R-N-M : Vertical Integration & Strategic Alliances

Vertical Integration framework

1. can supplier achieve better economies of scale or have better capabilities?

2. relationship-specifity? coodination problems? problem of leakage of info?

3. contract infeasible/ costly?

4. common ownership needed?

Build Borrow Buy

1. how relevant are internal resources

2. how tradeable are req resources

3. how close to partner do you need to be

4. how well can you integrate with target?

What is vertical integration?

The level of engagement a firm has in the stages of a product or service's value chain.

What are transaction costs?

All internal and external costs associated with an economic exchange.

What are external transaction costs?

Costs of transacting in the market, including searching, negotiating, monitoring, and enforcing.

What are internal transaction costs?

Costs associated with internalizing a transaction, also known as administrative costs.

When should a firm vertically integrate?

When internal transaction costs are less than external transaction costs.

What conditions favor vertical integration?

Uncertainties in contract drafting and specific asset requirements for new ideas.

What is taper integration?

A strategy where a firm is partially integrated but also relies on outside-market firms for some supplies or distribution.

What is a strategic alliance?

A voluntary arrangement between firms to share knowledge, resources, and capabilities for developing products or services.

What is the motivation for forming strategic alliances?

To strengthen competitive position, enter new markets, hedge against uncertainty, access critical complementary assets, learn new capabilities

What is the Smiley Curve?

A graphical representation showing the value added at different stages of the value chain, highlighting forward and backward integration.

What are the risks of vertical integration?

Increased costs, reduced quality, and reduced flexibility.

What is the value chain?

A set of discrete activities performed to design, build, sell, or distribute a product or service.

What are the primary activities in the automotive industry value chain?

Operations, outbound logistics, inbound logistics, marketing and sales, and after-sales service.

What are secondary activities in the value chain?

IT, HRM, R&D, Purchasing

What is the difference between full integration and strategic outsourcing?

Full integration involves internalizing all activities, while strategic outsourcing moves some activities outside the firm.

What were the initial goals of the Renault-Nissan strategic alliance in 1999?

To achieve growth, secure capital for survival, and improve competitive position.

Why did Renault and Nissan pursue a strategic alliance instead of an acquisition?

To share risks and costs while maintaining operational independence.

What were the ambitious goals set by Carlos Ghosn for Renault?

To restructure Renault, close plants, standardize parts, and centralize R&D to increase market speed.

What is meant by strategic fit in a partnership?

The degree of mutual dependence and compatibility between the partners to achieve alliance goals.

strategic fit of r/n

mutual dependence
- both dependent on each other to achieve goals (growth, economies of scale)
- N > R, but R didnt take advantage
complementarities
- geographies: R = europe, N = NA, asia
- eng experitse: R = D, N = G
- functional expertise: R = marketing, sourcing, N = efficient production
- resources: manuf centers for cross prod
cost syngergies
- R&D, purchasing, IT, platforms, CMF
- economies of learning at platform level

What is the significance of the Common Module Family (CMF) in the alliance?

It allows for building a wider spectrum of vehicles using fewer parts, reducing costs.

What was a key factor in the success of the Renault-Nissan strategic alliance?

Careful planning and prior cooperation before the alliance was formed.

What does the term 'co-opetition' refer to?

A strategy where competing firms collaborate in certain areas to achieve mutual benefits.

How does Japanese leadership style differ from French leadership style?

Japan: consensus-oriented, French: top-down with higher acceptance of power distance.

What cultural value is emphasized in France?

Caring for others and quality of life.

What cultural value is emphasized in Japan?

High loyalty to the team and high competition against other groups.

How did Nissan's market position change from 1999 to 2016?

Nissan moved from 8th to 6th place in terms of motor vehicles manufactured.

What are non-equity alliances based on?

Contracts between firms, such as supply agreements or licensing agreements.

What is a joint venture?

A standalone organization created and jointly owned by two or more parent companies.

What is the role of Renault-Nissan BV?

To develop the alliance strategy and manage alliance functions.

What is the Alliance Integrated Manufacturing System (AIMS)?

A system developed to share best practices in production among alliance partners.

What are tacit knowledge and its relevance in equity alliances?

Tacit knowledge is knowledge that cannot be codified, often shared through interaction in equity alliances.

How did Renault's output change compared to Nissan's from 1999 to 2016?

Renault increased output by 44%, while Nissan increased output by 126%.

What is the primary focus of equity alliances?

To share tacit knowledge and foster deeper collaboration.

motivations Renault

• growth to achieve scale (strengthen comp adv) 

• access intl markets (NA, Asia) (enter new markets) 

• learn from N for efficient production systems (learn new capabilities) 

motivations Nissan

• access to capital for firm survival

• restructuring assistance

• access intl markets (europe)

• learn from R (supplier selection, vehicle design)

R-N Joint Motivations

• shared risks & costs (R&D, platforms, prod dev)

• achieve economies of scale (purchasing, R&D, production, distribution)

• neutralise/block competitors

• stronger BP

IT synergies

RNIS for alliance info systems & database, cooperation on software & communication networks from alliance worldwide backbone 

R&D Synergies

CMF, shared platforms, investment to reduce CO2 emissions and introduce EV, eng expertise, new engines and gearboxes

Purchasing Synergies 

RNPO for joint purchasing and supplier selection, Actovaz-R-N for purchasing in Russia 

Inbound Logistics Synergies

global logistics strategy to reduce costs in shipping and warehousing, reduced customs duties (trade & customs team)

Operations Synergies

standardised production, AIMS for sharing best practices, cross prod to increase utilisation

Outbound Production Synergies 

geographic complementarities, new warehouse in australia, new ops in SA and Africa 

Marketing & Sales Synergies

shared marketing and PR, success in B2B fleet contracts bc of the efforts

Aftersales

cooperation in parts, distribution, and logistics, shared investment in connected vehicles

Cost Drivers 

economies of scale (R&D, prod, distribution, purchasing), economies of learning, experience curve effects (sharing best practices), prod design (CMFs, powertrains), capacity utilisation (cross production) 

Adding Mitsubishi

strategic fit: new knowledge (small cars, EVs), presence in Australia and asia (thailand etc), existing cooperation w nissan = additional synergies
cultural fit: previous cooperation = implies compataibility, but N & M direct competitors in japanese markets

alliance management capability

partner selection → alliance design & governance → post formation alliance management

partner selection

partner compatibility (R&N had strong strategic fit, complementarities)
partner commitment (R provided N with capital & Carlos Ghosn)

alliance design / governance 

equity alliance (mutual commitment & trust), focus on interorganisational trust (e.g. R didnt leverage BP) 

post formation alliance management

alliance governing board (RNBV)
international advisory board (global strategy)
cross-functional teams (implement renewal plans)
cross-company teams (implement alliance synergies)
alliance coordination bureau (plan board meetings)
alliance SVP/VP (oversee converged functions like purchasing)
relationship-specific assets (RNPO, RNIS), knowledge-sharing resources (AIMS), and interfirm trust