Strategic Alliances: Effectively Crossing Organizational Boundaries

1. Strategic Alliances: Effectively Crossing Organizational Boundaries Paul Olk December 5, 2008 National Yunlin University of Science and Technology, Taiwan NYUST - Olk

2. Analysis Overview Vision & Mission Resources & Capabilities Industry Environment 3 sources of Profit Value Network Positioning & Competitive Moves Fit with Corporate Strategy Performance NYUST - Olk

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4. Examples of Alliances NYUST - Olk

5. Alliance Challenges NYUST - Olk

6. Preparing for Partnerships • 1. Strategic Issues • Does the firm have a clear vision and strategy? • Does the firm understand where to form alliances, and where not to? • Are partner selection criteria clear? • Are potential partners being monitored? • Are the alliance activities of rivals being benchmarked? • 2. Organizational Issues • Does the firm have a culture of cooperation? • Is there strong teamwork in the firm? • Does communication flow freely? • Is responsibility decentralized in the firm? • 3. Managerial Issues • Are employees comfortable in situations requiring responsibility without control? • Do employees work well with others from different cultural backgrounds? • Do employees possess general management skills? • Do top managers display commitment to new initiatives? NYUST - Olk

7. Connection to a Company’s Strategy: Does your company have an “Alliance Strategy”? Goals, partner selection, structure Relationship management, alliance evolution Alliance Design Alliance Management Alliance Capability Design and management of alliance portfolio Alliance Portfolio Internal organization, knowledge management Competitive environment and company context Business Organization Business Strategy NYUST - Olk Adapted from Bamford, Gomes-Casseres, Robinson, Mastering Alliance Strategy 2003

8. Fourtypes of Alliance Partners Motives 1. Co-option/Economies of Scale • Potential rivals join together • Reduces costs, increases market share • Useful for building critical mass quickly (e.g., technical standards) • R&D Consortia – Eureka NYUST - Olk

9. 2. Cospecialization • Combining unique skills to create a new opportunity or reach a new market. • Millennium Pharmaceuticals knowledge of drug development with partners’ expertise in specific drugs • Ideal for international expansion – • Star alliance NYUST - Olk

10. Also good for technological markets • Dell – with various supplier partners • Easier to terminate than internal operations NYUST - Olk

11. 3. Learning • Learn skills from partners or jointly create new ones. • General Motors & Toyota – NUMMI. • GM learned Toyota’s production operations. • Toyota learned how to work with U.S. workers. • Emphasis on internalizing the skills. • Best when both partners learn. NYUST - Olk

12. 4. Risk Sharing • Hedging bets on new technology • An ‘options’ approach • Transition to an acquisition • Spreading risk across several partners • Multiple sourcing • Reducing political risk of a particular country • Cannot afford to ‘bet the company’ on each new technology NYUST - Olk

13. Alliance Boundaries • With your partner • With the alliance, if a separate entity • Why set up strong boundaries? NYUST - Olk

14. Signs of Rigid External Boundaries • Strategies and plans are developed independently • Information sharing and joint problem solving are limited • Accounting, measurement and reward systems are separate and unsynchronized • Sales forces push products on their terms • Resources are utilized inefficiently NYUST - Olk

15. Alternative Model: Value Network • Business and operational planning are coordinated – a supraorganizational coordination • Information is widely shared, and problems are solved jointly • Accounting, measurement, and reward systems are consistent • Selling is a consultative process • Resources are shared NYUST - Olk

16. Examples • Singapore Airlines and the Star Alliance • Code sharing and Frequent Flyer programs among 20 airlines • PT Unilever Indonesia • Supplier relationship program • Production system enhancement • Training • Technical assistance • Supervisory support • Suppliers Quality Management and Assessment Programme (SQMP), 33 are preferred suppliers • 84% of goods and services from local supply chain • Top 10 suppliers are Indonesian • Supports 8000 direct and 24000 indirect suppliers NYUST - Olk

17. Barriers • Legal and regulatory tradition • Competitive confusion • Lack of trust • Difficulty in letting go of control • Slowness in learning new managerial skills • Complexity NYUST - Olk

18. Creating Boundaryless External Relationships • Getting started • Building momentum • Sustaining progress NYUST - Olk

19. Stages of Formation Process NYUST - Olk

20. Figure 1 Paths to Successful Collaboration Managerial Activities Alliance Outcomes 1 3 5 6 1 2 1 2 4 6 1 2 1 6 2 1 The numbers in the ovals reflect either managerial activities or alliance outcomes NYUST - Olk

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22. Study of U.S., Israel and Taiwanese Small Firms using Alliances • High technology (broadly defined) • Age and Size: < 2 years or < 100 employees • Alliance partners: local, national, international • Alliances – required co-adaptation (e.g., not website sharing; not co-marketing) NYUST - Olk

23. US 5 years 33 employees 8 4.7 out of 5 4.4 out of 5 Leverage Resources Generate Sales Israel 18 years 53 employees 7 4.4 out of 5 3.7 out of 5 Leverage Resources Generate Sales leads to the following samples’ characteristics. Taiwan 9 years 25 employees 5 4.8 out of 5 4.6 out of 5 Leverage Resources Generate Sales Age* Company Size Number of alliances Importance of alliances Comfort with alliances* Use of alliances NYUST - Olk * Significant Difference Between Samples

24. Important Findings • Both Personal Ties and prior Organizational Ties positively affect Performance of the alliance • S. Jones and the Bootstrapped model • Friendship not as important as prior work ties • Work included professional associations • Trust • Complex relationship between types of Prior Ties and both Personal and Organizational Trust • Organizational Tie related to Personal Trust • Organizational and Personal Trust are separate but related • Open Book Policy – Swiss Company NYUST - Olk

25. Implications for Performance • Personal Trust directly leads to better Performance • Economies of Scale alliances lead to better Performance • For the small company, it was better to work with a similar competitor • Dominant impact of Partner Size differential • Speed in decision making • Importance of the relationship • Ability to make additional investments NYUST - Olk

26. Getting Started – Focused on Emergent and Engineered Formations • Arrange customer and supplier cameos • Take customer and supplier field trips • Hold open-agenda dialogues between senior management teams • Map customer and supplier needs • Collect customer/supplier data NYUST - Olk

27. Customer needs mapping • Helps to ally company’s core processes with suppliers’ and customers’ needs, while still maintaining internal needs. • Helps manage necessary tradeoffs • Process • A grid of customer/busniess needs and company processes • Rate the importance of each need (e.g., 1-5) • Evaluate the importance of each process to a specific need (e.g., 1-9) • Multiply the importance score by the process score • Summing up for each process reveals its relative importance NYUST - Olk

28. Building Momentum – for Established or Embedded relationships • Hold customer and supplier town meetings • Organize cross-value-chain task forces • Eli Lilly ‘Spider Web Performance Model’ • Share technical services • Teach salespeople to be consultants NYUST - Olk

29. Sustaining Progress • Integrate information systems • Reconfigure roles and responsibilities • The goal is to develop alliance capability NYUST - Olk

30. Alliance CapabilityPresence of a strategic alliance unit is associated with better performanceWhat do they do? From J. Bell (2004) NYUST - Olk

31. Levels of Competence NYUST - Olk

32. Key Alliance Success Factors • Develop a clear strategic purpose for the alliance. • Choose partners with complementary capabilities and compatible goals. • Choose the right alliance structure. • Negotiate a thorough, yet flexible, contract. • Enhance incentives to cooperate and minimize conflicts. • Improve trust, communication, and teamwork. • Develop and implement performance metrics. • Plan for evolution and termination. NYUST - Olk

33. Lessons from Toyota • Carefully select enterprise members: Strategically segment suppliers • Toyota took stock in strategic partners (not in the non-strategic ones); • These affiliated suppliers received more assistance and information from Toyota • More likely to have partnerships, rather than quasi-arms length or traditional arm’s length agreements when: • Complex-product industries • Long-term economic expansion • Long-term expansion is the goal • Create an identity for the extended enterprise • Create a mental identity • The Toyota Group – openly promoted as “co-existence and co-prosperity” • Co-locate engineers • Built a center commemorating its supplier associations NYUST - Olk

34. Toyota (cont.) 3. Be Patient: The enterprise needs time to merge and evolve. Phases of its over 50 years of development • Developing relationships and an enterprise identity • Toyota in the US created a supplier association in 1989 – 13 members, by 1998, over 100 • Designed to share information among the suppliers • Developing strong ties with Toyota • Toyota made well-trained consultants available for free to transfer valuable knowledge about the Toyota Production System • Helps to create norms of reciprocity; indebtedness and open communication • Developing strong ties among suppliers • Create subnetworks NYUST - Olk