Chapter 7 Strategic Alliances Opening Case HBO Definitions

Chapter #7 Strategic Alliances

Opening Case • HBO

Definitions • Strategic alliance • Whenever two or more independent organizations cooperate in the development, manufacture or sale of products or services. • Non-equity alliance • Cooperating firms agree to work together, but do not take equity positions in each or form an independent organization • Examples • Licensing agreements • Supply agreements • Distribution agreements

• Equity alliance • Cooperating firms hold equity positions in each other • Example • GM 34. 2% of Izuzu’s Stock • Joint Ventures • Cooperating firms create a legally independent firm • Example • SBC and Bell South co-own Cingular

How do strategic alliances create economic value? • Current operations • Exploiting economies of scale • Learning from competitors • NUMI Different rates of learning • More to learn • Absorptive capacity • Withhold Information • Managing risk and sharing costs

How do strategic alliances create economic value? • Creating a favorable competitive environment • Facilitate development of technological standards • Network industries • Increasing returns to scale (one fax machine) • Beta vs VHS IBM vs Apple (Cell Phones) HDTV • Facilitate tacit collusion • Firms coordinate their production and pricing decision

How do strategic alliances create economic value? • Facilitating entry and exit • Low-cost entry into new markets • Local distribution networks can be costly • Government restrictions/requirements • Low-cost entry into new industries and new industry segments • Dupont and Phillips • Welch’s and Eskimo Pie • Low-cost exit from industries and industry segments • Corning and Ciba-Geigy (sneak preview) • Managing uncertainty • Option to buy (bet)

Alliance Threats: Incentives to Cheat on Strategic Alliances • 1/3 of all strategic alliances do not meet the expectations of at least one alliance partner. • Ways to cheat • Adverse selection • Moral Hazard • Holdup

• Adverse Selection: Potential partners misrepresent the value of the skills and abilities they bring to the alliance • Difficult to assess the veracity of the claims of potential partners • Less tangible resources and capabilities are the most difficult to assess

• • Moral Hazard: Partners provide to the alliance skills and abilities of lower quality than promised Pixar versus Disney • Pixar: Toy Story, A bug’s life, Toy Story 2, Monster’s, Inc, Finding Nemo • Disney: Treasure Planet, The emperor’s New Groove, Lilo and Stich, Brother Bear

• Holdup: Partners exploit the transaction specific made by others in the alliance

Strategic Alliances and Sustained Competitive Advantage • The Rarity of Strategic Alliance • GM and Toyota (lean manufacturing) • Ford and Mazda (Designing new cars and joint manufacturing) • Daimler-Chrysler and Mitsubishi (supplier) • The Imitability of Strategic Alliances • Direct duplication (socially complex)

Substitutes for Strategic Alliance • • Going it alone Alliances will be preferred over going it alone when • The level of transaction specific investment required to complete an exchange is moderate • When an exchange partner possess valuable, rare, and costly to imitate resources and capabilities • When there is great uncertainty about the future value of an exchange

Substitutes for Strategic Alliance • Alliances will be preferred to acquisitions when • There are legal constrains on acquisitions • Acquisitions limit a firm’s flexibility under conditions of uncertainty • There is substantial unwanted organizational “baggage” in an acquired firm • The value of a firm’s resources and capabilities depend on its independence