KD

Chapter 10 - Strategic Alliances

Strategic Management Process

  • Mission: Define the core purpose of the organization.

  • Objectives: Set specific, measurable goals to achieve the mission.

  • External Analysis: Examine external environment for opportunities and threats.

  • Internal Analysis: Evaluate internal resources, capabilities, and competencies.

  • Strategic Choice: Identify and choose appropriate strategies.

  • Strategy Implementation: Execute chosen strategies effectively.

  • Competitive Advantage: Differentiate from competitors in a meaningful way.

  • Corporate Level Strategy: Determine which businesses to enter or exit.

    • Vertical Integration: Control over more than one stage of production.

    • Diversification: Expand into new markets or products.

    • Strategic Alliances: Collaborate with external partners.

    • Mode of Entry: Different methods to enter new markets.

Definition of Strategic Alliances

  • Strategic Alliance: A cooperative arrangement between two or more independent organizations for the development, manufacturing, or selling of products or services.

Motivation for Alliances

  • Purpose: Create economic value by:

    • Accessing complementary resources and capabilities.

    • Leveraging existing resources and capabilities.

  • Implication: Select partners that have strengths different from your own to enhance value creation.

Types of Alliances

  1. Non-equity Alliance Contracts

    • Includes licensing, supply, and distribution agreements.

  2. Joint Ventures

    • Creation of a new independent firm by two or more partners.

  3. Equity Alliance

    • Partners own stakes in each other through cross-equity holdings.

How Strategic Alliances Create Value

Key Mechanisms

  1. Improve Current Operations

    • Exploit economies of scale, share risks and costs, learn from partners.

  2. Shape the Competitive Environment

    • Facilitate the establishment of technology standards and tacit collusion to avoid competitive market battles.

  3. Facilitating Entry and Exit

    • Provide low-cost entry into new industries and geographic markets; allow easier exit strategies.

Challenges to Value Creation and Allocation

Potential Issues

  • Incentives to Misappropriate Value: Challenges in monitoring contributions and outputs of partners.

  • Value Appropriation: Difficulty in assigning value created among partners.

Forms of Value Misappropriation

  • Adverse Selection: Partners misrepresent value.

  • Moral Hazard: Providing lower-quality inputs than promised.

  • Holdup Problem: Exploiting transaction-specific investments of partners.

Sustained Competitive Advantage

Evaluating Rarity and Imitability

  • Rarity: Strategic alliances themselves are not rare; however, the specific complementary resources may be.

  • Costly to Imitate: Resource combinations in successful alliances may be challenging to replicate, especially if complex social factors are involved.

Substitutability of Alliances

  • Alternatives to alliances include internal development and mergers.

    • Strong justification needed for each method based on specific conditions and uncertainties.

Governance Responses to Challenges

Mechanisms

  1. Explicit Contracts & Legal Sanctions: Structure agreements to outline penalties for non-compliance.

  2. Joint Ventures: Create shared ownership to align interests.

  3. Trust and Reputation: Leverage informal governance to promote cooperative behavior.

Summary and Key Takeaways

  • Successful Alliances: Should aim to maximize gains from complementary resources while minimizing risks of cheating.

  • Implementation Strategies: Prioritize value creation and address allocation challenges with appropriate governance measures.

  • Competitive Advantage: Alliances must meet VRIO criteria (Value, Rarity, Imitability, Organization) to effectively generate competitive advantages.