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Strategic Alliances: Creating Economic Value and Avoiding Cheating

Learn about the different types of strategic alliances and how they create economic value. Discover the benefits and challenges of strategic alliances and how to avoid cheating.

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Strategic Alliances: Creating Economic Value and Avoiding Cheating

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  1. Chapter #7 Strategic Alliances

  2. Opening Case • HBO

  3. Definitions • Strategic alliance • Whenever two or more independent organizations cooperate in the development, manufacture or sale of products or services. • Non-equity alliance • Cooperating firms agree to work together, but do not take equity positions in each or form an independent organization • Examples • Licensing agreements • Supply agreements • Distribution agreements

  4. Equity alliance • Cooperating firms hold equity positions in each other • Example • GM 34.2% of Izuzu’s Stock • Joint Ventures • Cooperating firms create a legally independent firm • Example • SBC and Bell South co-own Cingular

  5. How do strategic alliances create economic value? • Current operations • Exploiting economies of scale • Learning from competitors • NUMI Different rates of learning • More to learn • Absorptive capacity • Withhold Information • Managing risk and sharing costs

  6. How do strategic alliances create economic value? • Creating a favorable competitive environment • Facilitate development of technological standards • Network industries • Increasing returns to scale (one fax machine) • Beta vs VHS IBM vs Apple (Cell Phones) HDTV • Facilitate tacit collusion • Firms coordinate their production and pricing decision

  7. How do strategic alliances create economic value? • Facilitating entry and exit • Low-cost entry into new markets • Local distribution networks can be costly • Government restrictions/requirements • Low-cost entry into new industries and new industry segments • Dupont and Phillips • Welch’s and Eskimo Pie • Low-cost exit from industries and industry segments • Corning and Ciba-Geigy (sneak preview) • Managing uncertainty • Option to buy (bet)

  8. Alliance Threats: Incentives to Cheat on Strategic Alliances • 1/3 of all strategic alliances do not meet the expectations of at least one alliance partner. • Ways to cheat • Adverse selection • Moral Hazard • Holdup

  9. Adverse Selection: Potential partners misrepresent the value of the skills and abilities they bring to the alliance • Difficult to assess the veracity of the claims of potential partners • Less tangible resources and capabilities are the most difficult to assess

  10. Moral Hazard: Partners provide to the alliance skills and abilities of lower quality than promised • Pixar versus Disney • Pixar: Toy Story, A bug’s life, Toy Story 2, Monster’s, Inc, Finding Nemo • Disney: Treasure Planet, The emperor’s New Groove, Lilo and Stich, Brother Bear

  11. Holdup: Partners exploit the transaction specific made by others in the alliance

  12. Strategic Alliances and Sustained Competitive Advantage • The Rarity of Strategic Alliance • GM and Toyota (lean manufacturing) • Ford and Mazda (Designing new cars and joint manufacturing) • Daimler-Chrysler and Mitsubishi (supplier) • The Imitability of Strategic Alliances • Direct duplication (socially complex)

  13. Substitutes for Strategic Alliance • Going it alone • Alliances will be preferred over going it alone when • The level of transaction specific investment required to complete an exchange is moderate • When an exchange partner possess valuable, rare, and costly to imitate resources and capabilities • When there is great uncertainty about the future value of an exchange

  14. Substitutes for Strategic Alliance • Alliances will be preferred to acquisitions when • There are legal constrains on acquisitions • Acquisitions limit a firm’s flexibility under conditions of uncertainty • There is substantial unwanted organizational “baggage” in an acquired firm • The value of a firm’s resources and capabilities depend on its independence

  15. Organizing for Strategic Alliance: Trying to avoid Cheating • Non Equity investments • Explicit Contracts and Legal Sanctions

  16. Organizing for Strategic Alliance: Trying to avoid Cheating • Equity Investments

  17. Organizing for Strategic Alliance: Trying to avoid Cheating • Firm Reputation

  18. Organizing for Strategic Alliance: Trying to avoid Cheating • Joint Ventures

  19. Organizing for Strategic Alliance: Trying to avoid Cheating • Trust

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