Chapter 7 Making Strategic Alliances and Networks Work

Global Strategy 1e Michael Peng Global Strategy Mike W Peng c h a p t e r 7 Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly acce.

chapte r Chapter Making Strategic Alliances and Networks Work Global Strategy Strategy Global Mike W Peng Mike W Peng Copyright Copyright © © 2014 2014 Cengage Cengage Learning Learning All All Rights Rights Reserved Reserved May May not not be be scanned, scanned, copied copied or or duplicated, duplicated, or or posted posted to to a publicly publicly accessible accessible website, website, in in whole whole or or in in part part Outline • Defining strategic alliances and networks • A comprehensive model of strategic alliances and networks • Formation • Evolution • Performance • Debates and extensions • The savvy strategist Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Defining Strategic Alliances and Networks • Strategic alliances are “voluntary agreements between firms” • Strategic alliances are compromises between pure market transactions and mergers and acquisitions • Alliances fall into two broad categories: contractual (non-equity) and equity-based • Strategic networks are strategic alliances formed by multiple firms to compete against other networks and singular firms Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part The Variety of Strategic Alliances • Strategic Alliances  A compromise between short-term, pure market transactions (e.g., spot transactions) and long-term, pure organizational solutions (e.g., mergers and acquisitions) The Variety of Strategic Alliances Mergers Mergers and and Acquisitions Acquisitions (M&A) (M&A) Market Market Transactions Transactions Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Figure 7.1 A Comprehensive Model of Strategic Alliances and Networks © M W Peng (www.mikepeng.com) 7–5 A Comprehensive Model of Strategic • Industry-based considerations Alliances and Networks  Traditional: Firms are independent players  The dynamic of five forces:  Horizontal alliances, entry barriers, upstream alliances with suppliers, downstream vertical alliances with buyers, and alliances and networks to provide substitute products/services • Resource-based considerations  The resource-based view is embodied in the VRIO framework, which are value, rarity, imitability and organizational aspect of strategic alliance and networks Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Industrybased consideratio ns Figure 2.1 © M W Peng (www.mikepeng.com) 2–7 Resource-based considerations Alliances can create or diminish value (V) Reduce costs, risks and uncertainties Access complementary assets and learning opportunities Use alliances as real options Choosing wrong partners Potential partner opportunism Risk of helping nurture competitors (learning © M W Peng (www.mikepeng.com) race) … R, I, O aspects of alliances Rarity – relational (collaborative) capabilities, the ability to manage interfirm relationships, may be rare Inimitability – alliances may make it easier to observe and imitate firmspecific capabilities Organization – some successful alliances are organized in a way that is difficult to replicate © M W Peng (www.mikepeng.com) INFLUENCE OF INSTITUTIONS Formal institutions Antitrust concerns – antitrust authorities more likely to approve alliances than acquisitions Entry requirements – many governments place limitations on foreign firm’s mode of entry INFLUENCE OF INSTITUTIONS Informal institutions Normative pillar –firms copy other reputable organizations to establish legitimacy Cognitive pillar – internalized, taken-forgranted values that guide alliances and acquisitions Strategic Alliances and Networks: Advantages and Disadvantages • Strategic alliances and networks must create value • Advantages must outweigh disadvantages ADVANTAGES DISADVANTAGES Reduce costs, risks, and uncertainties Possibilities of choosing the wrong partners Gain access to complementary assets and capabilities Costs of negotiation and coordination Opportunities to learn from partners Possibilities of partner opportunism Possibilities to use alliances networks as real options Risks of helping nurture competitors (learning race) Table 7.1 Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Formation • Stage one: To cooperate or not to cooperate • Stage two: Contract or equity? • Stage three: Positioning the relationship Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part FORMATION OF ALLIANCES © M W Peng (www.mikepeng.com) Stage Two: Contract or Equity? EQUITY-BASED ALLIANCES/NETWORKS NON-EQUITY-BASED ALLIANCES/NETWORKS Nature of shared resources (degree of tacitness and complexity) High Low Importance of direct organizational monitoring and control High Low Potential as real options High (for possible upgrading to M&As) High (for possible upgrading to equity-based relationships) Influence of formal institutions High (when required or encouraged by regulations) High (when required or encouraged by regulations) DRIVING FORCES Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Evolution • Combating opportunism  Need to protect against opportunism  Contractual safeguards and credible commitment • Evolving from strong ties to weak ties  Strong ties are cultivated over a long period of time  Weak ties are characterized by infrequent interaction and low intimacy  Firms have a combination of strong ties and weak ties  Benefits of the different types of ties depend on the firms’ strategies  Many interfirm relationships evolve from an emphasis on strong ties to a focus on weak ties Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Evolution (cont) Source: M Peng and O Shenkar (2002) Joint venture dissolution as corporate divorce Academy of Management Executive, 16 (2): 95 Performance • The performance of strategic alliances and networks  A combination of objective and subjective measures can be used to determine performance  Four factors may influence the performance of alliances and networks: equity, learning and experience, nationality, and relational capabilities • The performance of parent firms Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Alliance- and Network-Related Performance Measures ALLIANCE/NETWORK LEVEL PARENT FIRM LEVEL Objective Objective  Financial performance (for example, profitability)  Financial performance (for example, profitability)  Product market performance (for example, market share)  Product market performance (for example, market share)  Stability and longevity  Stock market reaction Subjective Subjective  Level of top management satisfaction  Assessment of goal attainment Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Table 7.4 Debates and Extensions • Majority JVs as control mechanisms versus minority JVs as real options • Alliances versus acquisitions ã Acquiring versus not acquiring alliance partners Copyright â 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Alliances versus Acquisitions © M W Peng (www.mikepeng.com) 7–21 Improving the Odds for Alliance Success AREAS DO’S AND DON’TS Contract versus “chemistry” No contract can cover all elements of the relationship Relying on a detailed contract does not guarantee a successful relationship and it may indicate a lack of trust Warning signs Identify symptoms of frequent criticism, defensiveness (always blaming others for problems), and stonewalling (withdrawal during a fight) Investment in the relationship Like married individuals working hard to invigorate their ties, alliances require continuous nurturing Once a party starts to waver, it is difficult to turn back Conflict resolution mechanisms “Good” married couples also fight Their secret weapon is to find mechanisms to avoid unwarranted escalation of conflicts Managers need to handle conflicts-inevitable in any relationship-in a credible, responsible, and controlled fashion Source: Based on text in M W Peng & O Shenkar, 2002, Joint venture dissolution as corporate divorce (pp 101–102), Academy of Management Executive, 16 (2): 92–105 Table 7.7 Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part The Savvy Strategist • New generation of strategists needs to be savvy at both competition and cooperation— “coopetition” • Improving relational (collaborative) capabilities is crucial for success • Need to understand the rules of game governing networks - both formal and informal • Carefully weigh the pros and cons associated with alliances and acquisitions Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part  ... taken-forgranted values that guide alliances and acquisitions Strategic Alliances and Networks: Advantages and Disadvantages • Strategic alliances and networks must create value • Advantages... Figure 7. 1 A Comprehensive Model of Strategic Alliances and Networks © M W Peng (www.mikepeng.com) 7? ??5 A Comprehensive Model of Strategic • Industry-based considerations Alliances and Networks. ..Outline • Defining strategic alliances and networks • A comprehensive model of strategic alliances and networks • Formation • Evolution • Performance • Debates and extensions • The savvy