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Business Alliance

Business Alliance. Sec. 1 Group 5 Linda K. I.D- 4980149 Pongpipat L. I.D- 4980214 Teng-I W. I.D- 4980124 Pratheep K. I.D- 4880198. Chapter 5. Putting Strategy Before Structure. Introduction.

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Business Alliance

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  1. Business Alliance Sec. 1 Group 5 Linda K. I.D- 4980149 Pongpipat L. I.D- 4980214 Teng-I W. I.D- 4980124 Pratheep K. I.D- 4880198

  2. Chapter 5 Putting Strategy Before Structure

  3. Introduction • “Strategic alliances”, the creation of alliances comes to be seen as an end in itself, rather than as means to a broader strategic end. The failure of these deals teaches one clear lesson: “it is the strategy behind the deal that matters, not the structure of the deal” • All strategy should grow out of an assessment of the firm's external competitive environment, its internal capabilities and its desired goals. Only once these are fit together should executives develop tactics and policies.

  4. Example of strategic failure • In 1988, Mitsubishi and Daimler-Benz launched a joint venture to market automobiles in Japan. Global competition drove the companies into each other's arms and their capabilities seemed well-matched. But the strategic intent of the alliance was never clear. No major projects were forthcoming -- the alliance was stillborn.

  5. Example of strategic failure • Case of IBM and Apple forming a much-touted alliance in 1990. Together they planned to take on Intel and Microsoft, but beyond this their goals were unclear. Despite the vague strategy, IBM and Apple signed a multi-part agreement outlining areas of collaboration, including investments in joint ventures and the formation of joint labs. The alliance was a failure and eight years later it has faded away.

  6. Alliance formation Alliance formation has three main elements: • Strategy • Partner Selection • Deal structure

  7. First element: Business Strategy Must Set Goals How should companies go about developing and implementing an alliance strategy? The process must start with an assessment of the firm’s external competitive environment, its internal capabilities and its business goals. Once these are fit together, the executives develop tactics and policies towards partner selection and alliance structure.

  8. Useful questions • What capabilities are required for any player to succeed in the competitive environment? Think broadly about the key success factors in the business. • Do we have these capabilities internally? If not, is it feasible for us to develop these capabilities in a timely manner and at reasonable cost? • If not, are these capabilities available in other firms? If so, how can we gain access to these external capabilities? • Is an alliance the only option? It usually isn’t. So ask: Can we buy the skills? Should we acquire a firm? Is there some transaction that will give us access to the capabilities?

  9. Partners must help reach goals • 3 Ways for Partner selection • Response to the proposal • Executive select close industry contacts • Based on market leadership • In many cases, these can be insufficient • After partnership, managers must take into account the reaction toward new alignment in the industry

  10. Concerns in Partnership • Can we get along with a particular company? • What is its management like? • Do our cultures fit? • Have we had a successful relationship in the past?

  11. Criteria for Partner Selection • Complementary Capabilities • Product and market • Technology and capital • Global network and local customers • Conflicts of Interest • Overlapping geographic markets • Competing sources of production • Transfer pricing across companies • Targets and missions • Common rivals • New market, new technology • Time horizons • Value • Compatible Goals • Market access…product access • Local knowledge…technology • Time saving…cash generation

  12. Structure must maximize cooperation • Structure play an important role in: • Align incentives structure • Establishes governance mechanisms • Allow evolution over time • Financial and Legal Arrangements • Valuation of partner contribution • Value sharing machenism • Transfer pricing • Length of Contract • Critical in for Structure that Lead to Success • Incentive alignment • Decision processes • Evolution

  13. Incentives for Cooperation • Without a good measurement the alliance’s progress can’t be tracked, managerial adjustments can’t be made and employees and customer – can’t be motivated. • measurement tool must be created • Data from the performance source.

  14. Incentives for Cooperation • Different companies have different goals/target

  15. Incentives for Cooperation • Now there is the Eli Lilly’s survey that helps company create better performance metrics, to help them measure the qualitative and quantitative targets. • It all depends on goals find what the alliance are trying to achieve and to measure performance.

  16. Governance: The Soul of an Alliance • Most companies define alliances by their structure type: a joint venture, a co-marketing etc. • Wrong !! Focus on structure not strategy

  17. Governance: The Soul of an Alliance • Open-Ended Agreement • It is an agreement that will change and evolve overtime and fill in some of its apparent gaps. It is a way that companies share their task of making decision in the future and provide a way to govern future negotiations between the firms.

  18. Governance: The Soul of an Alliance Problems:- • Some conditions cannot be met. • causes incompleteness in the contracts Causes:- • Due to rapid changes in technology and markets • uncertainty in what the joint project will require • difficulty in measuring inputs and outputs.

  19. Governance: The Soul of an Alliance Example:- • An example: IT company forming many alliance to handle logistic and after sales service. • Realize it was too large to handle. Solution:- • Tightened the governance structure • Promote all-inclusive alliance council forum • Create subcommittees around key issues. • Shape decision making • Encourage partners to work together to minimize cost of delievery • Result: Once everything set up in place and shown to work, then it was easy to build common process and easy to promote other goals

  20. Alliance will Evolve • The structure of an alliance will not stay the same, it will evolve to adapt to changes of the environment. • Three things to keep in mind to avoid losing influence in an alliance 1. Keep track of your own strategy 2. Monitor the value gain from the alliance 3. Continue to invest in yourself

  21. Example: VS • Toyota brought manufacturing process and design; whereas, GM provides market knowledge, labor knowledge, and plant. • Over the life of alliance, the balance of power shift towards Toyota. When value does not equal contribution • It’s either restructuring the alliance so that both parties benefit or cancel the alliance.

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