Week 5/6/7 Alliance Design

Lecture Notes:

1. The structure of an alliance is its architecture or blueprint, a set of features that define where and how
an alliance operates
. While the design is i!portant, it cannot substitute for bad alliance "#alue creation$ logic and it !a%
change o#er ti!e as the alliance e#ol#es
&. Alliance design is'
o (dentif%ing the role of the alliance in the business strateg%
o )etting the goals, rationale and scope of the alliance
o Deter!ining the criteria and !ethod for selecting a partner
o *rafting the structure and processes for sharing #alue and decision !aking in the alliance
+. (ssues in alliance design' ,ach are le#ers that %ou can pla% around with to !anipulate/ad-ust the alliance
to create the !ost #alue and !ini!i.e risk
o )cope of the alliance
o /artner choice and contributions
o Alliance go#ernance "e0uit% or non1e0uit%$
o Alliance interface

How to design a good alliance:
1. Which stage of the value chain:
o At which stage of the #alue chain will the alliance be for!ed
o (nfluenced b% e2ternal en#iron!ent "e.g. poor (/ protection$ as well as industr% and #alue1
creation logic

,.g. ,li13il% and 4a!ba2% had an alliance for all aspects e2cept 45D due to poor patent
protection in (ndia
Disne% and /epsi focus solel% on !arketing
o )o!e considerations'
Different 6ini!u! ,fficienc% )cale of production across stages
4isk1sharing
/rotecting core co!petencies "e.g. technolog%$
4eshaping co!petition in the industr% "e.g. /ower /* alliance$


2. The value creating logic:

o Co-option
*ooperate with co!petitors, co!pli!entors or other !arket leaders "e.g. Airlines, hotels
and car rentals$
7e% 8b-ecti#es'
- 9uild critical !ass/scale "8ne World Alliance$
- )trengthen !arket position or reshape co!petition, profitabilit% ":6 5 Daewoo$
- )etting industr% standard "(96 #s A(6 collaborated to produce new
!icroprocessor to reduce bargaining power of intel$

o Co-specialisation
;alue co!es fro! blending specialised capabilities and uni0ue resources "such as
knowledge$ to create new products
*reation of new !arkets and opportunities
Allows focus on core1co!petencies
;aluable in s%ste!s <solutions=

o Internalisation
De#elop new co!petencies
>ill gaps in knowledge and e2tend each partners skill base
Transfor!ing/restructuring
? 3earning !ust be internali.ed b% fir!s bring into their own practices to create #alue for
own co!pan%

3. Design in accordance with value-creation logic
Elements of Alliance Design:

cope of the !lliance:
Defines what the #enture and the partners can and can=t do "narrow scope can be e2panded o#er ti!e$
4e0uires'
o /artners to establish boundaries between the alliance and the parent fir!s
o (dentification of acti#ities in which the alliance !a% engage and those reser#ed for parents
o Deciding how the alliance uses the parents technolog% and assets
o Deciding who can use products and assets that the alliance de#elops
trategic cope the boundaries of the alliance
o :eograph%, functional, product !ini!i.e o#erlap with parent
"perational cope what acti#ities are -ointl% done within the alliance
o )uch as 45D, conducted with -oint or separate tea!s !ini!i.e unintended
infor!ation/technolog% leakage and coordination related costs and conflicts
? 6ust clearl% define scope fro! the start to reduce potential conflict 1 e.g. :6 entered )outh 7orea
with Daewoo to produce cars to ri#al @apanese cars in Aorth A!erican !arkets, howe#er Daewoo
atte!pted to enter the ,uropean !arket b% itself
)trategic wa%s to design alliance scope'
o Align scop with #alue1creation logic
o ;ar% strategic scope to reduce partner conflicts
o ;ar% operational scope for efficienc%
o 6ore -oint work ? !ore -oint tea!s ? tra#el , collaboration
o 3i!it scope initiall%, graduall% widen o#er ti!e

#artner Choice and Contri$utions:
Aeed to find the right partner dependent on alliance logic
Aot alwa%s is !arket leader best alliance depends on luck and chain of e#ents
)i!ilar alliances can ha#e #er% different outco!es
*riteria for selecting partners'
o )trategic fit
,.g. based on product, !arket strategies, resources etc.
o *an we get along with a particular co!pan%
Working towards !utual success or shared goals/#alues
o 8rganisational culture
Will there be cultural clashes between partners
o 6anage!ent
Different !anage!ent st%le 1 hierarchical #s egalitarian
o /rior ties
/re#ious interactions or alliances
9alance *apabilities and :oals'
o *o!pli!entar% capabilities'
/roduct and 6arketing one has !arketing e2pertise while the others is product
de#elop!ent
Technological and *apital
:lobal network and local custo!ers
o *onflict of interests'
8#erlap of geographic !arkets "e.g. Daewoo entering ,urope against :6=s wishes$
*o!peting sources of production "difficult to predict beha#ior of partner in long1run$
o *o!patible goals'
6arket access and product access
3ocal knowledge and technolog%
Ti!e sa#ing and cash generating
o Target and 6ission
*o!!on ri#als united against co!!on ene!%
Aew !arket, new technolog%
Ti!e hori.ons
;ale
/artner *ontributions'
o *ontribution influences power balance partner should reap fro! what he sows "howe#er can
ha#e conflict o#er #aluation of what he sows as it can be difficult to price intangible assets$
What does he sow
- 7now1how, reputation, !anufacturing, capital etcB
;alue of what he sows'
- ;alue of contacts/relationships
- ;alue of uni0ue "!anufacturing$ capabilit% or tactic knowledge
o /artner contributions and #alue creation'
VALUE CREATION CATEGORY PARTNER CONTRIBUTIONS
CO-OPTION Heavyweight advantages, reputation,
market leader!ip, i"e
CO-SPECIALI#ATION Unique non-tradable, rare & inimitable,
ownership specific resources
Reputation, proprietar$ kno% !o%,
e&perien'e, ta'it kno%led(e, or(ani"ationall$
em)edded routine, pri*ile(ed relation!ip
INTERNALISATION Leaderships in Skill+Capa)ilitie
Training & Co-practice , in-ratru'ture .
'apa)ilitie

Exa%ple' :, #s )A,*6A *ontributions "*o1)pecialisation$'
G !"C#$
US i'on
Link %it! B/0/, 1C23
4arketin(, ale, er*i'e
Core en(ine te'!nolo($
5ren'! I'on
Link %it! Air)u partner
5ren'! Go*t6 . 4ilitar$
5an te'!nolo($
? *ontacts and relationships hard to #alue proble!s with #aluing contributions for
co!pensation if alliance is ter!inated
o 4eco!!endation'
Deal with these earl% on'
- ,0uit% -oint #enture
- ,2ternal bench!arking
- /rice or pricing for!ula for assets
- ,2it pro#ision, trigger e#ents, e2it clause
Accept that contributions can change o#er ti!e and that it !a% be necessar% to renegotiate
ter!s of trade
;aluation' )orting out econo!ic interests'
o ;aluation issues'
Cow !uch are each partner=s contributions worthD
What econo!ic interest in the #enture will the partner recei#e in return for these
contributions
Cow the partners #alue the output of the alliance
o ,2a!ple' ,li13il% and 4a!ba2%
/artner *o!patibilit%'
- 9oth powerful
- )trong strategic co!patibilit%' co!pli!entar% resources and different !arket
seg!ents "generics #s branded$
- :ood cultural fit shared #ale of (/ protection
;aluation at Ter!ination
- 4a!ba2% was the loser
- ,2pected E7F! howe#er recei#ed E17!
Design Weakness'
- 3ack of e2it clause with pricing for!ula for #aluation at ter!ination


!lliance &overnance tructure:
4ange of go#ernance structures
o Equit' "Cierarchical$
8nl% appropriate when alliance related to core co!petencies or when high cost/risk
4e0uires !ore for!al reporting structure
@; "high co!!it!ent$ and !inorit% e0uit% stake "option$
/artial ac0uisition
o Non-Equit' "*ontract$
9u%er1)upplier
)trategic outsourcing "contract !anufacturing, 45D, ser#ices$
*ollaborati#e 45D, *o1!arketing "e.g. /epsi and Disne%$, *ross1)elling
*hannel partners
o Deter!inates of choice of !ode'
)trategic i!plications
o 6anagerial i!plications'
Di!inished le#el of control shared ownership G share control, risks, rewards, decision
!aking








o Classic (): ,0uit% is !ore than -ust e0uit%, also !anagerial etc. like @ust (n Ti!e, local knowledge
,0uit% leads to -oint ownership, which has i!portant i!plications on control such as econo!ic,
!anagerial, C4, !arketing etc.
o #artial !cquisition: ,2a!ple 1 4enault had to !ake an e0uit% stake to do this. Aot necessaril%
econo!ic control like in this case it was !anagerial for 4enault in order to help cut costs for
Aissan. *ut costs and introduced perfor!ance based seniorit% rather than seniorit% as was the
case prior to 4enault=s !inorit% e0uit% stake. /otential cultural i!plications for the 4enault *,8 1
cross functional tea!s had a lot of @apanese gi#en that foreigners aren=t looked that well upon in
@apan.
o Non-Equit' *Contractual+: Two fir!s -ointl% create #alue without a new entit% but still ha#e to
!eet the ob-ecti#es. Ao shared ownership or control o#er each other which is the ke% challenge.
Ao shared control. Het ha#e to still show co!!it!ent in honoring their agree!ent. )elf1
regulating. 6uch hard wa% of going about it, no for!alities. Cas to be done #oluntaril%. Trust
and the relationship aspect beco!es e2tre!el% i!portant in non1e0uit% alliances.


Equit' () Characteristics:
o *reation of a new legal entit%
o >or!al structure, hierarch%
o )hared ownership 5 shared control
o )hared rewards "each parent a residual clai!ant$
o )hared risks
o (ncenti#es aligned

,anagerial I%plications:










? As established structure assists
co!!unication in e0uit% alliance



Alliance >or! *onsiderations'
o )trategic' *ore "e0uit%$ #s Aon1core "non1e0uit% with co!pan% that has this as their core$,
Transaction costs, Task de!and, 6arket and product technolog%
o 6anagerial' *ontrol, Decision !aking, *oordination and *o!!unication
o *ountr%' 4egulation "i.e. foreign ownership$

When to for! a @oint ;enture'
o When core co!petencies are in#ol#ed
o Transaction costs are high
(nfor!ation costs "e.g. new and i!portant !arkets, new product and business$
Appropriation concerns
o Task de!and
Cigh degree of task interdependence
Task speciali.ation and co!ple2it%
o 3earning purposes
o 6anagerial
Irgenc% in decision !aking, control

,odels of (oint )entures: ;ar% in potential for conflict or risk
o Independent () "e.g. AI66(' :6 and To%ota$
*haracteristics'
- )tand1alone/autono!ous @; new
independent entit% created
- (nitial pooling of parent resources,
howe#er not continuous influence
6anagerial i!plications'
- Decision 6aking' )peed%
- *ulture' Distinct organi.ational culture
"separate fro! parents$
- *onflict' 3ow potential "no trade with
parents$


o Dependent () "e.g. >u-i1Jero2$
*haracteristics'
- 8ngoing and co!plete dependence of
@; on parent resources
6anage!ent i!plications'
- Decision 6aking' )low as parents
in#ol#ed
- *ulture' Difficult to define which
parent
- *onflict' 6oderate due to cultural
clash, one parent !a% be in !ore
powerful position and constant
interaction lea#es !ore roo! for
conflict to arise










o Interdependent () "e.g. :, and )A,*6A$
*haracteristics'
- 6ultiple le#els of ongoing interactions and resource flows between @; and
parent
- Alliance itself can de#elop its own core co!petencies and trade with parent
fir!s "creating new possibilit% for conflict in trading/negotiating with @; entit%$
6anage!ent i!plications'
- Decision 6aking' )low b% @; and parents
- *oordination' Cigh increasing costs
- *onflict' Cigh potential due to trade with parents, cultural clash, parents high
interdependence, clash of strategic interests etc.















Challenges in ():
o 4isk'
Inintended telegraphing of strategic info
*hange in partner ob-ecti#e o#er ti!e
o *onflicts'
Trade with parent
*hange in partner contributions o#er ti!e
;aluation 5 co!pensation issues
o /artner *o!patibilit%'
*ultural clash
*o!petiti#e o#erlap
,0ualit% in power status


4eco!!endations for @;s'
o 4edefine operational 5 strategic scope !ini!al -oint acti#ities
o ,2ternal bench!arking'
;aluation of changed contributions
/ricing for!ula for change o#er ti!e
4o%alt% fee for parent for (/ contributions
o /artner *hoice'
A#oid co!petitors
/artners with co!ple!entar% resources 5 capabilities
)trong partners, e0ual power
)creen for cultural differences
o ,2it *lause'
Define trigger e#ents
8ption to bu% sell
/ricing for!ula for #aluation at ter!ination
o Define roles, responsibilities 5 decision !aking rights

When to for% Non-equit' Contractual !lliances:
o Aeed to access to Aon1core co!petenc% if it is part of core co!petenc% then create a @; if not,
us a non1e0uit% alliance !ost cost effecti#e.
)peciali.ed inputs "bu%er1supplier$ co!ponents that are not core "e.g. (961(ntel$
)peciali.ed infrastructure, skills, knowledge "e.g. Apple i/od$
*ost efficienc% scale 5 scope, outsourcing "e.g. ,li13ill% 5 *hi1!ed$
o *ritical !ass for reshaping co!petition, !arket position'
*hannel partnerships "e.g. )tarbucks Westin hotels$
*o1!arketing "e.g. Disne% /epsi, )hell *oles$
o 3ow T*'
)tandard technologies, !ature products.

Non-Equit' Contractual -or%s:
o 9u%er1)eller Alliance re0uired for speciali.ed resources needing long1ter! and stable
relationship
7e% Aspects'
- 3i!ited to few with high bargaining power "few ke% suppliers$
- )pecialised resources and specific assets
- 3ong1ter! instead of short1ter! contracts
- ,2a!ple' Conda and Aippon Denso, (96 and (ntel
6utual 9enefits'
- ,fficienc% "lower costs and ti!e in A/D$, inno#ation reduces T* and uncertaint%
- 4apid response to changes in en#iron!ent "!arkets, technolog%, etcB$
o )trategic 8utsourcing As !arket conditions change, what is considered a core co!petenc%
and what is not changes 1 (96
7e% Aspects'
- 3i!ited to a few with high bargaining power "ke% suppliers of highl% custo!i.ed
ser#ices$
- )pecialised resource and specific assets
- 3ong1ter! contract renewed
- ,2a!ple' *ontract !anufacturing, 45D, ser#ices "phar!aceuticals and biotech$
o *o1!arketing
o *hannel /artnerships
o >ranchising

*ase )tud%' (96 ;ariet% of Aon1,0uit% Alliances'
o (961(ntel ' 9u%er1)upplier
o (9616icrosoft' 9u%er1)upplier "8)$, *o1!arketing ")oftware$
o (961Dell' )trategic outsourcing ")ales and distribution$

*osts of /oor Design'
o 6onitoring and coordination costs
o Destro%s #alue ",/), financial losses, insol#enc%$
o (/ appropriation
o ,rodes brand #alue
o Da!age reputation
o 3awsuits, antitrust re#iews
4ead-ust!ent costs'
o )tructural (nertia' 4aid adaptation kills the fir!
o Aew entrants are better at adapting than incu!bents "inertia due to age$