Describe the variety of inter-firm cooperation agreements, ranging from shared research to formal joint ventures and minority equity participation.

CHAPTER 6 – ENGAGING IN CROSS-BORDER COLLABORATION

A.WHY STRATEGIC ALLIANCES?

1. STRATEGIC ALLIANCES
2. Described as: the variety of inter-firm cooperation agreements, ranging from shared research to formal joint ventures and minority equity participation.

 

1. Forms of alliances include:

 

1. Traditional joint ventures, with these characteristics:

 

• Formed between senior MNE in and industrial country and junior partner in less-developed country
• Goal was for senior MNE to gain new market access for existing products.
• Local partner provides market expertise, protection from government intervention.
• Local partner gains access to new products and knowledge.

 

1. Modern form of alliances, characteristics:

• Typically formed between partners in industrialized countries.
• Focus on creating new products and technologies.
• Likely formed for short duration.

1. MOTIVATIONS DRIVING FORMATION OF STRATEGIC ALLIANCES
2. Technology exchange – MNEs forced to form R&D partnerships due to increase in interdisciplinary and inter-industry innovations (e.g., telecommunications, medical equipment, electronics).
3. Global competition – smaller MNEs must join forces to compete against single dominant market leaders.

 

2. MOTIVATIONS DRIVING FORMATION OF STRATEGIC ALLIANCES (continued
3. Industry convergence – several high-tech industries are beginning to overlap due to complexity of technological skill set needed to compete and survive in the industry (e.g.,, HDTV)
4. Economies of scale and reduction of risk –
5. Partners can pool resources to increase economies of scale
6. Partners and share and leverage specific strengths of each other

iii.   Sharing different and complementary resources can reduce cost of duplication.

1. Alliances as alternative to mergers – create alliances when political, legal or regulatory constraints prohibit mergers (e.g., code-sharing in airline industry when foreign ownership is prohibited)

 

1. RISKS AND COSTS OF COLLABORATION
2. Risks of Competitive Collaboration:                      
3. Asymmetrical benefits – one may use partnership to gain competitive edge over the other (e.g., one partner learns skills from the other but is reluctant to share its own).
4. Control of investments – one partner keeps control over key investments (e.g., in product development, marketing, manufacturing). Other partner becomes dependent.
5. Risk of “learning by doing” – one partner uses knowledge gained from the alliance to compete against the other partner. (i.e., risk of strengthening a competitor)
6. Risk of takeover – fear that alliance may result in the acquisition of one partner by the other.
7. Cost of Strategic and Organizational Complexity                
8. Risk and rewards of collaboration become more complex because they must be shared (i.e., allocated) between partners
9. BUILDING AND MANAGING COLLABORATIVE VENTURES
   
10. Challenges of Building Cooperative Venture                     
11. General challenges include
12. Strategic and environmental disparities among partners – individual partners may have opposing strategic objectives
13. Lack of common experience and perception base – may have different administrative heritages, different organizational cultures

 

iii.   Difficulties in inter-firm communications – e.g., due to different languages, culture

 

1. Conflicts of interest and priorities – regarding objectives.

 

1. Personal differences among managers – due to management teams from different cultural/national backgrounds

 

1. Pre-alliance Challenges

                                         Challenges faced by firms prior to joining forces with a partner.

 

1. Analyzing the partner’s strategic and organizational capabilities – often difficult due to lack of adequate information.

 

1. Escalation of commitment – managers involved in planning alliance reluctant to back out.

 

Solution: operational managers responsible for implementation involved in planning.

 

iii.   Defining scope of alliance – problem overstating the scope of the partnership.

 

Scope more difficult to define due to:

• Complicated cross-ownership of equity
• Need for cross-functional coordination
• Number and scope of joint activities
  

1. BUILDING AND MANAGING COLLABORATIVE VENTURE (continued)

 

2. Challenges of Managing Cooperative Ventures

1. Managing the boundary
2. Setting organizational boundary structures to separate the alliance from the partners’ operations. May use:

• Separate legal entity
• One or both partners given operational control
• Joint committees.

1. Choice of boundary structure depends on scope. Higher level of interdependent tasks needs structure with more decision-making integration (likely through separate entity).

 

1. Managing knowledge flows

1. Need to exploit knowledge generated by the partnership
2. Each needs to protect internal knowledge it does not want to share with the other partner (i.e., appropriability theory).
3. Set up effective governance structure –

1. To provide proper strategic direction.
2. “Distributive” equality (i.e., win-lose) in negotiations/governance not necessarily desirable (may lead to ineffectiveness). Use “integrative” equality based on relevant task/expertise instead.