Global Alliances and Strategy Implementation

1. Prentice Hall 2003 Chapter 7 1 Global Alliances and Strategy Implementation

2. Prentice Hall 2003 Chapter 7 2 Chapter 7 - Overview Strategic alliances Global and cross-border alliances: Motivations and benefits Challenges in implementing alliances Guidelines for successful alliances Strategic implementation Managing performance in international joint ventures Government influence on strategic implementation Cultural influences on strategic implementation E-commerce impact on strategy implementation

3. Prentice Hall 2003 Chapter 7 3 Strategic Alliances Strategic alliances are partnerships between two or more firms which decide they can better pursue their mutual goals by combining their resources – financial, managerial, technological – as well as their existing distinctive competitive advantages.

4. Prentice Hall 2003 Chapter 7 4 Alliance Categories Joint ventures – when two or more companies create an independent company Equity strategic alliances – in which two or more partners have different relative ownership shares (equity percentages) in the new venture Nonequity strategic alliances – when agreements are carried out through contract rather than ownership sharing

5. Prentice Hall 2003 Chapter 7 5 Global Strategic Alliances Global strategic alliances are working partnerships between companies (often more than two) across national boundaries and increasingly across industries.

6. Prentice Hall 2003 Chapter 7 6 Global and Cross-border Alliances: Motivations and Benefits To avoid import barriers, licensing requirements and other protectionist legislation To share the costs and risks of the research and development of new products and processes To gain access to specific markets To reduce political risk while making inroads into a new market To gain rapid entry into a new or consolidating industry and to take advantage of synergies

7. Prentice Hall 2003 Chapter 7 7 Challenges in Implementing Global Alliances “Perhaps the single greatest impediment managers face when seeking to learn or renew sources of competitive advantage is to realize that co-operation can represent another form of unintended competition, particularly to shape and apply new skills to future products and businesses.” David Lei

8. Prentice Hall 2003 Chapter 7 8 The Dual Role of Strategic Alliances(Exhibit 7-2) Cooperative Economies of scale in tangible assets (e.g., plant and equipment) Upstream-downstream division of labor among partners Fill out product line with components or end products provided by supplier Limit investment risk when entering new markets or uncertain technological fields via shared resources Competitive Opportunity to learn new intangible skills from partner, often tacit or organization embedded Accelerate diffusion of industry standards and new technologies to erect barriers to entry Deny technological and learning initiative to partner via outsourcing and long-term supply arrangements

9. Prentice Hall 2003 Chapter 7 9 The Dual Role of Strategic Alliances(contd.) Create a “critical mass” to learn and develop new technologies to protect domestic, strategic industries Assist short-term corporate restructurings by lowering exit barriers in mature or declining industries Encircle existing competitors and preempt the rise of new competitors with alliance partners in “proxy wars” to control market access, distribution, and access to new technologies Form clusters of learning among suppliers and related firms to avoid or reduce foreign dependence for critical inputs and skills

10. Prentice Hall 2003 Chapter 7 10 The Dual Role of Strategic Alliances(contd.) Alliances serve as experiential platforms to “demature” and transform existing mature industries via new components, technologies, or skills to enhance the value of future growth options

11. Prentice Hall 2003 Chapter 7 11 Guidelines for Successful Alliances Choose a partner with compatible strategic goals and objectives and one with whom the alliance will result in synergies through the combined markets, technologies, and management cadre. Seek alliances where complementary skills, products and markets will result.

12. Prentice Hall 2003 Chapter 7 12 Guidelines for Successful Alliances(contd.) Work out with the partner how you will each deal with proprietary technology or competitively sensitive information – what will be shared and what will not, and how shared technology will be handled. Recognize that most alliances last only a few years and will probably break up once a partner feels that it has incorporated the skills and information it needs to go it alone.

13. Prentice Hall 2003 Chapter 7 13 Suggestions for Minimizing the Risk of IJVs in the CIS Choose the right partner Find the right local general manager Choose the right location Control the IJV

14. Prentice Hall 2003 Chapter 7 14 Dealing With Hard Currency Problems in CIS IJVs Sell products to other foreign businesses within the Commonwealth that hold hard currency Use IJV rubles to buy raw materials or other products that are marketable in the West – and for which hard currency is paid Export products

15. Prentice Hall 2003 Chapter 7 15 Potential Problems and Solutions for U.S. CIS IJVs(Exhibit 7-4) Problems Financial infrastructure: hard currency cash flow and repatriation; capital availability Organized crime Access to materials and supply; poor quality Infrastructure: transportation, communication, banking Market access and distribution Solutions Reinvest; vertical integration; avoid hard currency deals; get local bank guarantees Local relationships Vertical integration; make or supply own Set up operational self-sufficiency where possible Set up alliances; own systems where possible

16. Prentice Hall 2003 Chapter 7 16 Potential Problems and Solutions for U.S. CIS IJVs(contd.) Operational licenses; rights to assets and resources; liabilities under old system Political risk Strategic and reliability conflicts Personnel and operational conflicts Motivation; compensation Validate with central and local authorities before commitment Minimize by locating in New England or Far East if possible Explore compatibility and background of partner Hire local executives and general manager Give respect; supply goods and services not accessible to employees

17. Prentice Hall 2003 Chapter 7 17 Control Elements in an IJV Agreement(Exhibit 7-5) Definitions Scope of operations Management Shareholders and supervisory board Executive board Arrangements in event of deadlock Operating management Arbitration Representations and warranties of each partner

18. Prentice Hall 2003 Chapter 7 18 Control Elements in an IJV Agreement(contd.) Organization and capitalization Financial arrangements Contractual links with parents Rights and obligations regarding intellectual property Termination agreements Force majeur Covenants

19. Prentice Hall 2003 Chapter 7 19 Dimensions of IJV Control The focus of IJV control – the scope of activities over which parents exercise control The extent, or degree, of IJV control achieved by the parents The mechanisms of IJV control used by the parents These dimensions are complementary and interdependent

20. Prentice Hall 2003 Chapter 7 20 Pervasive Influences on Strategy Implementation Government policy Societal culture Internet

21. Prentice Hall 2003 Chapter 7 21 E-Commerce Impact on Strategy Implementation Due to the complexity of global trade, many firms decide to implement their global e-commerce strategy by outsourcing the necessary tasks to companies which specialize in providing the technology to organize transactions and follow through with the regulatory requirements. These specialists are called e-commerce enablers.