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Strategic Alliances Chapter 7 April 5, 2006 Dr. Ellen A. Drost

Strategic Alliances Chapter 7 April 5, 2006 Dr. Ellen A. Drost. Objectives. Why Strategic Alliances Defining strategic alliances and networks A comprehensive model of strategic alliances and networks Debates and extensions. Basic foreign expansion entry decisions.

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Strategic Alliances Chapter 7 April 5, 2006 Dr. Ellen A. Drost

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  1. Strategic AlliancesChapter 7April 5, 2006Dr. Ellen A. Drost

  2. Objectives • Why Strategic Alliances • Defining strategic alliances and networks • A comprehensive model of strategic alliances and networks • Debates and extensions

  3. Basic foreign expansion entry decisions • A firm contemplating foreign expansion must make three decisions: • Which markets to enter • When to enter these markets • What is the scale of entry

  4. Strategic Alliances • WHY STRATEGIC ALLIANCES? • A. Spread and reduce costs • B. Specialization • C. Competition • D. Vertical integration • E. Horizontal integration • F. Knowledge

  5. Alliances are popular • WHAT ARE THE ALTERNATIVES TO ALLIANCES? • Develop capability internally • Buy inputs/technology • Merger or acquisition

  6. International Alliances • WHY INTERNATIONAL ALLIANCES? • A. Gain location specific assets • B. Overcome Government restrictions • C. Diversification • D. Minimize exposure to risk

  7. Structuring the alliance to reduce opportunism WHAT FORM SHOULD THE ALLIANCE TAKE? Contracts ----------------------------------------------------------------------Equity Marketing Consortium Wholly Owned R&D Joint Venture Turnkey License Franchise Short-term -----------------------------------------------------------------------Long-term  ---------------------difficult to control difficult to monitor difficult to enforce difficult to negotiate

  8. Alliances versus Joint Ventures • Not all strategic alliances are joint ventures. • A joint venture (JV) is a new organization—a “corporate child” created by two or more parent firms which hold partial equity ownership in the new venture. • Sony Ericsson • A non-JV alliance is two (or more) firms working together—“getting married” but not having “children.” • Renault is a strategic investor in alliance with Nissan. Both operate independently and they have not created a new firm.

  9. Strategic Networks • Overall, strategic alliances and networks are cooperative interfirm relationships • Strategic alliances formed by multiple firms to compete against other such groups and against traditional single firms • Also known as constellations • Star Alliance: United, Lufthansa, Air Canada, SAS, etc. • Sky Team: Delta, Air France, Korean Air, etc. • One World: American, British, Cathay Pacific, Qantas, etc.

  10. Type of alliances • Contracts • Turnkey Projects • Contractor agrees to handle every detail of project for foreign client • Licensing • Agreement where licensor grants rights to intangible property to another entity for a specified period of time in return for royalties • Franchising • Franchiser sells intangible property and insists on rules for operating the business • Joint Ventures • Equity participation • Wholly Owned Subsidiaries • Greenfield versus acquisition

  11. A Three-Stage Decision Model of Strategic Alliance and Network Formation Source: Adapted from S. Tallman & O. Shenkar, 1994, A managerial decision model of international cooperative venture formation (p. 101), Journal of International Business Studies, 25 (1): 91–113.

  12. Managing the alliance • WHAT ABOUT PARTNER SELECTION? • Differences can create value • Similarities minimize cost

  13. Debate 1: Learning Race versus Cooperative Specialization • Learning race view: Very influential • Assumption 1: Acquiring partner “know-how” is cost effective • Assumption 2: Other partners are passively being exploited • Cooperative specialization view: More realistic? • Learning races do exist, but they represent more of the pathologies rather than the norms • Mutual hostage taking can reduce such pathologies • Preventing spillovers can also reduce problems

  14. Debate 2: Majority JVs as Control Mechanisms vs. Minority JVs as Real Options • The “high control versus low control” debate in Chapter 6: Unresolved • One additional benefit of minority JVs: Real options • The more uncertain the conditions, the higher the value of real options • Minority JVs have great real options value, especially in uncertain, emerging economies • SIA 7.4: Anheuser-Busch’s minority JVs in emerging economies (e.g., Brazil, China, Mexico, Philippines)

  15. Debate 3: Alliances versus Acquisitions • Problems with M&As (see Chapter 9) • Too final: hard to undo • Too expensive • Extensive problems with post-merger integration • Many large MNEs have an M&A function (department), which focus exclusively on M&As • A combined “mergers, acquisitions, and alliances” function may be advisable – Table 7.5

  16. Pro: Quick to execute Preempt competitors Possibly less risky Con: Disappointing results Overpay for firm Optimism about value creation Culture clash. Problems with propose synergies Pro: Can build subsidiary it wants Easy to establish operating routines Con: Slow to establish Risky Preemption by aggressive competitors Acquisition and Green-field- pros & cons Greenfield Acquisition

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