Strategic Alliances A Practitioners Approach

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Strategic Alliances

A Practitioner’s Approach

University of Miami Graduate Program

School of Business Administration

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STRATEGICPLANNING ALLIANCE PLANNING AND EXECUTION

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FRAMEWORK FOR NEGOTIATING, DEVELOPING AND MANAGING A STRATEGIC ALLIANCE

The process consists of five phases:

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WHAT IS STRATEGY ?

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WHAT IS STRATEGY ?

• Word is derived from the Greek word “strategus” : art of the general

• Strategy is the pattern of major objectives and goals, and the essential policies and plans for achieving these goals

• Strategy is the match between the organization and the environment

• Strategy is an integrated set of actions aimed at securing competitive advantage

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WHY IS STRATEGY IMPORTANT?STRATEGIC PLANNING

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“ Would you tell me please, which way I ought to go from here?”

“ That depends good deal on where you want to go ’’ said the Cat

“ I do not much care”, said Alice

“ Then it does not matter which way you go”, said the Cat

“ …so long as I get somewhere”, Alice added as an explanation

“ Oh, you are sure to do that” said the Cat, “if you only walk long enough”

Lewis Carroll Alice in Wonderland

WHY IS STRATEGY IMPORTANT?STRATEGIC PLANNING

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WHAT IS STRATEGY?

WHAT IS TACTICS ?

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WHAT IS STRATEGY? WHAT IS TACTICS ?

Strategy is knowing what to do when there is nothing to do.

Tactics is knowing what to do when there is something to do.

Savielly Tarakover Polish Chess Grand Master

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STRATEGICPLANNING

Critical issues include:

• Understanding of business goals

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STRATEGICPLANNING



• Assessing the competitive environment


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Assessing the Competitive EnvironmentIndustry Structure – Porter’s Five Forces

Potential Entrants

Substitutes

CustomersIndustry Competitors

Suppliers

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Assessing the Competitive EnvironmentIndustry Structure – Porter’s Five Forces

Potential Entrants

Substitutes

CustomersIndustry Competitors

Suppliers

Globalization Trade Agreements

Political Economy

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Industry Structure – Porter’s Five Forces

Potential Entrants

Substitutes

CustomersIndustryCompetitors

Suppliers

Globalization Trade Agreements

Political Economy

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High

VOLATILITY

Low

Low

IMPACT ON BUSINESS

High

Industry Structure – Not All Forces are Equal

Exit

Globalization

Suppliers

Competition

Example

New Entrants

Technology

Product Substitution

Customers

PoliticalEconomy

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Our Industry

Clients’ served industries

Our Suppliers’ Industries

E Commerce

Technology

Must understand the structure of ALL industries that are your suppliers and/or your customers… now and future!

Potential Competitors?Mostly outsiders looking in

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Strategic DriversImpact

VolatilityTiming5 years

Example

High

High

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Customers

Example

High

High

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Suppliers

Customers

Example

High

High

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STRATEGICPLANNING




• Identifying and evaluating expansion alternatives– Expansion Matrix: Mode and direction


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CORPORATE EXPANSION MATRIXSTRATEGIC PLANNING

SAME BUSINESS

NEW MARKETSIN NEW REGIONS

VERTICAL INTEGRATION

RELATEDBUSINESS

UNRELATED BUSINESS

Mode

Direction

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CORPORATE EXPANSION MATRIXSTRATEGIC PLANING

SAME BUSINESS



RELATEDBUSINESS

UNRELATED BUSINESS

CONSOLIDATION

GLOBALIZATION

COMPETITIVE STRATEGY

SYNERGY

CONGLOMERATE

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INTERNAL DEVELOPMENT

STRATEGIC ALLIANCES

MERGERS ANDACQUISITION

CORPORATE EXPANSION MATRIXSTRATEGICPLANNING

SAME BUSINESS



RELATEDBUSINESS

UNRELATED BUSINESS

CONSOLIDATION

GLOBALIZATION

COMPETITIVE STRATEGY

SYNERGY

CONGLOMERATE

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SELECT THE PREFERRED COURSESTRATEGICPLANNING

Why is it important to select the right type of alternative?

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Why is it important to select the right type of alternative?

– Wide spectrum of possible strategic options– High rate of failure

JointVentureMergers

&Acquisitions

RelationshipInvestments,Licensing

> 50% < 50%

Decreasing Control / Commitment

Increasing Investment

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CO

MM

ITM

EN

T

PE

RM

AN

EN

TL

ON

GT

ER

M

TR

AN

SA

CT

ION

AL

No linkage Shared Resource

SharedFunding

CrossEquity

Shared Equity

WhollyOwned

OWNERSHIP

“How do you successfully manage this new entity and maximize value creation for your shareholders?”

STRATEGICPLANNING SELECT THE PREFERRED COURSE

Source: Booz Allen

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STRATEGICPLANNING




• Identifying and evaluating expansion alternatives

• Selecting the preferred growth course:– Acquisition– Internal Development– Strategic Alliances

• Establishing contingency plan

• Assessing the risks


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WHAT IS A STRATEGIC ALLIANCE?STRATEGIC PLANNING

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“ In a strategic alliance, firms cooperate out of mutual need and share the risks to reach a common objective. ”

Jordan D. Lewis Partnerships for Profit Free Press, 1990

“ A cooperative arrangement between two or more companies where:

- A common strategy is developed in unison and a win-win attitude is adopted by all parties.

- The relationship is reciprocal with each partner prepared to share specific strengths with each other, thus lending power to the enterprise.

- A pooling of resources, investments and risks occurs for mutual (rather than individual) gain.”

Booz-Allen & Hamilton

WHAT IS A STRATEGIC ALLIANCE?STRATEGIC PLANNING

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STRATEGICPLANNING

What are the advantages in forming strategic alliances?


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STRATEGICPLANNING

ADVANTAGES IN FORMING STRATEGIC ALLIANCE

1. Offers multinational access to resources

(e.g. products, technologies, personnel, market access)

2. Permits economies of scale through sharing or concentration of resources or facilities

(e.g. manufacturing) across all alliance partners

3. Shares risk, such as in joint R&D programs that

reduce the expenditure required by each firm

individually

4. Blocks or co-opts competition

(e.g. through defensive or offensive alliances)

5. Overcomes trade barriers

(e.g. in developing countries or nationally protected industries)

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STRATEGICPLANNING

What are the risks in forming strategic alliances?


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1. Creates a competitor, by transferring knowledge or market access to the partner

2. Inhibits integration of local operations into the global strategy, and limits internal development of key resources for global operations

3. Raises organizational and commercial risks (e.g. differences in culture may prove to be disruptive and costly; alliance may be detrimental for industry structure and profitability)

4. Reduces autonomy and strategic / competitive flexibility

5. Consumes significant proportion of management time and attention

RISKS IN FORMING STRATEGIC ALLIANCES

STRATEGICPLANNING

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STRATEGICPLANNING

How do you minimize the risk of failure?


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STRATEGICPLANNING

How do you minimize the risk of failure?

By addressing the two most frequent types of failure:

1. LOGIC … “It looked like a good idea, but it was not.”

2. PROCESS … “It was a good idea, but it did not work.”


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What would you look for in your partners?

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PARTNER

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1. COMPATIBILITY ...in strategic objectives,technology,values,

management philosophies and beliefs

2. COMMITMENT ...to high safety, industrial hygiene, environmental and ethical standards. And,

a long-term commitment to the relationship

3. TRUST ...in every aspect of the relationship. Trust must be balanced with self-interest. Know each other’s goals and be sure both can

succeed

4. COMMUNICATION ...frequent, open and informal to avoid potential conflicts

5. ACTION ORIENTED ... nature of relationship requires prompt

and decisive actions

6. STRONG REPUTATION ... solid corporate image, record, financial

resources and strength

IDENTIFY &SELECT

PARTNERSIX GOLDEN RULES

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Complementary

Unrelated orSimilar

Resources,Technologiesand staff

Similar Different

Cultures/Values

FailureSuccess

Failure Failure

Based on our experience, strategic and cultural compatibility are critical for success

IDENTIFY &SELECT

PARTNER

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WHAT IS CULTURE ?IDENTIFY &

SELECT PARTNER

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WHAT IS CULTURE ?IDENTIFY &

SELECT PARTNER

•The sum total of known written and unwritten dynamic beliefs, rituals, rules, regulations, policies, procedures, institutions and artifacts that characterize human populations.

• In essence,•Culture is learned, it is not innate.•Various aspects of culture are interrelated.•Culture is shared.•Culture defines the boundaries of different groups.

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National Professional

Functional

CompanyIndustry

Regional

Geography, history, political and economic forces, climate, region, language

Resources, technology, product market, regulation, competitive advantage

Education, training, selection, socialization

External environment, nature of task, time horizon

Founder, leader, administrative heritage, nature of product/industry stage of development

INTERACTING CULTURAL SPHERES

Source: Adapted from J. Santos

IDENTIFY &SELECT

PARTNER

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CULTURAL COMPATIBILITY -“PERCEPTION VS. REALITY”

IDENTIFY &SELECT

PARTNER

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CULTURAL COMPATIBILITY -“PERCEPTION VS. REALITY”

• What are the shared values between N.E. Asia and S.E. Asia?

• What are the cultural differences?

IDENTIFY &SELECT

PARTNER

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SELECTION OF

PA RTNER“SHARED VALUES” : NE ASIA AND SE ASIA

• Age, deference to seniority, authority

• Education

• Upward mobility

• “Face”; self steem

• “Harmony”, conflict avoidance

• Manners, proper behavior, personal demeanor

• Personal trust and relationship

• Reciprocity and mutual obligation

• Pragmatism versus idealism

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• ETHNICITY HOMOGENEOUS DIVERSE

• RELIGION CONFUCIAN ISLAM - BUDHISM CHRISTIANITY

• COLONIAL JAPAN NETHERLANDS-UK FRANCE-USA SPAIN

• FAMILY PATRILINEAL BILATERAL

• GROUP VERTICAL HORIZONTAL EXCLUSIVE INCLUSIVE

• WOMEN SUBORDINATE EQUAL • FOREIGNERS OPPOSED WELCOMED

• TRADE INWARD LOOKING OUTWARD ORIENTED

• WEALTH ACCUMULATION DISTRIBUTION

NE ASIA SE ASIA

SELECTION OF

PARTNER

CULTURE

CULTURAL DIVERSITY MAKES A DIFFERENCE

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Near Eastern

Turkey

Iran

Greece

NordicFinland

Norway

Denmark

SwedenGermanic

Austria

Germany

Switzerland

Anglo

United StatesAustralia

CanadaNew Zealand

IrelandUnited Kingdom

South Africa

Latin European

France

Belgium

ItalySpain

Portugal

Latin American

Chile

Peru

Argentina

VenezuelaMexico

Colombia

Far Eastern Malaysia

Hong KongSouth Vietnam

Singapore

PhilippinesIndonesia

Taiwan

Thailand

ArabBahrain

Abu Dhabi

United Arab Emirates

KuwaitOman

Saudi Arabia

Independent

Brazil

Japan India

Israel

SELECTION OF

PARTNERCountry Clusters

Source: S. Ronen and O. Shenkar (1965) “Clustering Countries on Attitudinal Dimensions”, Academy of Management Review, 10(3)

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Near Eastern

Turkey

Iran

Greece

NordicFinland

Norway

Denmark

SwedenGermanic

Austria

Germany

Switzerland

Anglo

United StatesAustralia

CanadaNew Zealand

IrelandUnited Kingdom

South Africa

Latin European

France

Belgium

ItalySpain

Portugal

Latin American

Chile

Peru

Argentina

VenezuelaMexico

Colombia

Far Eastern Malaysia

Hong KongSouth Vietnam

Singapore

PhilippinesIndonesia

Taiwan

Thailand

ArabBahrain

Abu Dhabi

United Arab Emirates

KuwaitOman

Saudi Arabia

Independent

Brazil

Japan India

Israel

SELECTION OF

PARTNERCountry Clusters

Source: S. Ronen and O. Shenkar (1965) “Clustering Countries on Attitudinal Dimensions”, Academy of Management Review, 10(3)

Elements that cross across national boundaries

• Geography

•History

•Linguistics

•Religion

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• POWER DISTANCE - the extent to which a society accepts that power in institutions and organizations is distributed unequally.

• UNCERTAINTY AVOIDANCE - the extent to which a society feels threatened by uncertain or ambiguous situations.

• INDIVIDUALISM - a loosely knit social framework in a society in which people are supposed to take care of themselves and of their immediate families only.

• COLLECTIVISM - the opposite occurs when the people distinguish between in-groups and out-groups ; they expect their in-group to look after them in exchange for absolute loyalty .

FOUR DIMENSIONS OF NATIONAL CULTURE

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POWER DISTANCE - the extent to which a society accepts that power in institutions and organizations is distributed unequally.

UNCERTAINTY AVOIDANCE - the extent to which a society feels threatened by uncertain or ambiguous situations.

INDIVIDUALISM - a loosely knit social framework in a society in which people are supposed to take care of themselves and of their immediate families only.

COLLECTIVISM - the opposite occurs when the people distinguish between in-groups and out-groups ; they expect their in-group to look after them in exchange for absolute loyalty .

MASCULINITY with its opposed pole FEMININITY . This dimension express “the extent to which the dominant values in society are assertiveness, money and material things, not caring for others, quality of life and people”.

AND A FIFTH DIMENSION OF NATIONAL CULTURE

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Source: G. Hofstede (1991) Cultures and Organizations

Hofstede’s MapsSELECTION

OF PARTNER

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Low

Formalization

High

Low

Hierarchy

High

SELECTION OF PARTNER PREDOMINANT CULTURAL PROFILES

Uncertainty Avoidance

PowerDistance

Village Market(Anglo Nordic)

Family or Tribe (Asian)

Well-Oiled Machine (Germanic)

Traditional Bureaucracy“pyramid of people” (Latin)

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Low

Formalization

High

Low Hierarchy High

SELECTION OF PARTNER PREDOMINANT CULTURAL PROFILES

Uncertainty Avoidance

PowerDistance

DecentralizedGeneralistPeople as free agentsFlexibilityMore delegationCoordination thru Informal communicationOutput Control

Decentralized decision makingNarrow span of controlSpecialist/technical competenceDiscretion limited by expertiseStrong role of “staff experts”Top management teamOrganized by functionsCompartmentalizedCoordination thru rulesStructural solutionsThroughput control/Efficiency

CentralizedPaternalisticLoyaltyGeneralistStrong social versus task rolesPersonal relationshipsSocial control

Centralized decision makingCoordination at the topLess delegation“Cloisonné” highly specializedStrong role of staffAnalytical abilityPyramid of peopleInformal relationships“Systeme D”Elitist( power and authority)Input control

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STRUCTURE &NEGOTIATE

DEAL


• Defining the scope of alliance– By territory, product, geography, technology– Flexibility for other alliances– Liability limitations

• Clarifying roles– Clear expectations, requirements of business strategy

• Defining what success will look like– Must be “win-win” to both parties– Alliance objectives– Specific performance criteria and milestones

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Critical issues include: Cont’d.

• Understanding & verifying synergies

• Anticipating likely competitor and customer response

• Evaluating the potential financial impacts

• Developing the business case

• Planning and completing negotiations

• Completing the due diligence

• Protecting majority and minority rights


DEAL

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Protecting majority and minority rights

• Memorandum of understanding

• Material Adverse Clause (MAC)

• Shareholders agreement

• By-Laws

• Management responsibility

• Dividend policy

• Technology and administrative fees

• Access to core technologies, people, trade secrets

• Conflict resolution methodology


DEAL

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High

Conflict Potential

Low

Low Extent of Organizational

Interaction

High

STRUCTURE & NEGOTIATE DEAL

TYPOLOGY OF AN ALIANCE

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High

Conflict Potential

Low

Low Extent of Organizational

Interaction

High

Pre

CompetitiveCompetitive

Non

Competitive

Pro Competitive


TYPOLOGY OF AN ALIANCE

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PROTECTING MAJORITY AND MINORITY RIGHTS

High

Relative Fear

Low

Low Relative Expectations

High

Source: Mustafi, Mahajan & Dutla - Handbook of Business Strategy


FEAR - EXPECTATION MATRIX

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PROTECTING MAJORITY AND MINORITY RIGHTS

High

Relative Fear

Low

Low Relative Expectations

High

Preparing for divorce

Courtship

HoneymoonMaturity

Source: Mustafi, Mahajan & Dutla - Handbook of Business Strategy


FEAR - EXPECTATION MATRIX

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What you can see

What you can’t see


DEALCOMPLETING THE DUE DILIGENCE

• Establishing an alliance is like buying an iceberg

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What you can see•Plants

• Industry Conditions

•Brands

• Financial Status

•Technology

•Competitors•Distribution

•Advertising

What you can’t see




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What you can see

•Reward System•Accounting System

•Decision-making process

•Customer Relations

•Suppliers relations

•Management style•Labor relations

•People

•R&D Pipeline

•Technology•Turnover

•Culture

•Morale What you can’t see




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• Selecting key management– Senior management must be committed– Appoint credible/successful managers

• Agreeing on success factors– Apply adequate resources to ensure success

• Identifying key milestones• Designing a practical operations plan

– Select initial projects of significant value and high potential

PLANIMPLEMEN-

TATION

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MINORITYINVESTMENT

JOINTVENTURE ACQUISITION

NOT ALL TYPES OF ALLIANCES CAN BE MANAGED THE SAME

CONTROL

STRATEGICVALUE

TIMEFRAME

KEY SUCCESSFACTORS

PLANIMPLEMEN-

TATION

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CONTROL

STRATEGICVALUE

TIMEFRAME

KEY SUCCESSFACTORS

MINORITYINVESTMENT

MARGINALNEGOTIATED

TRACK NEWTECHNOLOGIES

SHORT TERM

STRUCTURE OFAGREEMENT

JOINTVENTURE

CONTRACTUAL,POTENTIALLYCONTENTIOUS

DEVELOP NEW OPTIONS

MEDIUM TERM

MANAGINGSHARED

RESOURCES

ACQUISITION

EXCLUSIVE

CAPITALIZEON OPTIONS

LONGER TERM

MINIMIZINGINTEGRATION

COSTS

PLANIMPLEMEN-

TATIONNOT ALL TYPES OF ALLIANCES CAN BE MANAGED THE SAME

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Excellent

Poor

Strategic Formulation[ Thinking ]

Execution

Strategic Planning Strategic Formulation and Execution Matrix

Value Creation

Poor Excellent

Value Destruction

Red Zone

Value Stabilization/ Erosion


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Excellent

Poor

Strategic Formulation[ Thinking ]

Execution

Strategic Planning Strategic Formulation and Execution Matrix

Value Creation

Poor Excellent

Value Destruction

Red Zone



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• Announcement

• Operations start-up

• Assessment of milestone progress

• Adjustment of business goals

EXECUTE

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BUILDING BLOCKS FOR SUCCESSFUL STRATEGIC ALLIANCES

LEADERSHIP

CULTURE

PEOPLE

PERFORMANCE

CONTINUOUS IMPROVEMENT

Corporate Values - Clear strategic focus: VisionVisible senior management involvement

Common set of objectives

Assign your best people … drive process with passion

Definition of

success

Adjustkey

metrics

Createreward

incentives

Be flexible and adaptable + Learn from successes and failures

Willingness to share

knowledge

Willingness to use others’ knowledge

Willingness to accept

risk+ + =

Right Partner/Improved

Performance

SUMMARY

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Strategic Alliances

A Practitioner’s Approach

University of Miami Graduate Program

School of Business Administration

7474

www.aloaris.com

[email protected]

Strategic Alliances A Practitioners Approach

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