AGENDA

1. CREATING VALUE THROUGH HORIZONTAL ALLIANCES CREATING VALUE THROUGH VERTICAL ALLIANCES AGENDA

2. The Scope of Inter-corporate Linkages Contractual AgreementsEquity Arrangements Traditional Nontraditional No New Firm Creation of Entity Dissolution Contracts Contracts of Entity Arm’s-length Joint Research Minority Nonsubsidiary JV Mergers and Buy/Sell Equity JVs Subsidiaries Acquisitions Contracts Investments of MNCs Franchising Joint Product Equity Fifty-fifty Development Swaps Joint Ventures Licensing Long-term Unequal Sourcing Equity Agreements Joint Ventures Cross- Joint Manufacturing licensing Joint Marketing Shared Distribution/ Service Standard Setting/ Research Consortia Strategic Alliances Based on: Yoshino and Rangan, 1995

3. “Alliances are mere transitional devices and because of this they are destined to fail” Michael Porter “Many so-called alliances between Western companies and their Asian rivals are little more than sophisticated outsourcing arrangements -- the traffic is almost entirely one way” Hamel, Doz, and Prahalad “Avoid alliances like the plague.” Reich and Mankin Alliances-How far have we come?

4. Alliances Growing as a Source of Revenue Alliances as a Percentage of Revenue for Top 1,000 U.S. Public Corporations Source: Columbia University, European Trade Commission, Studies by BA&H, AC.1983-1987, 1988-1993, 1994-1996, 1999

5. Total business conducted through alliances 50% 40% 40% 30% 30% 20% 20% 10% 3-5% 0% 2000 2005 2010 1990 Source: EIU Global Executive Survey Andersen Consulting, Warren Company

6. Reduce Risks Size or Uncertainty Associated with Project Preempt Competitors Flexibility/Option Value Gain Efficiency Economies of Scale and/or Scope Speed to Market Access Complementary Skills New market entry; synergy-sensitive skills Learning Acquire New Skills Gain Market Knowledge and Experience Monitor Competition Politics Sensitive Industries Regulations Market Access Why Seek a Partner?

7. Reduce Risks E.g., Oil Drilling JVs (spread risk and cost of drilling) Gain Efficiency E.g.., McDonalds and Disney(share advertising costs) Learning (Development & Innovation) E.g.,; Autobody and Composites Consortiums (GM, Ford, Chrysler); Fuji-Xerox Access Complementary Skills E.g., Apple-Sony partnership to develop Powerbook; Politics E.g.,: Otis-Tianjin JV in China (Otis allowed to enter China) Objectives of Horizontal Alliances

8. Coordination Costs Management Time Redundant Structures Communication Programs Control Systems Loss of Competitive Position Leakage of Knowledge Reduced Flexibility Create a Potential Competitor Exposure Loss of Bargaining Power with Others Lower Market Valuation due to Loss of Control Premium But There are Costs in Collaboration

9. Leveraging each partner’s resources while protecting proprietary know-how; many horizontal alliances are inherently learning races. Building trust with potential competitors; simultaneously cooperating and competing (Co-opetition) Less ability to “control” partner decisions (relative to supplier alliances). Challenges for Horizontal Alliances

10. The partner’s strategic goals converge while their competitive goals diverge. (e.g., Philips and Du Pont collaborate to mfg. compact disks; neither invades the other’s market) The size, market power, and skills/resources of partners is modest compared with industry leaders; an attempt to catch up. (e.g., Japanese chipmakers collaborate to develop chips; U.S. automakers collaborate on autobody and battery technology). Each partner believes it can learn from the other and at the same time limit access to proprietary skills (e.g., Xerox and Fuji alliance; Xerox gets access to Japanese market and technology in Japan; Fuji participates in copier business; Fuji believes it can protect film business while Xerox believes it can protect worldwide copier business) Favorable Conditions for Horizontal Alliances

11. Alliance objective is characterized by a high degree of uncertainty, such as R&D alliances (need incentives to bring best technology) Desire to create a “new culture” (resources, processes, values) that fit the new opportunity. Desire to limit liability of parent companies. Superior way to measure alliance performance (separate P&L) The Logic for Joint Ventures

12. Identify Partners with: Strategic Fit: Compatible resources, assets, and capabilities Cultural Fit: Compatible cultures and work processes Establish clear performance objectives & monitor performance for the alliance and requirements for each partner; make technology transfer dependent on meeting performance requirements Develop plan to learn from partners Invest in absorbing key skills/technology from partners while protecting protect proprietary knowledge/skills as much as possible. Use appropriate “governance” mechanisms Build trust and align the incentives of partnering firms (e.g., joint stock ownership is superior to legal contracts for eliciting knowledge transfer). Create a “Strategic Alliance” function in your firm Assign responsibility to acquire and codify knowledge with regard to effective alliance management practices. Keys to Horizontal Alliance Success

13. Optimal Strategic Alliance Solution HOWEVER, Remember that it is the differences between the organizations Compatibility No that drive the formation but few Redeeming of the alliance Synergies Value The Importance of Strategic and Cultural Fit Good Commercial Compatibility but High Organizational Integration Difficult Strategic Fit Low Low High Organization/Cultural Fit