJV negotiation issues - equity contributions - management structure - “prenuptial” agreements regarding dissolution

19. Exhibit 9.6: Selected Questions for a Strategic-Alliance Agreement

20. Organizational Design in Strategic Alliances • Design depends on the type of alliance chosen • Informal ICAs often do not require formal design • Formal ICAs may require separate organization unit housed in one company, with employees from both • IJVs are separate legal entities, and require separate organization to carry out the alliances objectives

21. Decision-making Control • Two areas of decision making - Operational decisions (daily running of organization) • Strategic decisions (for long term survival) • Majority owners do not necessarily control both • In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management. • In non equity ICAs, strategic decisions remain with parent companies

22. Management Structures • Dominant parent: controls or dominates strategic and operational decision making - Often has majority ownership - Treats the IJV as wholly owned subsidiary • Shared management: both parent companies contribute approximately the same number of managers to the alliance organization

23. Management Structures • Split control management control: partners usually share strategic decision making and split functional decision making • Independent management structure: alliance managers act more like managers from a separate company - IJVs often recruit managers from outside the parent companies

24. Management Structures • Rotating management: key positions rotate among partners - Popular in developing countries - Trains management talent and transfers expertise

25. Choosing a Strategic Alliance Management Structure • If partners have similar technologies/ know-how and contribute equally- Shared management structure preferred • If partners have different technologies but contribute equally- Split management structure preferred • If one partner has dominant equity position, or is more important to one partner - Dominant management structure more likely

26. Choosing a Strategic Alliance Management Structure • For joint ventures • Mature joint ventures move to independent structures as the joint venture’s management team gains more expertise • Joint ventures in countries with a high degree of government intervention produce IJVs with local partner dominance • Independent management structures are more likely when the market is expanding, the venture does not require much capital, or the venture dose not require much R&D input from its parents

27. Commitment and Trust: Soft Side of Alliance Management • Commitment: taking care of each other and putting forth extra effort to make the venture work - Attitudinal commitment: willingness to dedicate resources and efforts and face risks to make the alliance work • If partners demonstrate these aspects of commitment, alliance will develop based on the principles of fair exchange. Fair Exchange- Occurs when partners believe that they receive benefits from the relationship equal to their contributions

28. Calculative Commitment • Commitment also has a practical side: calculative commitment • Alliance partner evaluations, expectations, and concerns regarding potential rewards from the relationship • Businesses require tangible outcomes for a relationship to continue

29. Trust • Commitment and trust go hand in hand • Credibility trust: confidence that the partner has the intent and ability to meet promised obligations and commitments • Benevolent trust: confidence that the partner will behave with goodwill and with fair exchange

30. Exhibit 9.7: The Trust/Commitment Cycle

31. Why Is Trust Important? • When there is no trust, partners hold back or take advantage of each other. • Formal contracts can never identify all issues that will arise • Technology and knowledge also include tacit elements that can only be shared when there is trust.

32. Building and Sustaining Trust and Commitment • Pick your partner carefully • Know each side’s strategic goals • Seek win-win situations • Go slowly • Invest in cross-cultural training • Invest in direct communication • Find the right levels of trust and commitment

33. Exhibit 9.8: The “Right” Levels of Trust and Commitment

34. Assessing the Performance of an International Strategic Alliance • If strategic intent is to produce immediate results, standard financial and efficiency measures can be used. • Other strategic alliance provide indirect strategic benefits, and may never generate profits. • IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning, and subjective measures like satisfaction and harmony

35. Exhibit 9.9: Selected Performance Criteria for Strategic Alliance

36. If the Alliance Does Not Work • Negotiate an end or improve implementation • Know when to quit/invest more • Avoid “escalation of commitment” - Companies continue in an alliance longer than necessary because of past financial and emotional investments. • Plan end at the beginning —“prenuptial agreements” • Death not always failure, many alliances are short term

37. Dedicated Strategic Alliance Units • Specialized units to manage alliance • Provide processes and procedures that help managers • identify the need for an alliance • Evaluate partners • Negotiate agreements • Structure the alliance organizations • Develop specific performance indicators

38. Key Lessons from Cross-Border Alliances • Understand and appreciate business and cultural differences • Keep strong executive support • Communicate • Negotiate logic before control • Commitment, trust and dedication • Have “checkpoint” as the alliance is being implemented • Review alliance’s viability

39. Conclusion • Use of international strategic alliances continues to grow in international business • Chapter provides solid understanding of the basics and how to manage strategic alliances • Strategic alliances are prone to failure and great effort must be taken to make them successful