7 7 c chapter Making Strategic Alliances and

7 7 c chapter Making Strategic Alliances and Networks Work Part II: Business-Level Strategies Global Strategy Mike W. Peng Copyright © 2009 Cengage. All rights reserved. Power. Point Presentation by John Bowen, Columbus State Community College

Outline • Defining strategic alliances and networks • A comprehensive model of strategic alliances and networks • Formation • Evolution • Performance • Debates and extensions • The savvy strategist Copyright © 2009 Cengage. All rights reserved. 2

Defining Strategic Alliances and Networks • Strategic alliances are “voluntary agreements between firms” • Strategic alliances are compromises between short-term and long-term solutions • Alliances fall into two broad categories: contractual (non-equity) and equity-based • The term “strategic networks” is derived from the term “social networks” highlighting the social aspects of interfirm relationships Copyright © 2009 Cengage. All rights reserved. 3

The Variety of Strategic Alliances • Strategic Alliances Ø A compromise between short-term, pure market transactions (e. g. , spot transactions) and long-term, pure organizational solutions (e. g. , mergers and acquisitions) The Variety of Strategic Alliances Market Transactions Mergers and Acquisitions (M&A) Figure 7. 1 Copyright © 2009 Cengage. All rights reserved. 4

A Comprehensive Model of Strategic Alliances and Networks Figure 7. 2 Copyright © 2009 Cengage. All rights reserved. 5

A Comprehensive Model of Strategic Alliances and Networks • Industry-based considerations Ø Traditional: Firms are independent players Ø The dynamic of five forces: v Horizontal alliances, entry barriers, upstream alliances with suppliers, downstream vertical alliances with buyers and alliances and networks to provide substitute products/services • Resource-based considerations Ø The resource-based view is embodied in the VRIO framework, which are value, rarity, imitability and organizational aspect of strategic alliance and networks Copyright © 2009 Cengage. All rights reserved. 6

Strategic Alliances and Networks: Advantages and Disadvantages • Strategic alliances and networks must create value • Advantages must outweigh disadvantages ADVANTAGES DISADVANTAGES Reduce costs, risks, and uncertainties Possibilities of choosing the wrong partners Gain access to complementary assets and capabilities Costs of negotiation and coordination Opportunities to learn from partners Possibilities of partner opportunism Possibilities to use alliances networks as real options Risks of helping nurture competitors (learning race) Table 7. 1 Copyright © 2009 Cengage. All rights reserved. 7

Formation • Stage one: To cooperate or not to cooperate • Stage two: Contract or equity? • Stage three: Positioning the relationship Copyright © 2009 Cengage. All rights reserved. 8

A Three-Stage Decision Model of Strategic Alliance and Network Formation Source: Adapted from S. Tallman & O. Shenkar, 1994, A managerial decision model of international cooperative venture formation (p. 101), Journal of International Business Studies, 25 (1): 91– 113. Copyright © 2009 Cengage. All rights reserved. Figure 7. 3 9

Stage Two: Equity or Contract (Non-equity) DRIVING FORCES EQUITY-BASED ALLIANCES/NETWORKS NON-EQUITY-BASED ALLIANCES/NETWORKS Nature of shared resources (degree of tacitness and complexity) High Low Importance of direct organizational monitoring and control High Low Potential as real options High (for possible upgrading to M&As) High (for possible upgrading to equity-based relationships) Influence of formal institutions High (when required or encouraged by regulations) Table 7. 2 Copyright © 2009 Cengage. All rights reserved. 10

Evolution • Combating opportunism Ø Need to protect against opportunism Ø Contractual safeguards and credible commitment • Evolving from strong ties to weak ties Ø Strong ties are cultivated over a long period of time Ø Weak ties are characterized by infrequent interaction and low intimacy Ø Firms have a combination of strong ties and weak ties Ø Benefits of the different types of ties depend on the firms’ strategies Ø Many interfirm relationships evolve from an emphasis on strong ties to a focus on weak ties Copyright © 2009 Cengage. All rights reserved. 11

Performance • The performance of strategic alliances and networks Ø A combination of objective and subjective measures can be used to determine performance Ø Four factors may influence the performance of alliances and networks: equity, learning and experience, nationality, and relational capabilities • The performance of parent firms Copyright © 2009 Cengage. All rights reserved. 12

Alliance- and Network-Related Performance Measures ALLIANCE/NETWORK LEVEL PARENT FIRM LEVEL Objective § Financial performance (for example, profitability) § Product market performance (for example, market share) § Stability and longevity § Stock market reaction Subjective § Level of top management satisfaction § Assessment of goal attainment Table 7. 3 Copyright © 2009 Cengage. All rights reserved. 13

Debates and Extensions • Learning race versus cooperative specialization • Majority JVs as control mechanisms versus minority JVs as real options • Alliance versus acquisitions Copyright © 2009 Cengage. All rights reserved. 14

Improving the Odds for Alliance Success AREAS DO’S AND DON’TS Contract versus “chemistry” No contract can cover all elements of the relationship. Relying on a detailed contract does not guarantee a successful relationship and it may indicate a lack of trust. Warning signs Identify symptoms of frequent criticism, defensiveness (always blaming others for problems), and stonewalling (withdrawal during a fight). Investment in the relationship Like married individuals working hard to invigorate their ties, alliances require continuous nurturing. Once a party starts to waver, it is difficult to turn back. Conflict resolution mechanisms “Good” married couples also fight. Their secret weapon is to find mechanisms to avoid unwarranted escalation of conflicts. Managers need to handle conflicts-inevitable in any relationship-in a credible, responsible, and controlled fashion. Source: Based on text in M. W. Peng & O. Shenkar, 2002, Joint venture dissolution as corporate divorce (pp. 101– 102), Academy of Management Executive, 16 (2): 92– 105. Copyright © 2009 Cengage. All rights reserved. Table 7. 4 15

The Savvy Strategist • Strategic horizon has expanded from how a single firm strategizes to highlighting interfirm strategy • Improving relational (collaborative) capabilities is crucial for success • Need to understand the rules of game governing networks - both formal and informal • Carefully weigh the pros and cons associated with alliances and acquisitions Copyright © 2009 Cengage. All rights reserved. 16