Chapter 14

Alliances and Joint Ventures

 Inter-Firm Relationships
 Inter-firm relationships are paths to
value enhancement along with internal
growth, M&As, etc.
 Analysis of relationships should be done
within the context of firm’s overall
strategic planning
 Alliances and other arrangements
between firms have become more
important since 1985 legislation eased
antitrust barriers
Chapter 14-2
 Joint Ventures
 JV characteristics
• Combination of assets from 2 or more parent
firms place into a separate business entity
• Limited scope and duration
• May not affect competitive relationships
• Examples: R&D, joint production of single
product
 JV timing similar to M&As (correlation over
0.95) – driven by same factors affecting total
investment activity

Chapter 14-3
 Joint Ventures
 JVs and business strategy:
• JVs a part of multiple paths to value growth
(Geis & Geis, 2001)
• Used over 782 JVs and alliances to:
– Develop new product markets
• Cable TV – NBC alliance –
• Online gaming – JV with Dreamworks to
produce games –
– Expand into new geographic areas (ex. deals
to expand in Japan)
– Participate in new technologies (ex. wireless
deals with Qualcomm, Ericsson)
Chapter 14-4
 Joint Ventures
 JVs and restructuring – JVs can be used as
transitional mechanism in broad restructuring
(Nanda & Williamson, 1995)
• Buyer can better determine value of seller's brands,
personnel, etc.
• Risk of making mistakes is reduced through direct
involvement with business
• Customers moved to buyer over a period of time in
which both firms are involved in JV
• Buyer builds up expertise in JV
• Seller is able to realize higher value from sale
following JV due to increased buyer knowledge of
assets
Chapter 14-5
 Joint Ventures
 Other benefits
• Knowledge acquisition is goal of at least 50%
of JVs – best for “learning by doing” with
complex processes
• Risk reduction – expansion of activities with
smaller required investment
• Tax aspects – contribution of patent or
technology may be more tax effective than
licensing (depreciation may offset revenues)
• International aspects – reduces risk of foreign
expansion (some nations require firms to take a
local partner)
Chapter 14-6
 Joint Ventures
 Reasons for failure (70% disbanded early)
• Technology never developed
• Inadequate preplanning
• Disagreement over basic objectives
• Managers refuse to share expertise with
counterparts from other firm
 Requirements for success
• Participants have something of value to JV
• JV should be carefully preplanned
• Agreement should provide flexibility
• Should include provisions for termination
• Key executives involved in implementation
Chapter 14-7
 Joint Ventures
 Empirical tests
• Business and economic patterns (Berg et al, 1982)
– Industry JV participation increases with: firm
size, capex, profitability
– Technologically oriented JVs: substitute for
long-term R&D more often than short-term
– JVs and R&D are complements at industry
level
• Event returns (McConnell & Nantell, 1985)
– Value of gains evenly divided between firms
– No change of mgmt. – gains must be from
synergy

Chapter 14-8
 Joint Ventures
Authors Year JV Type Return
McConnell, 1985 All 0.73%
Nantell
Koh, 1991 IT sector 0.87%
Venkatraman
Crutchley et al 1991 Japan-US 1.05%
Chen et al 1991 China-US 0.71%
Johnson, 2000 WSJ 1.67%
Houston announced
Chapter 14-9
 Strategic Alliances
 SA characteristics
• Informal or formal agreement between two or
more firms to cooperate in some way
• Created due to industry uncertainty and
ambiguity – value chains, new technology, etc.
• Need not create new entity
• Relative size of firms may be highly unequal
• Difficult to anticipate consequences –
relationships evolve, firm boundaries blur
• Firms pool resources and expertise hoping for
synergy from learning capabilities, etc.
• Allow firms much flexibility
Chapter 14-10
 Strategic Alliances
 Examples
•
Cooperation on system for voice commands for
the internet (VXML)
•
Joint offering of international 2-day delivery
• Sumitomo Rubber
Combined research and purchasing in 6 JVs
• AOL followed strategy of providing subscribers
with many benefits through alliance
– Partnerships with brick & mortar retailers
– Deals with software developers
Chapter 14-11
 Strategic Alliances
 2.6% of SAs result in M&As – more likely in mature
industries (Hagedorn, Sadowski, 1999)
 Types of alliances (Bleeke & Ernst, 1995)
• Collisions between competitors – tensions cause
failure
• Alliances of the weak – weak grow weaker
• Disguised sales – strong competitor buys weak
• Bootstrap alliances – weak firm improved by strong
until alliance becomes on equal footing
• Evolution to a sale – successful SA becomes sale
when tension emerges
• Alliances of complementary equals – SA succeeds
due to compatibility
Chapter 14-12
 Strategic Alliances
Authors Year SA Type Return
Chan et al 1997 All 0.64%
High tech 1.12%
Low tech 0.10%
Das et al 1998 Technology Over 1%
Marketing Negative
Kale et al 2002 SA function 1.35%
No SA func. 0.18%
Chen et al 1991 China-US 0.71%

Chapter 14-13
 Strategic Alliances
 Requirements for success
• Well defined strategic themes
• Organization relationships should facilitate
communication to share decision making
• SAs viewed in real options framework – allows
portfolio of potential growth opportunities
• High level management should be involved
• Must be positive incentive to overcome tension
• SA governance must adapt to different types of
alliances
• SAs must seek out growth opportunities to
augment core capabilities
Chapter 14-14
 Relative Roles
 Acquisitions
• Rapid augmentation of firm capabilities
• Consequences are long lasting
• Often costly due to takeover premium
• Challenges of combining organizations
 Joint ventures
• Reduce relative size of investments and risks
• Create new entities and relationships
• Can develop learning and new opportunities
 Strategic alliances
• Broaden range of potential opportunities
• Relationships are more ambiguous – greater need for
communication
Chapter 14-15
 Minority Equity Investments
 Actively employed by successful high technology
firms with substantial cash balances
 Rationale for investor
• Investments in promising startups can yield high
returns and substantial long term benefits
• Information source about growth opportunities
• Method for learning about industries and firms
• Identification of new managerial talent
• May expand markets for investor’s products
 Rational for recipient
• May gain knowledge from investing firm
• Increases financing resources
• May bring visibility
Chapter 14-16
 Technological and
Marketing Agreements
 Exclusive agreements
• Enable firms to combine complementary
strengths more quickly and at lower costs
• May develop into other forms of
interdependence between firms
 Licensing agreements – licensee may use the
knowledge or processes of licensor for a fee
• Method of expanding market for firm’s product,
or gaining acceptance for new product
• Licensee may gain by adding successful product
• High immediate returns for licensor in market,
but may create future competitor
Chapter 14-17
 Franchising
 Contracts between franchisor (parent) and
franchisee that grant rights to use name, brand, etc.
within specific area
 Widely used in geographically dispersed industries
(Mail Boxes Etc., McDonald’s)
 Reduces monitoring costs – franchisees returns are
tied to performance
 Potential conflicts
• Franchisor has risk of franchisee not conforming to
standards
• Franchisee may prefer to use different vendors
• Disagreements with respect to size of franchisee’s
exclusive area exclusive
Chapter 14-18