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Business Alliances and Networks

Business Alliances and Networks. Gerrit Rooks. The alliance explosion. Sony Ericsson Sony does the marketing and designing Ericsson does the manufacturing

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Business Alliances and Networks

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  1. Business Alliances and Networks Gerrit Rooks

  2. The alliance explosion

  3. Sony Ericsson Sony does the marketing and designing Ericsson does the manufacturing Philips and Sara Lee/DE combined their knowledge in respectively household appliances and coffee to create the successful Senseo coffee concept Examples of alliances

  4. Coca Cola shares its knowledge with McDonalds. This allowed McDonalds to enter more markets, faster and more succesfully Friesland foods manages the inventory of some of its buyers (Vendor managed Inventory), enhancing customer service and reducing inventory costs Examples of alliances

  5. Helio, a cellphone venture Internet-service provider EarthLink of Atlanta and South Korean wireless operator SKI Telecom, entered a strategic alliance with MySpace. Ghananian business firms only work together with a few selected, trusted partnerfirms. Example of alliances

  6. Toyota works very closely with a selected number of suppliers, whereas American companies like GM, Chrysler and Ford work with arms length suppliers. Philips plugs its marketing gap with alliances Philips (electronics) and NIke combined their strength to develop wearable electronics, (MP3 related equipment) Philips works together with Robijn on ironing products Philips works together with IKEA Examples of alliances

  7. Unexpected combinations

  8. Unexpected combinations

  9. Alliance networks: the Texas Instrument network

  10. In only two years, 75% of the industry is directly or indirectly connected Alliances lead to networks Source: De Man, 2006, Alliantiebesturing

  11. In some industries networks of former competitors now compete with each other Note, in the airline sector it is all about market power and cost savings. Every network member profits. Stable technical environment. Mergers are often not possible Networks compete Source: De Man, 2006, Alliantiebesturing

  12. Strategic alliances are a popular management tool

  13. Alliance goals

  14. Strategic alliances are voluntary arrangements between firms involving exchange, sharing, or codevelopment of products, technologies, or services. • (Gulati, 1998)

  15. Trend: more flexible alliance forms

  16. Issues in Alliance Research

  17. Theoretical perspectives on alliances (formation and termination)

  18. Theoretical perspectives on alliances • Resource dependency • Transaction cost theory • Social networks • Alliance management

  19. The general and specific environments REGULATORY INSTITUTIONS LEGISLATIVE INSTITUTIONS COMPETITOR SUPPLIER FIRM EMPLOYEE DISTRIBUTOR CUSTOMER ECONOMIC INSTITUTIONS OTHER INDUSTRIES GOVERNMENT

  20. Resource dependency • Organizations are dependent on their environments • They need resources to survive and grow • Environment becomes poor if: • Important customers are lost or new competitors enter • Organizations manage their transactions with the environment • The goal: Ensure predictability of access to resources, reduce uncertainty and dependency

  21. Interorganizational strategies for managing resource dependence • Two basic interdependencies in the specific environment: 1) Symbiotic interdependence • Exist among an organization and its suppliers and distributors 2) Competitive interdependence • Exist among organizations that compete for scarce inputs and outputs • Strategies to reduce uncertainy / dependence • Reputation building • Strategic alliances / long term contracts • Co-optation • Merger / Acquisition • Collusion

  22. Resource dependency explanation of alliance instability • Changes in 'resource fit' increase the hazard of dissolution of business relationships • Changes in resource fit can result from: • increases in a firm’s resource requirement • a decrease in the firm’s partner resource provisions • increases in potential resource provisions by alternative partners

  23. Transaction cost theory (TCE) • Tries to answer the fundamental question: “Why do firms exist?” or alternatively "what are the boundaries of the firm?" • Transaction costs: • Negotiating contracts, • Monitoring contracts, • Enforcing contracts, • Transaction costs = friction within the economy

  24. Transaction cost theory (cont’d) • The goal of the organization is to minimize transaction costs (formally production costs are also included) • of exchanging resources in the environment • of managing exchanges inside the organization • “Every dollar or hour of a manager’s time spent in negotiating or monitoring exchanges with other organizations or inside the organization is a dollar or hournot used for creating value”

  25. Sources of transaction costs • Uncertainty and bounded rationality • The environment is uncertain and complex • Transactions (especially R&D) are complex • People have a limited ability to process infromation and to understand the environment surrounding them • The higher the level of uncertainty, the greater is the difficulty of managing transactions between organizations

  26. Sources of transaction costs (cont’d) • Opportunism and small numbers • Though not all, some people behave opportunistically — they cheat or exploit other stakeholders in the environment • When an organization is dependent on one supplier or a small number of traders, the potential for opportunism is higher • The organization has to spend resources to negotiate, monitor, and enforce agreements with trading partners to protect itself (i.e., transaction costs increase)

  27. Sources of transaction costs (cont’d) • Risk and specific assets • Investments in skills, machinery, knowledge, and information that create value in one exchange relationship but have no value in any other exchange relationship • Specific asset investments increase risk in a business relationship • To counter such a risk, the investing firm may try to negotiate extensively and enforce terms of a contract which increases transaction costs

  28. TCE and Linkage mechanisms • Transaction costs are low when: • Organizations are exchanging nonspecific goods and services • Uncertainty is low • There are many possible exchange partners • Transaction costs increase when: • Organizations exchange more specific goods and services • Uncertainty increases • The number of trading partners fall

  29. Transaction cost logic (i.e. risks)

  30. Explaining alliance failure (note we already discussed resource dependency and transaction costs theory)

  31. Alliance instability and decay

  32. Social network explanation: trust B • Opportunism problems are fundamental problems in alliances • interfirm rivalry • incomplete contracts • learning races • Transaction cost theory does not consider the social embeddedness of business alliances • past • future expectations • third parties

  33. Social Embeddedness € Single firm Only transactions no relations Dyad Transactions often take place within relation Network Relations are nested within networks of relations Temporalembeddedness Networkembeddedness

  34. Payoffs TrustorTrustee Learning an conditional cooperation No trust Trustor Punishment Punishment 0 0 Trust Abuse trust Trustee Sucker Temptation 5 -1 Honor trust Reward Reward 3 3 Preference:Temptation > Reward > Punishment > Sucker

  35. Alliance: 2 sided prisoners dilemma

  36. Repeated games • Suppose you play iterated prisoner’s dilemma against a rangeof opponents…What strategy should you choose, so as to maximize your overall payoff? • Axelrod (1984) investigated this problem, with a computer tournament for programs playing the prisoner’s dilemma • Axelrod’s tournament: invited political scientists, psychologists, economists, game theoreticians to play iterated prisoners dilemma • Guess who won? • Anatol Rapoport contribution 'Tit-for-Tat' • The shadow of the future • cooperation because of anticipated sanctions • The shadow of the past • learning because of past interactions

  37. Third parties and trust • reputation effects • Information diffusion • selection • for sanctioning B A B A

  38. Combining social network theory and resource dependence theory

  39. Centrality and resources • Resources = those tangible and intangible assets which are tied semi-permanently to the firm • Ties are channels through which resources can flow • The more ties, i.e. the higher the degree, the more resources a firm can acquire

  40. The better the resource fit of two firms, the more stable the alliance • Changes in resource fit can result from: • increases in a firm’s resource requirement • a decrease in the firm’s partner resource provisions • increases in potential resource provisions by alternative partners • Asymmetry in degree centrality can affect resource fit

  41. increased resource requirements of the better connected partner, the less well connected partner is less well able to provide needed resources, the better connected partner has more alternative partners. Difference in degree centralities change resource fit A B A B

  42. Some firms manage the alliance process better than others Apparently those firms have built up a capability in managing alliances Firms with a superior alliance capabilities create more shareholder value (Anand and Khanna, 2000) Star performers are Hewlet-Packard, Nike, Intel, Benetton, Disney, Cisco, Microsoft, Toyota Alliance capabilities

  43. Sending staff to an alliance training is especially useful for firms that have no experience with alliances Alliances specialists raise the success rates, particularly when they are in middlemanagement (not in the staff and not too close to operations) Evaluation is a remarkably strong tool for raising alliance success. Especially the comparison of different alliances of one company is a powerful learning tool which increases alliances success Alliance capabilities Source Duijsters, 2006

  44. It has defined corporate alliances It has defined different alliance functions Corporate Executive Sponsor Corporate Relationship Manager Alliance specialist It has created a Corporate Alliance Website on its intranet For managing the Microsoft alliance, Philips has: Set up a database containing all contracts, projects, people Opened a Microsoft program office next door to Microsoft's head office Philips is building up its alliance capabilities Source: Kempen 2001

  45. Alliance management techniques Partner A Alliance Partner B 1 3 2 3 1 • Clear strategic intent • Absorptive capacity • Open culture / Organizational form • Infrastructure • Complementary goals/create win-win situation • Matching targets & compensation practices • (Co-) location • Managing cultural differences • Choice of governance structure • Personal Unions • ‘Boundary spanners’ • Staff rotation • Debriefing Source: De Man , Koene en Rietkerken, 2001

  46. Communication is the key: multiple points of contact Philips Sara Lee/DE Corporate level Corporate level International Steering Committee Core Line Marketing & equity meeting OPCO OPCO OPCO DAP Senseo PIM Meeting National Steering Committees NSO's Joint sales teams per country

  47. Some rehearsal questions • What alternative is not a strategic alliance? • Two competing firms that secretly make price agreements • Buyer A purchases exclusively from Supplier B • A firm manufactures an article under license • A+B • A+C • B+C • All • None

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