Chapter 8

Chapter 8
International Strategic Alliances:
Design and Management

Copyright© 2004 Thomson Learning All rights reserved

Strategic Alliances Issues

•• Increasingly popular strategy to develop new product
Increasingly popular strategy to develop new product
and to expand into new markets
and to expand into new markets
•• However, strategic alliances are very risky and
However, strategic alliances are very risky and
unstable
unstable
•• Failure rate of 30% to 60%
Failure rate of 30% to 60%
•• Even profitable alliances can be torn by conflict
Even profitable alliances can be torn by conflict

Copyright© 2005 South-Western/Thomson Learning All rights reserved

Exhibit 8.1: Implementing a
Strategic-Alliance Strategy


Exhibit 4.3: The Value Chain
(not included in the exam)


Where to Link in the Value
Chain

•• Alliance combining same value-chain activities are to
Alliance combining same value-chain activities are to
gain efficiencies, merge talents, or share risks
gain efficiencies, merge talents, or share risks
•• Upstream/downstream alliances serve the objective of
Upstream/downstream alliances serve the objective of
low-cost supply/manufacturing
low-cost supply/manufacturing
•• Operations/marketing alliances provide access to
Operations/marketing alliances provide access to
markets
markets
•• Depends on the objective that the firm seeks to
Depends on the objective that the firm seeks to
achieve
achieve

Criteria for Choosing Partners

•• Seek out companies with compatible management
Seek out companies with compatible management
styles
styles
•• Seek a partner that will provide the “right” level of
Seek a partner that will provide the “right” level of
mutual dependency
mutual dependency
•• Avoid the “anchor” partner
Avoid the “anchor” partner
•• Anchor partner: a partner that holds back the
Anchor partner: a partner that holds back the
strategic alliance because it cannot or will not
strategic alliance because it cannot or will not
provide its share of the funding
provide its share of the funding

Criteria for Choosing Partners
(cont.)

•• Be cautious of the “elephant-and-ant” complex
Be cautious of the “elephant-and-ant” complex
•• Occurs when two companies are greatly unequal in
Occurs when two companies are greatly unequal in
size
size
•• Assess operating-policy differences with potential
Assess operating-policy differences with potential
partners
partners
•• Assess the difficulty of cross-cultural communication
Assess the difficulty of cross-cultural communication
with a likely partner
with a likely partner


Choosing an Alliance Type

•• Three main types of strategic alliances
Three main types of strategic alliances
•• Informal international cooperative alliances
Informal international cooperative alliances
•• Formal international cooperative alliances
Formal international cooperative alliances
•• International joint venture
International joint venture


Informal International
Cooperative Alliance

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


Formal Cooperative Alliances

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


International Joint Ventures
(IJV)

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


Exhibit 8.5: Types of Alliances


Negotiating the Agreement

•• IJV negotiation issues
IJV negotiation issues
•• equity contributions
equity contributions
•• management structure
management structure
•• “prenuptial” agreements
“prenuptial” agreements


Exhibit 8.6: Selected
Questions for a Strategic-
Alliance Agreement


Organizational Design in
Strategic Alliances

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


Decision-making Control

•• Majority ownership does not necessarily control
Majority ownership does not necessarily control
•• Operational decisions
Operational decisions
•• Strategic decisions
Strategic decisions
•• In IJVs, strategic decision making takes place at the
In IJVs, strategic decision making takes place at the
level of IJV’s board of directors or top management.
level of IJV’s board of directors or top management.


Management Structures

•• Dominant parent: controls or dominates strategic
Dominant parent: controls or dominates strategic
decision making
decision making
•• Often has majority ownership
Often has majority ownership
•• Treats the IJV as wholly owned subsidiary
Treats the IJV as wholly owned subsidiary
•• Shared management: both parent companies
Shared management: both parent companies
contribute approximately the same number of
contribute approximately the same number of
managers to the alliance organization
managers to the alliance organization



•• Split control management control: partners usually
Split control management control: partners usually
share strategic decision making and split functional
share strategic decision making and split functional
decision making
decision making
•• Independent management structure: alliance
Independent management structure: alliance
managers act more like managers from a separate
managers act more like managers from a separate
company
company
•• IJVs often recruit managers from outside the parent
IJVs often recruit managers from outside the parent
companies
companies



•• Rotating management: key positions rotate among
Rotating management: key positions rotate among
partners
partners
•• Popular in developing countries
Popular in developing countries
•• Trains management talent and transfers expertise
Trains management talent and transfers expertise


Choosing a Strategic Alliance
Management Structure

•• If partners have similar technologies or know-how and
If partners have similar technologies or know-how and
contribute equally
contribute equally
•• Shared management structure preferred
Shared management structure preferred
•• If partners have different technologies but contribute
If partners have different technologies but contribute
equally
equally
•• Split management structure preferred
Split management structure preferred
•• If one partner has dominant equity position
If one partner has dominant equity position
•• Dominant management structure more likely
Dominant management structure more likely

Human Resource Management
in Strategic Alliances

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


Critical HRM Problems and
Issues

•• HRM planning: Employees need to know strategic
HRM planning: Employees need to know strategic
intent of alliance.
intent of alliance.
•• Parent involvement: As alliances get older and larger,
Parent involvement: As alliances get older and larger,
they tend to develop their own HRM practices.
they tend to develop their own HRM practices.
•• Staffing the alliance management and technical
Staffing the alliance management and technical
personnel—crucial and risky decision
personnel—crucial and risky decision
•• Staffing the alliance workforce
Staffing the alliance workforce
•• Assigning managers strategic or operations tasks
Assigning managers strategic or operations tasks

Critical HRM Problems and
Issues

•• Performance assessment—needed for retention,
Performance assessment—needed for retention,
promotion and salary decisions
promotion and salary decisions
•• Loyalty—managers may often feel dual loyalty
Loyalty—managers may often feel dual loyalty
•• To parent and to alliance
To parent and to alliance
•• Career development—must provide clear information
Career development—must provide clear information
on how alliance assignments fit within careers
on how alliance assignments fit within careers
•• Cultural differences
Cultural differences
•• Training
Training

Commitment and Trust

•• Commitment: putting forth extra effort to make the
Commitment: putting forth extra effort to make the
venture work
venture work
•• Attitudinal commitment: willingness to dedicate
Attitudinal commitment: willingness to dedicate
resources and efforts and face risks to make the
resources and efforts and face risks to make the
alliance work
alliance work
•• If partners demonstrate these aspects of commitment,
If partners demonstrate these aspects of commitment,
alliance will develop based on fair exchange.
alliance will develop based on fair exchange.
•• Occurs when partners believe that they receive
Occurs when partners believe that they receive
benefits from the relationship equal to their
benefits from the relationship equal to their
contributions
contributions

Calculative Commitment

•• Commitment also has a practical side: calculative
Commitment also has a practical side: calculative
commitment
commitment
•• Alliance partner evaluations, expectations, and
Alliance partner evaluations, expectations, and
concerns regarding potential rewards from the
concerns regarding potential rewards from the
relationship
relationship
•• Businesses require tangible outcomes for a
Businesses require tangible outcomes for a
relationship to continue
relationship to continue


Trust

•• Commitment and trust go hand in hand
Commitment and trust go hand in hand
•• Credibility trust: confidence that the partner has the
Credibility trust: confidence that the partner has the
intent and ability to meet promised obligations and
intent and ability to meet promised obligations and
commitments
commitments
•• Benevolent trust: confidence that the partner will
Benevolent trust: confidence that the partner will
behave with goodwill and with fair exchange
behave with goodwill and with fair exchange


Exhibit 8.8: The
Trust/Commitment Cycle


Why Is Trust Important?

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


Building and Sustaining Trust
and Commitment

•• Pick your partner carefully
Pick your partner carefully
•• Know each side’s strategic goals
Know each side’s strategic goals
•• Seek win-win situations
Seek win-win situations
•• Go slowly
Go slowly
•• Invest in cross-cultural training
Invest in cross-cultural training
•• Invest in direct communication
Invest in direct communication
•• Find the right levels of trust and commitment
Find the right levels of trust and commitment


Exhibit 8.9: The “Right” Levels
of Trust and Commitment


Assessing the Performance of
an International Strategic
Alliance
•• If strategic intent is to produce immediate results,
If strategic intent is to produce immediate results,
standard financial and efficiency measures can be
standard financial and efficiency measures can be
used.
used.
•• Other strategic alliance provide indirect strategic
Other strategic alliance provide indirect strategic
benefits.
benefits.
•• IJV and ICA performance criteria: often must include
IJV and ICA performance criteria: often must include
criteria other than financial, such as organizational
criteria other than financial, such as organizational
learning.
learning.


If the Alliance Does Not Work

•• Negotiate an end or improve implementation
Negotiate an end or improve implementation
•• Know when to quit/invest more
Know when to quit/invest more
•• Avoid “escalation of commitment”
Avoid “escalation of commitment”
•• Companies continue in an alliance longer than
Companies continue in an alliance longer than
necessary because of financial and emotional
necessary because of financial and emotional
investments.
investments.
•• Plan end—“prenuptial agreements”
Plan end—“prenuptial agreements”
•• Death not always failure
Death not always failure

Chapter 8

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