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 governance choices in the context of vertical integration?

Decisions firms make regarding whether to 'make or buy' in managing economic exchanges.

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 role of asset specificity in vertical integration?

It indicates the need for firms to create unique components or machines that are not available in the market.

What is the significance of Tesla's vertical integration?

Tesla's internal manufacturing capabilities make it difficult for competitors to replicate its products.

How does vertical integration affect competitive advantage?

It can create relational competitive advantages by embedding critical resources in strategic alliances.

What is the value chain?

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

What is the relationship between vertical integration and innovation?

Vertical integration can lead to more innovative products by reducing reliance on external suppliers.

What is the impact of legacy components on vertical integration?

Legacy components can limit innovation and necessitate the development of new parts by the firm.

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

How do strategic alliances contribute to competitive advantage?

By allowing firms to share resources and capabilities that span firm boundaries.

What is the role of detailed contracting in vertical integration?

It is often needed to mitigate risks associated with complex transactions.

What is the relationship between vertical integration and market governance?

Vertical integration can reduce reliance on market governance by internalizing transactions.

What is the significance of the Disney Theme Park example?

It illustrates how strategic alliances can be structured to share revenues and risks.

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 is the competitive forces framework (Porter) in relation to vertical integration?

It analyzes how vertical integration can influence competitive dynamics in an industry.

What is the importance of human capital in vertical integration?

Investments in human capital can enhance a firm's ability to innovate and maintain competitive advantages.

What is a hedge against uncertainty in business?

A strategy that involves making investments to mitigate risks associated with uncertain market conditions.

How did Walt Disney use a hedge against uncertainty?

Disney's investment in Hulu served as a hedge against declining cable subscriptions.

What is a motivation for forming strategic alliances?

Access to critical complementary assets such as marketing, distribution, or manufacturing.

What was the significance of Tesla's partnership with Toyota?

It provided Tesla access to a large-scale, high-quality manufacturing plant (NUMMI) in California.

What was the purpose of the joint venture between General Motors and Toyota?

To learn new capabilities and engage in co-opetition through the NUMMI partnership.

What does a real options approach to decision-making involve?

Breaking down a larger investment decision into smaller, sequential decisions based on revealed information.

How is the real options approach applied in the pharmaceutical industry?

Major pharmaceutical companies form alliances with biotech start-ups and invest further when drugs are successfully introduced.

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.

What are some complementary resources between Renault and Nissan?

Complementary geographies, manufacturing capabilities, and engineering expertise.

What is synergy potential in the context of strategic alliances?

The potential for partners to achieve greater efficiencies and benefits through collaboration in areas like purchasing and R&D.

What is the role of the Renault-Nissan Purchasing Organization (RNPO)?

To facilitate joint purchasing and supplier selection to reduce costs.

How did Renault and Nissan cooperate in R&D?

By sharing platforms and developing common engines and gearboxes to reduce costs.

What benefits did the Renault-Nissan alliance leverage along the value chain?

Economies of scale, learning, experience curve effects, and improved capacity utilization.

What was a key benefit of the cooperation in operations between Renault and Nissan?

Standardization of production processes, leading to increased productivity.

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 major focus of the Renault-Nissan alliance in terms of market strategy?

Integration of marketing and public relations to enhance B2B sales efforts.

What was one of the cultural challenges faced by Renault and Nissan?

Differences in corporate culture that affected cooperation in Human Resources.

What was the impact of the Renault-Nissan alliance on global logistics?

Development of global logistics strategies that reduced shipping and warehousing costs.

What is the role of IT infrastructure in the Renault-Nissan alliance?

To maintain alliance information systems and databases for effective cooperation.

How did the Renault-Nissan alliance address environmental concerns?

Through R&D collaboration aimed at reducing CO2 emissions and developing electric vehicles (EVs).

What was the overall assessment of the strategic fit between Renault and Nissan?

Very strong, due to mutual dependence and complementary resources.

What were the shared risks and costs in the Renault-Nissan alliance?

Shared R&D investments, product development, and platform sharing.

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.

What is capacity utilization in the context of strategic alliances?

It refers to reducing excess capacity and increasing capacity utilization by using cross-production.

What strategy helps alliance partners overcome local and regional market fluctuations?

The strategy of complementarities.

What are the main dimensions of national culture according to Hofstede's 6-D model?

Individualism, masculinity, and long-term orientation.

How does Japanese leadership style differ from French leadership style?

Japanese leadership is consensus-oriented, while French leadership is more 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.

What is the overall assessment of the strategic fit between Nissan and Renault?

Generally good strategic fit due to shared industry understanding and complementary expertise.

What were the expected synergies for Nissan and Mitsubishi in 2018?

466 million euros.

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 was Renault's revenue growth percentage from 1999 to 2018?

3.34%.

What was Nissan's net income in 2004?

$7.18 billion.

What is the purpose of the Alliance Radar as proposed by Shipilov?

To integrate the logic of the value chain with alliance thinking and visualize all alliances.

What are non-equity alliances based on?

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

What is an example of an equity alliance?

Toyota's $50 million equity investment in Tesla to learn about electric vehicles.

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 does cross-shareholding in alliances generate?

Mutual interest and commitment to the success of the alliance.

What is a key aspect of post-formation alliance management?

Having a dedicated alliance governance board to discuss mid-term plans and investments.

What is the Alliance Integrated Manufacturing System (AIMS)?

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

What factors can undermine inter-firm trust in alliances?

Plans to merge that do not respect differences between partners.

What is the significance of relationship-specific investments in alliances?

They enhance commitment and cooperation between 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.

What is the expected value of synergies for Nissan by 2020?

10 billion euros.

What was the net income of Renault in 2004?

$4.34 billion.

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.

What is the role of cross-functional teams in alliance management?

To implement renewal plans and focus on achieving alliance synergies.

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