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S
S
TRATEGIC
TRATEGIC
A
A
LLIANCES
LLIANCES
A
GUIDELINE FOR
I
DENTIFICATION
,
E
VALUATION
,
N
EGOTIATION
AND
I
MPLEMENTATION
by
D
D
ANIEL
ANIEL
K
K
LEIN
LEIN
Thesis submitted in June 2001 to the Department of Civil Engineering,
University of Applied Sciences, Stuttgart, Germany,
in partially fulfillment of the requirements for
the Degree of Diplom Ingenieur (FH) in Civil Engineering,
Specialization Area Construction Management
in January 2002
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A
A
CKNOWLEDGEMENTS
CKNOWLEDGEMENTS
Many thanks to Gammon Construction (China) Ltd in alphabetical order Andrew
Bacon, Steve Chamberlain, Tim Hallworth, Mike Harvey (you are butchering the
language
), Mark Olive, and John Wong, who gave me the opportunity to work on a
part-time basis on my thesis and simultaneously gain valuable job experience.
Special thanks to Steve Chamberlain, who provided me with a significant amount of
the used literature.
I would also like to thank my supervisors, Prof. Dr.-Ing. H. J. Olschewski and Prof. Dr.
K. Schneider from the University of Applied Sciences, Stuttgart, Germany, who have
agreed to support and supervise my thesis.
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T
T
ABLE OF
ABLE OF
C
C
ONTENTS
ONTENTS
0 C
ONTENT
Cover page
1
Acknowledgements 2
Table of Contents
3
Figure Content List
9
1 I
NTRODUCTION
1.1
Scope and objective of this thesis
11
1.2 Summary
11
1.3 History
13
1.4 Definitions
14
1.4.1
Common definitions and abbreviations for relevant terms
14
1.5 Preface
18
1.6
Why implement Strategic Alliances?
24
1.6.1
Dynamic forces driving Strategic Alliances
27
1.7
Characteristics of Strategic Alliances
30
1.8
Types of Strategic Alliances
30
1.9
Four basic criteria in an alliance for each partner
35
1.10 What are Strategic Alliances not?
35
1.11 Are Strategic Alliances always strategic?
36
1.12 Why do alliances fail?
36
1.13 Implication on share prices
39
1.14 Tomorrow's
champions
40
1.15 Sample of a Strategic Alliance Network in the Telecommunications
Industry
42
1.16 In the construction industry
42
2 I
DENTIFY
2.1 Preparations
(
strategical, operational, and psychological
) 47
2.2 Strategic
fit
47
2.2.1
Stages of a Combination Strategy
48
2.2.2
Alliance strategy needs to change as needs change
50
2.2.3
Strategic Alliances in the airline industry: a totally different
kind of strategic fit
53
2.2.4
Entry / Operation strategies: wholly owned subsidiary, joint
ventures, exporting
53
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2.3 Operational
fit
55
2.3.1
Partner choice: what to look for in an alliance partner
55
2.3.2
Determining type and structure of Strategic Alliances
56
2.3.3
Filling the Capability Gap
57
2.4
Psychological fit - Human factors
58
2.5
Alliance success factors
59
2.5.1
Rethinking the management of alliances
62
2.6
In the construction industry
62
3 C
OMPANY CULTURE
3.1
Why company cultures can clash
64
3.2
Stages of culture clash
64
3.3
Characteristics of company cultures
65
3.4 Respecting
cultures
66
3.5
Systematically learning about partners' cultures
66
3.6
Culture clash in international combinations
67
3.6.1
Managing the culture clash
67
3.6.2
Protecting core values
67
3.6.3
Culture at the working level
68
3.6.4 Managing
mind-sets
68
3.6.5
Sources of tension in building new teams
69
3.6.6
Molding individuals into a team
69
3.7
The origins of organizational culture
69
4 E
VALUATION AND
A
SSESSMENT
4.1
Assessing one's own capabilities corporate self-analysis
72
4.1.1
What capabilities do we need in order to target and
accomplish our goals?
73
4.2
Assessing organizational culture
75
4.2.1
Levels of acculturation
77
5 N
EGOTIATE AND SELECT PARTNER
/
S
5.1
Finding and selecting the right partner/s
80
5.2 Country
culture
83
5.3
Develop a workable alliance
84
5.4
Protecting proprietary technology
85
5.5 Legal
issues
86
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6 I
MPLEMENT
6.1
Vision and Mission
88
6.1.1
Critical Success Factors (CSF)
88
6.1.2
Elements of a vision
89
6.2
Principles, Priorities, Systems and Processes
90
6.2.1
Speed of integration
90
6.2.2
The multinational strategic management process: a linear
situational overview
91
6.3 Human
Resources
92
6.3.1
Retaining desired talent
93
6.3.2
Middle managers' role
93
6.3.3
Core management staff
94
6.3.4
Focusing and prioritizing executive attention
94
6.3.5
Senior team development
95
6.3.6
Selecting managers and organizing the alliance
95
6.3.7 Alliance
CEO
97
6.3.8
Key managers and operating personnel
97
6.3.9
Training and development of management and workforce
98
6.4 Leadership
100
6.4.1
Leaderships role in the integration program
100
6.4.2 Alliance
leadership
101
6.5 Management
102
6.5.1
Communicating with staff
104
6.5.2
Getting staff to communicate
105
6.5.3
Changing circumstances and structural adaptation
105
6.5.4
Developing detailed structures
105
6.5.5
Reducing risk by incremental approaches
107
6.5.6
Relationship risks in alliances
107
7 M
AKING
M
ULTINATIONAL
S
TRATEGIC
A
LLIANCES
WORK
7.1
The liaison role
109
7.2
Collaboration and Cooperation
110
7.3
Collaborative / team-oriented management style
110
7.4
Nurturing a collaborative mindset
111
7.5 Conflict
resolution
112
7.5.1
Using conflict resolution positively
113
7.6 Using
teams
113
7.7
Alliance management: working for the future
113
7.8
Control balanced with autonomy
114
7.9
Tailoring Governance to Alliance
115
7.10 Institutionalizing Alliance Capability
115
7.11 Performance
Measurement
119
7.12 Levels of alliance capability
122
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7.13 Resources
125
7.14 Preparing for problems and failures
126
7.15
Becoming a Partner of Choice
127
7.15.1 Reputation
Benefits
127
7.15.2 Reputation
Sources
127
7.15.3
Building an Alliance Brand
128
7.16 Getting maximum leverage
129
7.17 Nine
I'
S
for successful
WE
'
S
129
8 T
ERMINATION
8.1
Exit strategies: when and how to terminate
131
9 C
ONCLUSION
10 G
ENERAL APPENDIX
10.1 Unlocking the Value
134
10.2 Managing the five dimensions of a combination
134
10.3 The CEO's 10 commandments of combination leadership
135
10.4
Employee survival guide
137
10.5 For small companies: the 28 steps towards an alliance
139
10.6 Press release: Caterpillar and DaimlerChrysler to form Global
Alliance, Nov 22, 2000
141
11 A
PPENDIX TO
P
ART
2
I
DENTIFY
11.1 Company
guidelines
145
11.2
The strategy of a multinational Strategic Alliance
146
11.3 Strategic
fit
147
11.3.1
Initiating alliance partner: Profile
148
11.3.2
Initiating alliance partner: Market Position
148
11.3.3
The industry and competitive market
148
11.3.4
Potential alliance partners
149
11.4
Alliance type and operational fit
149
11.4.1
Operational fit (or integration)
150
11.4.2
The alliance structure: calculating and reducing risk
151
11.4.3 Additional
details
152
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12 A
PPENDIX TO
P
ART
3
C
OMPANY CULTURE
12.1 Managerial
personalities
153
12.2 Types of organizational cultures
153
12.2.1 Power
cultures
156
12.2.2 Role
cultures
156
12.2.3
Task / achievement cultures
157
12.2.4
The person / support culture
157
13 A
PPENDIX TO
P
ART
4
E
VALUATION AND
A
SSESSMENT
13.1 Test your company's alliance needs
158
13.2 Cultural
questionnaire
159
13.3 Evaluation
samples
161
14 A
PPENDIX TO
P
ART
5
N
EGOTIATE
14.1 Sample of an analytic framework
164
14.2 Sample of an action plan
165
14.3 Negotiation and partner selection
166
14.3.1
Negotiating style and partner relationship
166
14.3.2 Compatible partner selection: more detailed business
profile
167
14.3.3
Partner selection: more detailed people profile
168
14.3.4 Negotiations
169
14.3.5 Legal and governance perspectives: preparing for worst-
case scenarios
170
14.4 Bridging cultural gaps
171
14.4.1
The role of personal relationships: business or people first? 171
14.4.2
Focus on the individual or on the group?
173
14.4.3
Status: is everyone created equal?
174
14.4.4
Language / information flow factors
174
14.4.5
A question of priorities: what is the value of time?
175
14.4.6
Some general guidelines
175
14.5 Latin America: Seven Success Factors for Alliances
176
14.6 Asia: Ten Success Factors for Doing Business
177
14.6.1
Smooth implementation pitfalls to avoid
178
14.6.2
Ten Success Factors
179
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15 A
PPENDIX TO
P
ART
6
AND
7
15.1 Cultural contrasts: Training
181
15.2 Cultural contrasts: Motivation
181
15.3 Cultural contrasts: Performance reviews
182
15.4 Multinational Management Staffing
183
15.5 Strategic Leadership Quotient Sample Diagnostic
183
15.6 Alliance type and structure
184
15.7 Leadership style, staff and organization
186
15.8 Control and reassessment
187
15.8.1
Enterprise Strategic Framework
188
15.8.2
Diagnostic control reporting systems
188
15.8.3
Diagnostic guidance and control processes
190
15.8.4
Interactive planning and control systems
190
16 R
EFERENCES AND
B
IBLIOGRAPHY
A
192
B
193
C
193
D
193
E
194
F
194
G
194
H
195
I
196
K
196
L
196
M
196
N
196
O
196
P
197
R
197
S
197
T
197
W
197
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F
F
IGURE
IGURE
C
C
ONTENT
ONTENT
L
L
IST
IST
1 I
NTRODUCTION
Figure 1
Alliances relevant to all industries
20
Figure 2
Alliances average $ 48 mill investment
21
Figure 3
Industry agenda drives relevance of cross-border alliances
22
Figure 4
Ally or do it on your own?
23
Figure 5
High success alliance companies average 90 % success rate,
but fare worse in acquisitions
24
Figure 6
Growth is number one reason for alliances for top 2000 US
and European firms
26
Figure 7
Primary alliance drivers globalization and capability gaps
28
Figure 8
Business life cycle phases influence alliance imperatives
29
Figure 9
Types of enterprise collaborative relationships
31
Figure 10
Alliance segmentation criteria
33
Figure 11
Seeds of alliance failure sown long before agreements are
signed
38
Figure 12
AOL stock rises on alliance news, but falls on merger news
40
Figure 13
Strategic technology alliance network, telecom 1997 - 1998
42
2 I
DENTIFY
Figure 14
Roadmap to alliance success
45
Figure 15
Corning shows the way: 48 alliances
50
Figure 16
Alliance Architecture Models: each company needs to select
the appropriate blend for these "pure tone" architectural
models
52
Figure 17
Types of enterprise collaborative relationships decision
situation diagram
54
Figure
18 Alliances at successful companies report more to top
management
61
4 E
VALUATION AND
A
SSESSMENT
Figure 19
Capabilities and position asset analysis
71
Figure 20
Racing toward global capabilities evolution of alliance
drivers
74
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5 N
EGOTIATE AND SELECT PARTNER
/
S
Figure 21
Strategic Alliances more complex to negotiate
79
Figure 22
Commitment is determined by perceived level of comfort
81
Figure 23 Drivers and rationale understanding from both partners'
perspective
82
6 I
MPLEMENT
Figure 24
Elements of a vision
89
Figure 25
The multinational strategic management process: a linear
situational overview
92
Figure 26
Half of recent alliances are amongst competitors
102
7 M
AKING
M
ULTINATIONAL
S
TRATEGIC
A
LLIANCES
WORK
Figure 27a
and 27b
Samples of flattened structures
112
Figure 28
Most firms evolve their alliance capability
117
Figure 29
Elements included in an alliance repository
119
Figure 30
Building an alliance capability
120
Figure
31 Successful companies do more assessments of both
themselves and partners
122
11 A
PPENDIX TO
P
ART
2
-
I
DENTIFY
Figure 32
Alliance framework relevance to alliance best practices to
different alliances
146
15 A
PPENDIX TO
P
ART
6
AND
7
Figure 33
Multinational Management Staffing
183
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1. Introduction
1.1 Scope and objective of this thesis
The purpose of this thesis is to give a review about the broad topic of Strategic
Alliances namely in a way understandable to non-management experts.
After reading this thesis the reader should be able to answer questions such as
· what are Strategic Alliances,
· should a company operate through Strategic Alliances or should other strategies
be considered,
· what types of Strategic Alliances do exist,
· how to identify the strategic and operational fit,
· what impact company culture can have on an alliance,
· evaluate and assess capabilities,
· how to negotiate and select partners,
· what impact country culture can have on alliances,
· how to implement and make the alliance work.
Deliberately, this thesis is kept very general, and the relevance to the construction
industry is outlined at the end of the parts 1, 2 and 9 respectively.
Furthermore the objective is to be practice-oriented rather than to wander in
theoretical realms. Just like an estimate this thesis covers the major items and
detailed samples are only provided in special cases to underline some very important
coherences and to make the `theory' more understandable. Samples and further
information can be found in the respective appendices.
Hence, the purpose of this thesis is not an enumeration of Strategic Alliance
samples, as every Strategic Alliance highly depends on particular circumstances.
However, the samples and further information covered by the appendices will
facilitate the general understanding of some issues.
1.2 Summary
The thesis consists of 16 parts: parts 1-9 are the ultimate thesis, and parts 10-15 are
the appendices. Part 16 contains the references and bibliography used.
Part 0: Content
This part includes the cover page, acknowledgements, a table of contents, the figure
content list and the required statement.
Part 1: Introduction
At the beginning the scope and objective of this thesis are defined. A synopsis, a
brief history and definitions follow. `Introduction' covers general items such as: why
implement alliances, characteristics and types of alliances, why alliances can fail and
the implication on companies share prices. At the end the specifics in the
construction industry are outlined.
Part 2: Identify
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The strategic, operational and psychological fit is now described, as well as how to
lead alliances towards success. At the end the specifics in the construction industry
are outlined.
Part 3: Company culture
Company cultures are sometimes not considered in the deal and could pose a threat
to the alliance success. This part describes how to manage culture clash, work
together, avoid tensions and establish teams. The origins of company culture are
briefly outlined.
Part 4: Evaluation and assessment
Corporate self-analysis is always a basic necessity prior to enter into a deal.
Subsequently a company can determine what to look for in and how to evaluate and
assess potential partners. Organizational culture one's own and the potential
partners one - needs to be assessed as well as it can be a latent obstacle towards
an alliance success.
Part 5: Negotiate and select partner/s
This part includes answers for questions such as: Where and how can a firm find a
suitable partner? What impact might different country cultures have on negotiations?
Protecting proprietary technology is as well an issue during negotiations.
Part 6: Implement
If the implementation goes wrong, the whole alliance might be at risk. `Implement'
covers issues such as the vision and mission a firm should have, establishing and
following principles, priorities, systems and processes. Human resources, say middle
managers, senior team and CEO's are a crucial chapter in every combination,
followed by leadership and management. Latter covers topics like internal
communication (staff staff, staff management), developing detailed structures and
how to handle relationship risks and general risks.
Part 7: Making Multinational Strategic Alliances work
After successful implementation of the combination partners need to collaborate and
cooperate continuously. The on-and-off approach is not advisable in the majority of
cases. Upcoming conflict needs to be resolved as well as how to use teams and
manage them. Furthermore control in the new created entity needs to be balanced
with autonomy, as control should not hamper the alliance as a whole. Performance
measurement and alliance capabilities are closely related together. Companies need
a systematic approach as not to invent the wheel time and again. After sailing
successfully around problems, eventually a firm might become a partner of choice for
other firms, creating new combinations and therefore increased value.
Part 8: Termination
Combinations (mergers, acquisitions and Strategic Alliances) are not forged for
eternity. One needs to take account of how to end a combination without causing
harm to the parent entities.
Part 9: Conclusion
The conclusion might outline some trends and developments in the business
community as a whole and for the construction industry in particular.
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All appendices (part 10 to part 15) are for further information and reference. The
reader might find it useful to glance through these appendices, as they can facilitate
the understanding of some issues.
Finally all references and bibliography used are listed in part 16.
1.3 History
Alliances are as old as mankind. Thousands of years ago tribes started to ally with
others in order to achieve their goals, such as to trade with each other and to combat
other tribes.
With the early beginnings of trade the first deals and treaties were signed paving the
way for co-operation and collaboration. The names Fugger, de `Medici, Rothschild,
etc. remind us on former merchants who through their alliances and wide co-
operations created considerable wealth for themselves and their families.
Pacts between cities such as the "Hanseatic League" forged in the early 13
th
century
created alliances, which benefited every member. Trade monopolies emerged
creating high profits for some companies and economic disequilibrium sometimes
resulting in wars and military disputes.
In recent history alliances, pacts, and treaties were formed, especially during WW1
and WW2. A few examples include Entente, Locarno, the Axis, Kellog-Brian,
Comintern, and many others. The North Atlantic Treaty Organization (NATO) and
consequently the Warsaw Treaty Organization or Warsaw Pact were established
after these devastating world wars. The aim of these pacts was/is a protection of an
armed attack on any member and provided for collective self-defense. Other treaties
covering political, economic, and social co-operation followed.
The modern market place is also like a "war" and as a result companies have started
to co-operate in order to develop their products and services faster, with lower costs
and better respectively higher quality.
Today many companies co-operate with each other co-operation between
competitors is becoming more and more "normal" which was incredible a few
decades ago. Going further the competition nowadays is no more company against
company but rather a bunch of companies a constellation against another
constellation.
The result is that the mind-set of business executives regarding alliances and co-
operation has changed. Companies are constantly seeking for suitable partners for a
merger, an acquisition and for Strategic Alliances. The main advantage of an alliance
has not changed in time and enables partners "dating" longer without committing
themselves too much to each other in terms of costs, as this is the case in mergers
and acquisitions. If there is no fit, almost no harm is done to both parties.
Senior managers in companies now have significant strategic decisions to make if
they want alliances (called Strategic Alliances) to develop, expand and protect their
business.
However, governments' worldwide should closely monitor these developments as
monopolies have always only benefited their owners as they then have the ability to
control prices in a given industry.
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1.4 Definitions
Webster
1
defines:
· Strategic:
1: of, relating to, or marked by strategy <a strategic
retreat>
2a: necessary to or important in the initiation, conduct, or completion of a
strategic plan
2b: required for the conduct of war and not available in adequate quantities
domestically
<strategic materials>
2c: of great importance within an integrated whole or to a planned effect
<emphasized
strategic points>
3: designed or trained to strike an enemy at the sources of his military, economic,
or political power <a strategic bomber>
· Alliance:
1a: the state of being allied: the action of allying
1b: a bond or connection between families, states, parties, or individuals
<a closer alliance between government and industry>
2: an association to further the common interests of the members; specifically: a
confederation of nations by treaty
3: union by relationship in qualities
4: a treaty of alliance
1.4.1
C
OMMON DEFINITIONS AND ABBREVIATIONS FOR RELEVANT
TERMS
· Acquisition. The purchase of one company or a part of one company by another.
The purchased assets will usually be integrated into the operations of the
acquirer, but some assets may be sold off.
· Alliance. Inter-firm relationship between two or more separate firms that is short
of A
CQUISITION
and deeper than A
RM
'
S
L
ENGTH
C
ONTRACT
. It is characterized by a
governance structure to manage the "incomplete" (
or open-ended
) elements of the
agreement. There are many structural forms of alliances, including J
OINT
V
ENTURE
,
L
ICENSING
,
J
OINT
R&D, some S
UPPLIER
relationships, and so on. May be
an E
QUITY
or
N
ON
-E
QUITY
R
ELATIONSHIP
.
· Marketing and Sales Alliance. A M
ARKETING AND
S
ALES
A
LLIANCE
is a
relationship entered into specifically to increase the sales of products of one or
both of the A
LLIANCE
partners.
· Alliance Plan. An A
LLIANCE
P
LAN
is a business and operating plan for the
alliance.
· Proactive Alliance. A P
ROACTIVE
A
LLIANCE
is an alliance that comes about after
one company actively seeks the partnership of another organization.
· Reactive Alliance. A R
EACTIVE
A
LLIANCE
is an alliance that comes about after one
company is approached by another organization with a request for partnership.
1
www.webster.com
; see also
www.dictionary.com
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· Arm's Length Contract. An inter-firm relationship lacking preferential terms, i.e.
in which the firms offer each other "standard" or "market" terms and prices.
· ASP: Application Service Provider. An Application Service Provider is a company
that provides applications to you as a service, as opposed to you running the
application at your own facility.
· Chaebols. Chaebols (
in South Korea
) are conglomerates of many companies
clustered around one holding company. The parent company is usually controlled
by one family and the companies hold shares in each other. Similar to Japanese
K
EIRETSUS
.
· Co-branding. Agreement between two or more separate firms to promote their
brands jointly in the marketplace.
· COGS: Cost of Goods Sold.
· Combination. Generic term or genus for M
ERGERS
, A
CQUISITIONS
and
S
TRATEGIC
A
LLIANCES
(
including all the different types
).
· Consortium, Consortia. An association or a combination, as of businesses,
financial institutions, or investors, for the purpose of engaging in a J
OINT
V
ENTURE
.
· Constellation. A set of firms tied together through A
LLIANCES
and that competes
in a particular industrial or geographic domain against other constellations or
against single firms. (
Two companies form a Pair. Three companies form a Triad. Four and
more companies form a Group.
)
· Co-option. Potential competitors are turned into allies and providers of
complementary goods and services that allow new business to develop. The term
CO
-
OPTION
is used in the sense, that
· potential rivals are effectively neutralized as threats by bringing
them into the alliance
· firms with complementary goods to contribute are wooed, creating
network economies in favor of the coalition, of the alliance.
· Cospecialization. Is the synergistic value creation that results from combining of
previously separate resource positions, skills and knowledge sources. Partners of
the alliance contribute unique and differentiated resources to the mutual success.
· CSF's: Critical Success Factors. Areas of activity that should receive constant
and careful attention from management.
· Divestiture. The sale of a part of a company to another company. The assets
sold will usually be de-integrated from the divesting company's operations,
although a gradual transition of management is possible.
· EBIT: Earning Before Interest, and Tax.
· EBDIT: Earning Before Depreciation, Interest, and Tax.
· EDI: Electronic Data Interchange.
· Equity Investment. The purchase of a part of one company's equity by another
company for cash, stock, or other consideration.
· Equity Relationships. Any inter-firm relationship involving one firm owning part
of the equity in another firm. Common forms are J
OINT
V
ENTURES
or M
INORITY
E
QUITY
I
NVESTMENTS
. E
QUITY
R
ELATIONSHIPS
are usually A
LLIANCES
.
· Exit Provisions. The agreements between companies in an A
LLIANCE
that govern
the way they would divide assets and rights in the event of a dissolution of the
A
LLIANCE
, and related provisions regarding who or what may trigger a dissolution.
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· Franchising. A system of business organization whereby a central firm (
franchisor
)
grants territorial rights to the use of its trademarks and technologies to local
owners (
franchisees
).
· IPO. Initial Public Offering. A new company's first offering of shares to the public.
After the IPO, the company's shares will usually be listed on a stock exchange.
· Incomplete Contract. An agreement (
written and unwritten
) between two firms that
leaves open important terms of exchange, usually because of contingencies that
cannot be accurately foreseen at the time of the agreement. In order to govern
such an agreement, the firms may use a "relational" or "evolving" contract; such
contracts are the essence of an A
LLIANCE
.
· Joint Marketing. An A
LLIANCE
in the area of marketing, for example involving one
company promoting the products of the other, or two companies combining sales
efforts.
· Joint R&D. An A
LLIANCE
in the area of R&D, for example involving each company
developing a part of a product or exchanging information in the joint development
of a product.
· Joint Venture. An A
LLIANCE
consisting of two or more companies owning parts of
the equity in a separate corporation. The new corporation may be run more or
less autonomously from the parent firms. J
OINT
V
ENTURES
are often classified (
from
one partner's perspective
) as minority, 50/50, or majority, depending on the share of
ownership of one partner.
· Keiretsu. A network of businesses that own stakes in one another as a means of
mutual security, especially in Japan, and usually including large manufacturers
and their suppliers of raw materials and components.
2
· Letter of Intent (LoI): Expression of tentative intentions of the parties and creates
no liability as between the parties.
· Licensing. An inter-firm agreement whereby one company grants the right to
another company to use its patents in defined domains. Cross-licensing
agreements involve the companies simultaneously granting reciprocal rights to
each other's patents or to whole patent portfolios.
· Memorandum: 1. An informal record; a brief written note of some transaction; 3.
An outline of an intended instrument; 4. An instrument written in concise
summary.
· Merger. The unification of two or more companies or of their assets. This term is
often used when two more-or-less equally-sized companies join, because it is
often not clear in such cases that one company "acquired" the other; alternatively,
the term is used when companies want to signal that both will have a balanced
influence on the management and organization of the new entity, even if one is
larger than the other. From strictly structural point of view, A
CQUISITIONS
or
M
ERGERS
tend to lead to the same result.
· MNC: MultiNational Corporations.
· Minority Equity Investment. An investment of one company in another that
represents less than 50% of the equity of the second firm. Can be a share of a
J
OINT
V
ENTURE
or of another stand-alone firm. (
see also E
QUITY
I
NVESTMENT
)
2
Further reading: Michael L. Gerlach, Alliance Capitalism, The Social
Organization of Japanese Business, University of California Press
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· Network Organization. Loose term used to denote business organizations
characterized by formal and informal networks of relationships.
· NIH and NMH syndrome: "not invented here" and "not manufactured here".
· Non-Equity Relationships. Inter-firm relationships that do not involve one
company owning equity in another entity or firm. Examples are L
ICENSING
,
F
RANCHISING
,
J
OINT
R&D
P
ROGRAMS
, etc.
· NPBT: Net Profits Before Tax.
· OEM. Original Equipment Manufacturer. A S
UPPLIER
relationship whereby the
OEM provides a full product to a buyer, which then brands the product and sells it
in its channels. This practice is especially prevalent in the computer industry.
· Option. A provision that grants the owner of the option the right to buy more
shares of a company at a certain price or to exercise other rights in the future,
should conditions warrant it.
· Operations. O
PERATIONS
refers to the process being in action, the state of being
actively involved in business activities and transactions.
· Outsourcing. The delegation of certain functions to an external company. Can be
through an A
LLIANCE
or through an A
RM
'
S
L
ENGTH
C
ONTRACT
.
· Partnering. Is a long-term commitment between two or more organizations for
the purpose of achieving specific business objectives by maximizing the
effectiveness of each participant's resources. The relationship is based upon
trust, dedication to common goals, and an understanding of each other's
individual expectations and values.
Expected benefits include improved efficiency and cost effectiveness, increased
opportunity for innovation, and the continuous improvement of quality products
and services.
· Partnership. Two definitions:
· (1) A loose term often used to denote some sort of A
LLIANCE
; or
· (2) a strict legal term describing a jointly owned enterprise that is not
a corporation and that follows different tax and management rules
than would a standard J
OINT
V
ENTURE
.
· Points of Interface. P
OINTS OF
I
NTERFACE
are individuals within a company
engaging in direct, continuous, and substantive contact with the person in the
A
LLIANCE
partner's company regarding a specific A
LLIANCE
.
· Private Label. One company manufactures a product for sale under another
company's label. This term is roughly synonymous with OEM, but is used in most
consumer products industries other than computers.
· ROI: Return on Investment.
· SBU. Small Business Unit.
· SMU. Small and Medium-sized Enterprise.
· Strategic. Being S
TRATEGIC
is the process of planning and directing operations
into the most advantageous position before entering into an agreement.
· Supplier. A company that supplies a product or service to another. S
UPPLIERS
may be selected on an A
RM
'
S
L
ENGTH
basis or on a preferential basis. In the latter
case, the supplier-buyer relationship takes on the features of an A
LLIANCE
.
· SWOT analysis: Analysis of one company's Strengths, Weaknesses,
Opportunities, and Threats.
· Tactics. T
ACTICS
is the process of reacting or deploying during engagement.
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· TCO: Total Cost of Ownership. A very popular buzzword especially in the
computer industry representing how much it actually costs to own a PC. The TCO
includes:
· Original cost of the computer and software
· Hardware and software upgrades
· Maintenance
· Technical
support
· Training
Most estimates place the TCO at about 3 to 4 times the actual purchase cost of
the PC. The TCO has become a rallying cry for companies supporting network
computers. They claim that not only are network computers less expensive to
purchase, but the TCO is also much less because network computers can be
centrally administered and upgraded.
· Transaction. The difference between an alliance and a transaction is that an
alliance is based on trust, the transaction in contrast is based on a contract. With
transactions, information sharing is limited to what it needed to close the deal,
because divulging more could yield an advantage to the other side. Transactions
also encourage finger pointing rather than creative problem solving.
· Vendor. S
UPPLIER
. See that definition.
Sources:
3
,
4
,
5
, and
6
1.5 Preface
About one (
and a half
) decade ago, if a company wanted to step into a new market, it
developed everything what it needed by themselves. Another possibility was to made
an acquisition or to merge with another company. Today this attitude changed to a
faster and lower risk route: forming business alliances. Because of maturing markets
multinational Strategic Alliances become more important to success in business.
Companies of all sizes are seeking growth in new markets alliances are becoming
unavoidable and absolutely necessary. All the different types of Strategic Alliances
are a major enabling tool, a management tool of multinational firms, as well as they
are for domestic ones. A company needs to establish a business strategy, an alliance
strategy not a Strategic Alliance. Business strategy should drive alliance decisions,
not vice versa.
7
8
These alliances have a number of remarkable characteristics,
which make them sometimes difficult to use effectively.
3
www.dictionary.com
4
Marketing and Sales Strategic Alliances Best-Practices Report Executive
Summary, American Productivity & Quality Center 1998,
www.apqc.org
5
scheduled by Prof. Ben Gomes-Casseres, Brandeis University
www.brandeis.edu
and principal of Alliance Strategy Consulting
www.alliancerevolution.com
6
Establishing an extranet, article in
www.office.com
7
The Alliance Analyst: Alliance Advantage Strategy before Structure,
August 15, 1998 (based on a conversation with Benjamin Gomes-Casseres)
www.alliancestrategy.com
8
Ben Gomes-Casseres, Video lecture: What is an alliance strategy? 2000,
Brandeis University,
www.brandeis.edu
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Accenture found out that the average company, which may have had no alliance a
decade ago has now about 30.
9
9
Accenture: Myths of Alliances: Executive Summary
www.accenture.com
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Figure 1
Source:
10
All industries are affected as shown on the chart above. North America, Europe and
Asia-Pacific formed the most alliances being the worlds powerhouses (
Japan normally
as well but presently suffering form a almost decade long depression
). Alliances referred here
imply mergers, acquisitions and Strategic Alliances. North America established the
most alliances in the computer and software sector, whereas Europe has built most
alliances in services and transportation. Asia / Pacific forged their alliances in sectors
such as services, industry and consumer / retail. Obviously North America has the
most alliances, as their economy is one of the biggest in the world.
Different stages of country / region development affect the forming of alliances in
specific sectors which is very clearly shown on this chart.
10
www.smartalliances.com
, chart 13
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Figure 2
Source:
11
Booz-Allen & Hamilton figured out that in 1994-1995 the average alliance size in
financial terms was about 50 million US$, as depicted in the chart above. Compared
to the US the alliance investment in Mexico, Asia, China and Eastern Europe is
significantly higher. The markets in these developing countries are not mature, they
are emerging. Investors forming these alliances are mostly from the US, Western
Europe and Japan and seeking for new growth opportunities.
Another aspect is the sector in which an alliance is forged. Alliances producing
consumer goods require a significant higher financial investment in fixed assets
(
production facilities and equipment
) than a marketing alliance or a service alliance. Due to
economies of scale and other reasons, alliances involve more and more multiple
countries, which is shown in the next graph.
11
www.smartalliances.com
, chart 14
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Figure 3
Source:
12
,
13
The best sample of cross-border alliances is maybe the automotive industry.
Corporations strive to cut costs, remain competitive and lure consumers with
outstanding quality and competitive prices. Competitive prices can be obtained in
purchasing the auto parts as cheap as possible from selected suppliers to the
required quality with long-term agreements a form of an alliance. The supplier now
searches on his part for better and cost-reducing solutions. One possibility is forming
joint ventures (
this is a type of a Strategic Alliance
) with other companies, which are able to
provide the auto parts in the required quality at a competitive price. And this in turn
results in higher cross border-transactions as labor costs are (
generally speaking
) lower
in developing countries and regions such as China, Eastern Europe, Latin America
and Asia in general.
The general thought when forming a Strategic Alliance is - Why do it on your own
when you can achieve your objectives quicker and add competitive advantage to the
business offering at the same time? This goes especially for knowledge and R&D
alliances. The next figure illustrates this clearly pointing out the potential gap between
12
www.smartalliances.com
, chart 25
13
John R. Harbison, Peter Pekar Jr., Smart Alliances, A practical guide to
repeatable success, 18
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"ally" or the "go-it-alone" approach which ultimately results in higher or lower
revenues.
Figure 4: Ally or do it on your own?
Source:
14
The alliance approach can also be used to build integrated products or services. A
team of partners a constellation - can significantly raise the competitive bar
whereby a single competitor will be outflanked or be forced to respond and thus place
a severe strain on its internal resources.
Furthermore, studies
15
have shown that alliances have a higher success rate than
mergers, 60% compared to 50% (KPMG, 1998). Similar results by Booz-Allen &
Hamilton are depicted in the following chart:
14
Deepak Boothra, Strategic Knowledge Alliances Understanding knowledge
based alliances in the information technology industry
members.tripod.com/~dsdww/stratall.html
15
McKinsey's earlier research indicated a 50 % long-term success rate,
measured in strategic and financial terms. David Ernst and Tammy Halevy,
When to think alliance, What mergers miss, The McKinsey Quarterly 2000
Number 4, p 47-55,
mckinseyquarterly.com/home.asp?tk=danielk::
, and
www.mckinsey.com
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Figure 5
Source:
16
,
17
Alliances are nowadays in focus because they deliver a special combination of
speed, flexibility and versatility that's ideally suited for today's economy, which
changes at breakneck speed.
And compared to other growth vehicles such as internal development or external
acquisition, alliances help companies move quickly and with less risk into the new
market positions demanded by the changing economy. Some find that alliances are
the best growth engine in these times of economic transition.
1.6 Why implement Strategic Alliances?
Strategic Alliances are used by a company's management because they can:
· Enable overseas expansion
· Create new opportunities as global competition increases
·
speed globalization - enable rapid adaptation to changing competitive market
forces.
Unlike a merger or acquisition, alliances don't involve integration activities that
consume months or years
16
www.smartalliances.com
, chart 17
17
John R. Harbison, Peter Pekar Jr., Smart Alliances, A practical guide to
repeatable success, 129
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· Provide access to new customers, products and markets, and expand
distribution channels
· concentrate on value creating combinations wherein partners aim to grow their
business rather than just cut costs and consolidate
· Consolidation
(
cost cutting and efficiency
) is as well an option
· Alliances allow companies to focus on core competencies do what you do
best, and outsource the rest through alliances
· Exchange of intelligence such as business leads and marketing information
· Develop and improve operations (
flexibility
), facilities and processes
· Improvement in research, product development, and manufacturing
capabilities
18
· Product or service diversification
· Vertical integration
19
· Provide additional financial resources
· Share risk between partners mitigating the costs of responding to
unpredictable trends (
especially in R&D and technology
)
· Enable adaptation of common global frameworks to suit local requirements
20
· Reduce competition and resource sharing (
economies of scale
)
· Alliances provide a mechanism for rivals to work together towards shared
business goals (
e.g. to compete with rival alliances already taking shape, protect /expand
market share
)
The following graph depicts a 1999 survey in which companies state that growth,
access to critical capabilities and access to new markets are the most important
elements the key reasons for forming an alliance.
18
In practice, interestingly, studies of US-Japanese JV's find that
although the American side strives for short-run financial returns, their
Japanese partners focus on bringing technical and marketing know-how back
into the parent company; Joining Forces making one plus one equal three
in Mergers, Acquisitions, and Alliances, 6-9
19
This is more appropriate in acquisitions:
a) acquire the (alliance) supplier to ensure predictability in
availability or cost of raw materials,
b) acquire the (alliance) distributor to provide a new channel for
products or services; Joining Forces making one plus one equal three in
Mergers, Acquisitions, and Alliances, 6-9
20
Sometimes, an alliance with a local company is the only way to enter a
country where regulation does not permit wholly owned subsidiaries. This
is true in developing countries, especially China, but also when foreign
firms want to do business in the US; Joining Forces making one plus one
equal three in Mergers, Acquisitions, and Alliances, 6-9
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Figure 6
Source:
21
But, nothing ventured nothing gained. In order to gain something (
or achieve some
goals
), sometimes some obstacles and difficulties (
pains
) have to be overcomed and
dealt with:
· Expenses and drain on profitability
· Time and resources required to manage transition
· Reduced work productivity and quality
· Unintended consequences for employee attitudes and behaviors
· Culture
clash
· Customer concerns (
more in M&A's
)
21
www.smartalliances.com
, chart 69
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1.6.1
D
YNAMIC FORCES DRIVING
S
TRATEGIC
A
LLIANCES
The world and especially the economy and business world never stands still. The
amplitude of business cycles have never been constant and predictable. Some
dynamic forces driving management to enter into alliances are:
1. Competitive boundaries have blurred as technology advances have created
crossover opportunities merging formerly distinct industries.
2. Advances in communications (
voicemail, e-mail, and e-Business
) and the trend toward
global markets link formerly fundamentally different products, markets and
geographical regions, and facilitate the open communication which is essential
between partners.
3. Demanding customers and intensifying competition increasingly requires
advantaged capabilities across the board, and no company has the time or
resources (
financial & knowledge
) to either develop these by themselves or acquire
them.
4. The quenchless drive for technology standards and compatibility in a globally
linked world demands for cooperation.
5. More and more companies have successfully scaled the alliance learning curve
and a global body of expertise to ensure successful alliance formulation and
execution.
6. The watchful eyes of Wall Street. Alliances in general outperform mergers in
terms of stock market value creation, as they tend to raise both partners market
value, while acquisitions tend to raise the market cap of the acquiree and lower
that of the acquirer.
As shown in the graph below the primary alliance drivers are gaps in globalization
and capabilities. If a firm intends to expand its operations to become the global leader
in its field (
e.g. telecom, computers, electronics
) the capabilities requirements (
especially
brainpower
) are high. These requirements can be found in the research and
development area, in highly sophisticated production processes such as wafer
production and in prototype development and production. The high-tech production
equipment also needs high capabilities whereas the capabilities in the production
area in the automotive industry, chemicals & energy and consumer products are low.
In other words the manpower required is not the main issue as cheap manpower /
labor can be found almost in every corner of the world. Auto parts can be produced
as mentioned before almost everywhere in the world the production process can be
globalized. Brainpower can only be found in certain areas in the world, and
developing nations try desperately to catch up with especially Western countries to
narrow the knowledge / development gap.
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Figure 7
Source:
22
,
23
Another alliance driver is the business life cycle. This cycle is shown in the next
graph. Once the linkage between these alliance imperatives and the corporate and
business strategies and objectives is clear, the next step might be determining where
strategic alliances can be effective in meeting these objectives and strategies. This
dynamic process is similar to the general economic cycle.
After a recession (
business life cycle: early growth
) the economy recovers and grows
(
business life cycle: rapid growth and consolidation),
reaches the peak (
business life cycle:
stability)
then begins a downturn (
business life cycle: here: decline)
followed by a period of
negative growth
(a recession
or depression
), that ends in a trough before the next upturn.
22
www.smartalliances.com
, chart 28
23
John R. Harbison, Peter Pekar Jr., Smart Alliances, A practical guide to
repeatable success, 32
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Figure 8: Business Life Cycle phases influence alliance imperatives
Source:
24
Many companies see alliances only as a discrete activity filling in a hole, here or
there, primarily where one cannot purchase a capability or build it oneself.
They miss the real power of this new tool to become a superior growth engine. Real
alliance power comes not from discrete alliances, real alliance power comes from
using a group of alliances i.e. creating a string or class of interconnected alliances
(
constellations
) to rapidly overcome the competition.
Surveys reveal the following facts about how to achieve success in Strategic
Alliances:
1. Cultural commonalties or effective management of differences distinguishes
successful alliances from unsuccessful ones
2. When a company is actively involved in a larger number of alliances these
alliances should be organized and managed in levels - tiering
24
John R. Harbison, Albert J. Viscio, Peter Pekar Jr. and David Moloney,
Booz-Allen & Hamilton: The Allianced Enterprise: Breakout Strategy for
the New Millennium, Fifth in a Series of Viewpoints on Alliances, 2000
,Exhibit 4,
www.smartalliances.com
,
www.bah.com
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3. Successful companies are looking to create and adhere to an alliance best-
practice process (
no trial-and-error
or ad-hoc approaches
)
4. Communication between alliance partners must be open and structured.
5. A key to alliance success is monitoring customer responses and service
complaints
6. A process must be in place when it comes to partnering with competitors, as
these alliances are very delicate
7. Alliance managers performance should not only be measured by the success of
the alliance but also by performance of responsibilities
8. Flexibility is the key in all aspects of alliance development, negotiation, and
implementation
9. Successful companies have strategies in place to keep individual personalities
from affecting the alliance relationship
10.
Continuous measuring, monitoring, and reviewing throughout the life of the
alliance is substantive
1.7 Characteristics of Strategic Alliances
The term `Strategic Alliances' is used to describe a wide range of cooperative
partnerships and joint ventures. Strategic Alliances have three distinctive
characteristics:
· Two or more entities unite to pursue a set of important, agreed-upon goals while
in some way remaining independent subsequent to the formation of an alliance.
· The partners share both the benefits of the alliance and control over the
performance of assigned tasks during the life of the alliance. This is the most
distinctive characteristic of alliances and the one that makes them so difficult to
manage.
· The partners contribute on a continuing basis in one or more key strategic areas
(
that is, important to them
), for example technology or products.
25
Booz-Allen & Hamilton defines `strategic' as an alliance involving an equity stake.
26
1.8 Types of Strategic Alliances
Strategic Alliances can evolve (
and / or include
):
· Memorandum of Understanding MoU's (
as an outline of an alliance or a concise
summary
)
· Informal / non-contractual agreements
· franchising and licensing agreements with and without equity investment
· cooperative partnership contracts (
nonequity contractual arrangements, e.g. international
airline alliances
)
· equity investments in new or existing joint ventures and
25
Robert J. Mockler, Multinational Strategic Alliances, 2
26
John R. Harbison and Peter Pekar Jr., Booz-Allen & Hamilton: Cross-Border
Alliances in the Age of Collaboration, Second in a Series of Viewpoints
on Alliances, 1997,
www.smartalliances.com
,
www.bah.com
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· consortia.
27
Most organizations start in some form of functional model and move eventually into
some sort of matrix organization with overlapping functional, product and area
organization. As depicted in the graph below and in the following table, these
company models or enterprise collaborative relationships are evolutionary, as they
grow from the models on the left to the models on the right, or in other words from
contractual to equity agreements. In the middle of the spectrum are what we call
Strategic Alliances:
Figure 9
Types of Enterprise Collaborative Relationships
Enterprise Collaboration Relationships
Contractual
Equity
Buy/Sell
and other
contracts
Licensing
and
franchising
agreements
Partnership contracts
involving:
·research % development
·product development
·sourcing
·manufacturing
·marketing
·distribution / service
Existing equity
Equity
investments
in joint
ventures
and
franchises
Equity
exchange
New entity
Nonsubsidiar
y joint venture
Joint ventures
with varying
percentages
of partner
ownership
Consortia
Joint venture
subsidiaries
of
multinational
corporations
Termination
Dissolution
of entity
Mergers and
acquisitions
Strategic Alliances
Source:
Robert J.
Mockler,
Multi-
national
Strategic
Alliances,
18
Source:
28
The `Strategic Alliance sector' from the above chart is shown below in a table form:
Licensing Alliance
/
Partnership
/ Partnering
Consortia JV
Merger
Acquisition
Financial Investment
Control
Impact
Integration
27
Robert J. Mockler, Multinational Strategic Alliances, 3-6, 16
28
Robert J. Mockler, Multinational Strategic Alliances, 18
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Pain of separation
Low High
Source:
29
At the lower end of the continuum is the relatively simple relationship of organization
with low financial investment, low control, impact, integration and low pain of
separation.
A company licenses a product, service, or trademark to another firm.
Next, a Strategic Alliance/Partnership/Partnering is a cooperative effort by two or
more business entities in following or pursuing their own strategic objectives.
Partnering, as used in the building industry (
and other industries
), is becoming
increasingly well understood as a way of working with clients to jointly deliver
immensely improved construction performance.
Partnering is a more specific form of Strategic Alliancing with a greater and more
specific emphasis on long-term highly structured agreements between companies to
cooperate in an unusually high degree to achieve their separate but complementary
objectives.
A joint venture and consortium
(main difference is liability
) goes further, by establishing
a complete and separate formal organization with its own structure, governance,
workforce, procedures, politics, and culture while the predecessor companies still
exist.
Equity arrangements not only makes the relationship more permanent, it makes
major issues more visible and more dangerous to ignore.
At the far end of the continuum are mergers and acquisitions.
A merger usually involves full combination of two previously separate organizations
into a third (
new
) business entity.
An acquisition typically is the purchase of one organization by another.
Sometimes laws may prevent the possibility of a merger or acquisition. Or an
unstable political situation, unforeseeable currency exchanges, and unfamiliarity with
the new country's business environment could make a merger or an acquisition too
risky. Or the partner is only interested in an alliance but not open to an acquisition.
Probably one of the most important arguments is that an alliance or joint venture can
provide the opportunity to test the compatibility and working style of the partners. If it
turns out that there is no fit between the companies a retreat causes less or probably
no damage to the company image, business and clients relationships, etc. This
cannot be achieved even in the friendliest acquisition.
Furthermore, alliances are often preferred to acquisitions and divestitures because
they can bypass or reduce the valuation, tax, and regulatory issues associated with
outright changes in control.
More detailed alliance types are shown in the table below, including the origination,
the value drivers and where the key decisions are made:
29
Mitchell Lee Marks, Philip H. Mirvis, Joining Forces making one plus
one equal three in Mergers, Acquisitions, and Alliances: 1998, 10
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Figure 10
Source:
30
Yoshino & Rangan (1995) classifies alliances in pre-competitive, competitive, pro-
competitive, and non-competitive alliances, structured by conflict potential (
high low
)
over extent of organizational interaction (
low high
):
30
The Lared Group, ASAP Conference, Emilio Fontana, Presentation 1999
www.laredgroup.com
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Typology of Single Business Alliances
C
ONFLICT
P
OTENTIAL
H
IGH
L
OW
Pre-competitive Alliances
· Firms in unrelated industries
working on new technology or
a product
· High conflict potential
· Low organizational interaction
·
Example
: Swatch / Mercedes for small
urban car; DuPont / Sony to develop new
optical memory storage technology
Competitive Alliances
· Direct rivals in industry on core
products (
most challenging to
manage
)
· High conflict potential
· High organizational interaction
·
Example
: GM / Toyota at Fremont;
California; Motorola / Toshiba for
microprocessors in Japan
Pro-competitive Alliances
· Vertical value chain, e.g.
manufacturer-supplier-buyer
(
e.g. outsourcing
)
· Keiretsu
· Low conflict potential
· Low organizational interaction
·
Example
: GM / Hitachi to develop
electrical components for autos
Non-competitive Alliances
· Non-rivals in the same industry
working on niche products (
non-
competing firms [at least in major
markets]
)
· Low conflict potential
· High organizational interaction
·
Example
: GM / Isuzu, joint development
of small car sold by both
L
OW
H
IGH
Extent of Organizational Interaction
Further to these classifications Yoshino & Rangan (1995) developed a relative
ranking of strategic goals in alliances which are shown in the table below:
Strategic Goals in Alliances
Pre-competitive Alliances
Competitive Alliances
1. Flexibility
1. Core protection
2. Core protection
2. Learning
3. Learning
3. Value (cost)
4. Value (cost)
4. Flexibility
Pro-competitive Alliances
Non-competitive Alliances
1. Value (cost)
1. Learning
2. Flexibility
2. Value (cost)
3. Core protection
3. Flexibility
4. Learning
4. Core protection
If Strategic Alliances cross national borders, cross-cultural complexities and problems
occur and affect their effectiveness and success.
Success of Strategic Alliances (
national or multinational
) depends highly on contingent
thinking and entrepreneurial skills. So it is understandable, that many companies
would prefer to retain 100% control over - especially - overseas ventures. This
applies to all four alliance types shown in the table above.
As this is not always within reach, many ventures insist on majority control wherever
feasible to protect technology, core skills, facilitate integration and simplify
management and control.
Governments worldwide encourage and stimulate Strategic Alliances. In cooperation
with multinational firms, governments use Strategic Alliances in many ways:
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· To privatize state-owned companies while continuing to profit from and to some
degree control the businesses
· To attract capital while nurturing local businesses
· To bring technology to their country
· To improve overall economic performance quickly, especially in developing
countries, without giving up control of local businesses to foreign operators and
enterprises.
31
Joint ventures with the purpose to privatize former state-owned companies are found
in following industries and areas (
among others
):
· water supply (
Bolivia, China
)
· telecommunications
(
almost all European countries, China
)
· energy
(
almost all European countries
) and power stations (
China
)
· banking
(
Hungary
)
· aircraft construction (
Britain, France, Germany and Spain Airbus
).
1.9 Four basic criteria in an alliance for each partner
In successful alliances four basic criteria for each partner must be fulfilled:
· The alliance must add value (
e.g. distribution, how to handle potential competition
)
· The alliance must enable learning (
e.g. continuing exchange of information, how to
manage cultural gaps and conflicts
)
· The alliance must protect and enhance core competencies and competitive
advantages (
e.g. how to transfer technology
)
· And finally the alliance must enable the operational flexibility needed for the
venture to be successful
(e.g. how to handle competing operations
)
The beauty as well as the challenge of an alliance lies precisely in its flexibility
and the partial commitments of its members, and the flexibility of alliances is often a
strength, not a weakness.
1.10 What are Strategic Alliances not?
Strategic Alliances are not:
· Mergers
· Acquisitions
· Wholly owned subsidiaries of multinational corporations
· Sometimes joint ventures (
depending on their specific circumstances
)
· An agreement through which a firm grants a license for using technology in
exchange for a royalty (
Exception: two or more independent corporations continue their
contribution and control
)
32
31
Robert J. Mockler, Multinational Strategic Alliances, 2-4
32
Robert J. Mockler, Multinational Strategic Alliances, 5-6
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1.11 Are Strategic Alliances always strategic?
Alliances can range from having a very important (
strategic
) effect for one or each
partner to only marginally affecting a company's future. Again, it depends on the
specific circumstances.
Strategic Alliances do not fit all company strategies and are only one possibility for a
corporation regarding expansion, penetrating new markets, etc. Sometimes it makes
more sense if a company is expanding entirely on their own.
Example: Citibank's expansion
33
in Asia. The supporting computer and
telecommunications technologies and as well the capital resources enabled Citibank
to expand very quickly without the need of a partner.
Industry, market and company strategic-fit and operational-fit not only dictate the type
of Strategic Alliances use, they also dictate whether or not Strategic Alliances are
needed.
1.12 Why do alliances fail?
Of course, many alliances fail (
but far less than M & A
)
34
and for many reasons, but in
general they are mismanaged or misunderstood or both. A few reasons should
nonetheless be stated:
Strategical unfit
Operational (
and management
) unfit
· strong-weak partner / weak-weak
partner
· strong-weak partner / weak-weak
partner
· clashing cultures are left unchecked
(
country, corporate
)
· culture clashes (
country, corporate
)
· geographic / operational overlap
· trust
· love at the first sight
· personnel
(
Corporate Politics
)
· not linked to an overall strategy and
goals (
e.g. short-term tactical reaction to
something a competitor did
)
· commitment and clear communication
· Corporate politics: planning and
implementation are guided by political
rather than productive objectives
· expectations / time pressure
· personnel
(
top talent exits
)
· alliance evolution (
no recognition
)
· IT-systems don't "talk" to one another · complexity
(
new structures may not align
)
· financial
aspects
(
If one pay too much to
buy a alliance company or join a partner, the
resulting debt load requires massive cost
cutting
)
· incentives
(
asymmetric
)
· financial
aspects
· hidden agendas with the aim to
absorb the other partners knowledge,
skills and sometimes even its assets
· learning aspects (
uneven
)
33
Robert J. Mockler, Multinational Strategic Alliances, 6, 12
34
Research by Accenture shows that 30 percent of alliances fail outright
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A McKinsey study found that 50% of alliance failures are due to poor strategy while
50% are the result of poor management that is the matter of execution.
Such sentiments were echoed in a Conference Board speech by Chuck Knight, the
chief executive of Emerson Electric. "I do not believe that [alliances] fail in the
planning stage," he said, "they fail in implementation - that is the graveyard of
corporate America." And as alliance complexity rises and experienced human
resources are pulled ever-thinner, the challenges of follow-through will become more
acute.
35
This Conference Board Survey of 138 firms indicated the following causes of alliance
failure:
Reason for failure
% of Respondents
Drastic changes in environment
56
Cultures too different
44
Poor
leadership
43
Ambiguous
leadership
43
Overestimated
market
35
Poor integration process
34
Source:
36
Studies by Booz-Allen & Hamilton over a 6-year period involving 500 CEO's gave
these reasons for alliance failures:
· selected wrong partner
· overly optimistic expectations
· lukewarm
commitment
· poor
communication
· undefined
roles
· unclear value creation
· loose
agreement
· little relationship building
· weak business plan
· lack of alliance experience
· not bridging partners' styles
The graph below shows the exact percentage of the statements mentioned above:
35
The Alliance Analyst: Managing alliances--skills for the modern era, March
18, 1996,
www.allianceanalyst.com
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Robert J. Mockler, Multinational Strategic Alliances, 198
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Figure 11
Source:
37
The reasons for alliance failure stated above demonstrates that alliances are seen as
an end in itself and not as a means in the direction of a broader goal.
And the failures teach one clear lesson: what matters is the strategy behind the deal,
not the deal itself.
A company can and should learn from both successful and unsuccessful alliance
experiences. Eventually a company should develop a core competency in alliance
capability, which can give it a competitive edge.
One critic of multinational Strategic Alliances is Michael Porter, who believes, that
they are transition devices, tend to insure mediocrity, and are destined to fail. In his
view, they involve significant costs in terms of coordinating, reconciling goals and
giving up profits. While many disagree with these views, Porter correctly points out
that Strategic Alliances are in many cases transitional and can terminate as strategic
requirements change and/or insurmountable operational problems arise.
38
37
www.smartalliances.com
, chart 49
38
Robert J. Mockler, Multinational Strategic Alliances, 8
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1.13 Implication on share prices
Besides focusing more and more on short-term performance, investors and analysts
are closely watching alliance announcements. Managers should therefore think about
and ahead prior to proceeding:
·
Do alliance announcements affect share prices?
·
Are these effects directly related with ultimate success?
·
Most important, can company managers explain when to use alliances
instead of acquisitions and when to use certain deal structures and not
others?
The results of McKinsey's analysis, combined with their wide experience, indicate
that it is unwise for managers to proceed with an alliance without thinking through its
implications for share prices. First of all, large alliances do move market
capitalization. That alone should get managers' attention. Additionally, McKinsey
found that alliances are better received than mergers and acquisitions in fast-moving,
highly uncertain industries such as electronics, mass media and software. They are
also the preferred choice for companies trying to build new businesses, enter new
geographies, or access new distribution channels.
The market prefers contractual alliances, because they are simple and flexible, rather
than more complicated equity joint ventures. And, finally, when it comes to alliances,
it turns out that polygamy pays: multipartner alliances (
alliance constellations
) and
consortia tend to be quite well received.
The evidence is for large alliances clear without ambiguity as they really create
shareholder value. Just over half (52%) of large alliances caused the share price of
the parent to rise or fall by more than one standard deviation
39
of its normal
movement, and of these, 70 % of the price reactions were increases a "win rate"
that is substantially higher than the percentage for acquirers in M&A transactions.
(
McKinsey's definition of large alliances: those, that created a top-ten player, involved assets of more
than US$ 500 million, or included the sale of an equity stake.
)
Among alliances as a whole, share prices moved by a comparable extent for only
29% of the participants at the time of the alliance announcement, and just half of
those where price increases. Since alliances provide a highly tailored way to access
capabilities such as specific products or technologies, many deals are small relative
to the parents' overall business and may not provoke much movement in share
prices.
The question is, why do big alliances have such impressive success rates? For one
thing, big deals attract more examination from the market. And companies are more
likely to invest significant management resources in thinking through the strategy,
choosing the right partner, developing an appropriate deal structure, and
communicating the purpose of the deal to the media and the market.
39
Standard deviation: The square root of the variance. A measure of
dispersion of a set of data from its mean. (Variance: A measure of
dispersion of a set of data points around their mean value. The
mathematical expectation of the average squared deviations from the mean.
Bloomberg.com: Financial Glossary,
www.bloomberg.com
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Therefore, management should articulate with absolute clarity how the deal fits into
the company's overall strategy. It should also clearly specify the benefits for the
company and its partners, the effects on current partners, and the options that
management expects the alliance to create in the future.
40
The impact on AOL's share price following alliance news (
investment in Hughes to access
DirecTV: increase in market capitalization
) and a few weeks later the merger news (
merger
with Time Warner: decrease in market capitalization)
is shown below:
Figure 12
Source:
41
1.14 Tomorrow's champions
Today's worldclass alliance organizations may not necessarily hold that title for long.
No one truly has mature skill levels yet. In other words, there is a lot of daylight
between current worldclass infrastructures and infrastructures which are corporate-
wide, consistent, or anywhere near optimal.
40
David Ernst and Tammy Halevy, When to think alliance, What mergers miss,
The McKinsey Quarterly 2000 Number 4, 47-55,
mckinseyquarterly.com/home.asp?tk=danielk::
, and
www.mckinsey.com
41
www.smartalliances.com
, chart 68
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- Quote paper
- Daniel Klein (Author), 2001, Strategic Alliances: A guideline for Identification, Evaluation, Negotiation and Implementation, Munich, GRIN Verlag, https://www.grin.com/document/185703
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