Chapter 8 International Strategic Alliances Design and Management

Chapter 8 International Strategic Alliances: Design and Management

Strategic Alliances Issues • Popular strategy to develop new product and to expand into new markets • However, strategic alliances are very risky and unstable • Failure rate of 30% to 60%

Where to Link in the Value Chain • Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks • In operations alliances MNC combine manufacturing activities to reach economies of scale • Operations/marketing alliances provide access to markets

Choosing a Partner: The Most Important Choice? • A key criteria is strategic complementarity • Pick a partner with complementary skills that enhances but does not necessarily duplicate an alliance partner’s skills • Seek out compatible management styles • Seek a partner that will provide the “right” level of mutual dependency

Criteria for Choosing Partners • Avoid the “anchor” partner – one that holds back the strategic alliance because it cannot or will not provide its share of the funding • Be cautious of the “elephant-and-ant” complex that occurs when two companies are greatly unequal in size • Assess operating-policy differences with potential partners • Assess the difficulty of cross-cultural communication

Choosing an Alliance Type • Three main types of strategic alliances 1. Informal international cooperative alliances 2. Formal international cooperative alliances 3. International joint venture

1. Informal International Cooperative Alliance • Non-legally binding agreements between companies from two or more countries • Agreements of any kind • Provide links anywhere on their value chains • Limited involvement between companies

2. Formal Cooperative Alliances • Higher degree of involvement than informal alliances • Formal contract • Popular in high tech industries because of high costs and risks

3. International Joint Ventures (IJV) • Separate legal entity owned by two or more parent companies from different countries • No need for equal ownership • Equity based on cash or other contributions • Ex. : One partner brings technology while other partner brings financial contributions

Negotiating the Agreement • The formal agreement is not as important as the ability of managers to get along • IJV negotiation issues • equity contributions • management structure • “prenuptial” agreements

Organizational Design in Strategic Alliances • Depends on the type of alliance chosen • Informal ICAs often have no formal design issues • Formal ICAs may require separate organization unit housed in one company • IJV—Parent companies set up separate legal entity

Decision-making Control • Two areas need to be considered: • Operational decisions (focus on day to day running) • Strategic decisions (focus on long term survival) • Majority ownership does not necessarily control • In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top

Management Structures • Dominant parent: controls or dominates strategic and operating decision making • Often has majority ownership • Treats the IJV as wholly owned subsidiary • Shared management: both parent companies contribute approximately the same number of managers to the alliance organization • Split control management control: partners usually share strategic decision making but split functional decision making

Management Structures (Cont. ) • Independent management structure: alliance managers act more like managers from a separate company • IJVs often recruit managers from outside the parent companies • Rotating management: key positions rotate among partners • Popular in developing countries • Serves to train management talent and transfer expertise to developing country

Choosing a Strategic Alliance Management Structure • If one partner has dominant equity position then: • Dominant management structure more likely • If partners have similar technologies or knowhow and contribute equally then: • Shared management structure preferred • If partners have different technologies but contribute equally then:

Human Resource Management in Strategic Alliances • HRM functions include recruiting and staffing for alliance positions • The HRM functions of an IJV are more complex • Managers (and sometimes workers) come from two or more firms or from two or more cultures

Critical HRM Problems and Issues • HRM planning: Must communicate to all employees the strategic intent of alliance. • Parent involvement: As alliances get older and larger, they tend to develop their own HRM practices. • Staffing the alliance management and technical personnel: Crucial and risky decision. Must not unload unwanted managers to alliance. • Staffing the alliance workforce: Assess local labor supply • Performance assessment: Needed for retention, promotion and salary decisions. Avoid adopting the system of one partner. • Loyalty: Managers may often feel dual loyalty to parent and to alliance • Career development: Must provide clear information on how alliance assignments fit within careers. Career ladder must exist within the IJV

Commitment and Trust • Commitment and trust go hand in hand • Commitment: putting forth extra effort to make the venture work and taking care of each other • Facets of commitment: • Attitudinal commitment: willingness to dedicate resources and efforts and face risks to make the alliance work • Calculative commitment: the practical side related to the alliance partner evaluations, expectations, and concerns regarding potential rewards from the relationship

Commitment and Trust • Trust: The confidence that the partner will deliver on the expected contributions to the alliance • Two types: • Credibility trust: confidence that the partner has the intent and ability to meet promised obligations and contributions to the alliance • Benevolent trust: confidence that the partner will behave with goodwill and with

Why Is Trust Important? • When there is no trust, partners hold back or take advantage of each other (Opportunistic Behavior). • Formal contracts can never identify all issues that will arise • Technology and knowledge also include tacit elements that can only be learned through trust.

Building and Sustaining Trust and Commitment • Pick your partner carefully • Know each side’s strategic goals • Seek win-win situations. Maintain a balance in which side gains from the alliance • Go slowly – problems will arise and take time to work out. • Invest in cross-cultural training • Invest in direct communication • Find the right levels of trust and commitment

Assessing the Performance of an International Strategic Alliance • If strategic intent is to produce immediate results, standard financial and efficiency measures can be used. (e. g. , profit center) • Some alliances provide indirect strategic benefits. • IJV and ICA performance criteria: • Often must include criteria other than financial, such as organizational learning.

If the Alliance Does Not Work • Negotiate an end or improve implementation • Know when to quit / invest more • Avoid “escalation of commitment” • Companies continue in an alliance longer than necessary because of financial and emotional investments. • Plan end—“prenuptial agreements” • Death not always failure. Some alliance are suppose to be short term

CONCLUSION • Alliances are important and will continue to grow • Key is to pick the right partner • Partners negotiate the structure that support their strategic intent • There must be agreement to HRM practices • Trust and commitment are basic foundations for successful alliances • Alliance performance is difficult to determine • Usually learning and market penetration can be used as performance measures