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					Strategic Alliances and
     Partnerships
  BM499 Strategic Management

        David J. Bryce

         October 1, 2002
                  Alliances-
            How far have we come?

   “If you think you can go it alone in today’s global
    economy, you are highly mistaken” (Jack Welch,
    CEO of GE)
   “Microsoft can’t make it alone, but together anything
    is possible.” (Bill Gates, Chairman of Microsoft)
   “Our approach is to develop long term relationships
    with companies that offer a unique advantage with
    General Motors. The Alliance Strategy is our major
    thrust.” (John F. Smith, Jr., Chairman & CE of
    General Motors)
        Corporate Evolution
           and Alliances

 Moving from Managing a
  Portfolio of Products...
 To Managing a Portfolio of
  Businesses...
 To Managing a Portfolio of
  Relationships
              Alliances Growing as a Source of Revenue
                        Alliances as a Percentage of Revenue for
                        Top 1,000 U.S. Public Corporations

                      30%

                      25%

                      20%

                      15%

                      10%

                       5%

                       0%
                                  1980         1985         1990           1995   1998

Source: Columbia University, European Trade Commission, Studies by BA&H,
AC.1983-1987, 1988-1993, 1994-1996, 1999
                         Growth in Mergers & Acquisitions
                                   vs. Alliances
14,000



12,000
                                                                                                                          M&A
                                                                                                                          Alliances
10,000



 8,000



 6,000



 4,000



 2,000



    0
                      1996                           1997                        1998                           1999   2000
                                                                      M&A Transactions      JV/Alliances
                                                            Strategic Alliances are More Important for Growth
                                                                                  -Forbes
 Source: Thomas Financial, reported in Forbes, May
 21, 2001, p. 27.
                             The Scope of Inter-firm
                                 Relationships
Contractual Agreements                                Equity Arrangements

Traditional      Nontraditional        No New Firm          Creation of Entity       Dissolution
Contracts        Contracts                                                           of Entity
 Arm’s-length       Joint Research      Minority        Nonsubsidiary JV               Mergers and
 Buy/Sell                               Equity          JVs           Subsidiaries     Acquisitions
 Contracts                              Investments                   of MNCs
 Franchising        Joint Product       Equity             Fifty-fifty
                    Development         Swaps             Joint Ventures
 Licensing          Long-term                             Unequal
                    Sourcing                              Equity
                    Agreements                            Joint
                                                          Ventures
 Cross-             Joint Manufacturing
 licensing
                    Joint Marketing
                    Shared                 Strategic Alliances
                    Distribution/
                    Service
                    Standard Setting/
                    Research Consortia
  Based on: Yoshino and Rangan, 1995
                   Strategic Alliances

   Benefits:                          Drawbacks:
       Speed (vs. acquisition or          Lack of control; must
        greenfield)                         share decision making
       Access to key                      Potential spillover of
        complementary assets                knowledge and
       Removal of potential                capabilities
        competitor                         Organizational clashes
       Maintain incentives for             may impede ability to
        partner management                  collaborate
              Mergers & Acquisitions

   Benefits:                         Drawbacks:
       Speed (vs. greenfield)            Cost of acquisition
       Full control over                  (premiums)
        complementary assets              Unnecessary adjunct
       Removal of potential               businesses
        competitor                        Organizational clashes
       Upgrade corporate                  may impede integration
        resources & capabilities          Major commitment
                                               M&A Returns-Acquiring Firms

                                     0.035
       Cumulative abnormal returns



                                      0.03
                                     0.025
                                      0.02
                                     0.015
                                                                                    Single Bidder
                                      0.01
                                                                                    Multiple Bidders
                                     0.005
                                         0
                                     -0.005   -15 -10 -5   0   5   10 15 20 25 30
                                      -0.01
                                     -0.015
                                                               Event day
Source: Bradley, Desai, & Kim, 1988
                                                       M&A Returns-Targets

                                0.5
 Cumulative abnormal returns




                               0.45
                                0.4
                               0.35
                                0.3
                                                                                            Single Bidder
                               0.25
                                                                                            Multiple Bidder
                                0.2
                               0.15
                                0.1
                               0.05
                                 0
                                      -15   -10   -5    0    5   10     15   20   25   30

Source: Bradley, Desai, & Kim, 1988                         Event day
    LEVERAGING THE RESOURCES OF PARTNERS


                              Toyota
                            Engineering
                         (7,000 Engineers)


                                                     Remaining 250
       Top 35                                        Tier I Suppliers
Affiliated Suppliers                                 (10-15,000 Engineers
(5-6,000 Engineers)




     Toyota can leverage its value creation resources by 5-15x
     by involving suppliers in the Extended Enterprise
Types of Costs that Vertical Alliances
      are Designed to Reduce

   Transaction costs
   Quality costs
   Product development costs
   Logistics costs (warehousing and
    transportation)
   Inventory costs
Three Key Sources of Inter-firm
    Competitive Advantage

  Dedicated                 Knowledge
    Asset                    - Sharing
 Investments                 Routines




               Inter-firm
                 Trust
       CREATING EFFECTIVE PARTNERSHIPS



   Build trust
   Create multiple functional interfaces
    to facilitate system learning
   Make dedicated/customized
    investments
                   BUILDING TRUST

   Formal Mechanisms such as long term contracts, stock
    ownership, collateral bonds, are often necessary to
    signal a credible long term commitment to a partner.
   Interorganizational Trust is often built on processes, not
    people. A partner is trustworthy if its
    interorganizational processes are understandable and
    predictable.
   Informal Mechanisms such as reputation, personal trust,
    relational norms, are key to creating value over the long
    term. Formal mechanisms alone do not produce
    information sharing which is critical to partnering
    success.
           THE VALUE OF TRUST


   Increases learning (greater
    information sharing)
   Increases customized investments
    (willingness to risk tailored
    investments)
   Increases speed to quickly respond
    to market changes
   Lowers transaction costs
                      THE COST OF MISTRUST
                      50%



                      40%    47%



                      30%
Percent of face-
to-face contact
time with suppliers                      28%
                      20%
                                                                21%
                                                         21%

                      10%



                      0%
                              GM          Ford      Chrysler   Toyota


                            Negotiating price/contract
                            Assigning blame for problems
       CREATING EFFECTIVE PARTNERSHIPS



   Build trust
   Create multiple interfaces to facilitate
    learning throughout the network
   Make dedicated/customized
    investments
                      Toyota’s Supplier - Customer Interface

           Surface Contact vs. Multiple-Point Contact
                           (Correct)

Top           R&D                                          R&D              Top
Execu-                                                                      Execu-
tives                                                                       tives

          Manufacturing                                   Manufacturing



         Quality Assurance                              Quality Assurance
         Quality Control                                Quality Control



             Purchasing                                        Sales


             Customer              Point Contact               Supplier
                                     (Wrong)
                 Effective Partnerships at P&G/Wal-Mart



Merchandising                              Sales

Forecasting                                Forecasting

Inventory Management                       Inventory Management

Warehousing                                Warehousing

Transportation                             Transportation

Systems                                    Systems

Marketing                                  Marketing

Accounting/Finance                         Accounting/Finance
       CREATING EFFECTIVE PARTNERSHIPS



   Build trust
   Create multiple functional interfaces
    to facilitate system learning
   Make dedicated/customized asset
    investments
         TYPES OF DEDICATED ASSETS


   Dedicated Site Investments (locating plants
    in close proximity to economize on
    inventory, transportation, coordination
    costs).
   Dedicated Physical/Process Investments
    (making relation-specific capital
    investments in machinery, tools,
    processes)
   Dedicated Human Investments (dedicating
    personnel to develop relation-specific
    know-how and improve communication/
    coordination)
                         Toyota Plant Configuration in Japan*




                                              Motamachi, TC
                                                                      Honsha, TC
                                                            3 miles


                                                                             1 mile
Tahara, Nagoya
                                                                                           Headquarters &
                                                                                           Technical Center

                                Takaoka, TC           Tsutsumi, TC
                                                                          6 miles


                                            3 miles

     Affiliated Supplier Plants                                  Independent Supplier Plants
      • Avg. distance of 30 miles                                  • Avg. distance of 87 miles
      • 43.5 weekly deliveries                                     • 40.5 weekly deliveries
      • 10,635 man days of face-to-face contact                    • 3,764 mandays of face-to-
                                                                     face contact
       • 12.5 guest engineers
                                                                   • 2.6 guest engineers

* 1992 All plants are in Toyota City (TC) or Nagoya
                              GM Plant Configuration in the United States*



                                                                     Flint, MI
                                      51 miles
                                                                 55 miles
                Lansing, MI                                                 Hamtramck, MI
                                                                                                                      North
                                                                                  650 miles                       Tarrytown, NY
          2400 miles
Fremont, CA                                     Ypsilanti, MI                                        200 miles
  (Nummi)
                                                                                                                           Linden, NJ
               Internal Supplier Plants          External Supplier Plants
               • Avg. distance of 350 miles        •Avg. distance of 427 miles
                                                   •7.5 Weekly deliveries                  Lordstown, OH
           387 miles                               •1,107 man days of face-to-
                                                    face contact
                                                   •.17 guest engineers                                                    Wilmington,
             Van Nuys, CA
                                                                                                                               DE
                                                                                           Bowling Green,
                                                                                                KY
                                                                                                            900 miles
                              Kansas City, KS        Wentzville, MO

                 1400 miles                                                                     Spring Hill, TN
                                                                               455 miles

* 1991Passenger car plants only                                 Arlington, TX
  (Mileage from 1990 Rand McNally Road Atlas)
                                           The Relationship Between Plant Distance and
                                                   Automaker Inventory Costs
Total Inventory as a Percentage of Sales




                                            0.12

                                                                                                        Chrysler
                                             0.1
                                                                                                GM     Ford
                                            0.08

                                            0.06            Nissan


                                            0.04
                                                       Toyota
                                            0.02

                                              0
                                                   0        100        200        300        400         500        600

                                                         Average Distance Between Supplier and Automaker Plants (In Miles)
               Horizontal Alliances

   Benefits
     Facilitates access to technologies or customers,
      especially when these needs may be only temporary
     Provides opportunities to rapidly reach scale in
      needed capabilities
     Supplies opportunities for learning that can be put to
      later use
               Horizontal Alliances

   Drawbacks
     May transfer technologies or know-how that turns a
      partner into a competitor
     The capabilities of a partner may come to substitute
      for important strategic capabilities that the firm
      should actively nurture internally
     Alliances are sometimes difficult to focus and/or
      they outlive their usefulness before they’re
      disbanded, leading to needless consumption of
      resources

				
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