Strategic Alliances and Partnerships

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Strategic Alliances and Partnerships

• BM499 Strategic Management
• David J. Bryce

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

• If you think you can go it alone in todays
  global economy, you are highly mistaken (Jack
  Welch, CEO of GE)
• Microsoft cant 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)

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Corporate Evolutionand Alliances

• Moving from Managing a Portfolio of Products...
• To Managing a Portfolio of Businesses...
• To Managing a Portfolio of Relationships

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Alliances Growing as a Source of Revenue
Alliances as a Percentage of Revenue for Top
1,000 U.S. Public Corporations
Source Columbia University, European Trade
Commission, Studies by BAH, AC.1983-1987,
1988-1993, 1994-1996, 1999
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Growth in Mergers Acquisitionsvs. Alliances
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The Scope of Inter-firm Relationships
Contractual Agreements Equity
Arrangements Traditional Nontraditional No New
Firm Creation of Entity Dissolution Contr
acts Contracts of Entity Arms-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
Distribution/ Service Standard
Setting/ Research Consortia
Strategic Alliances
Based on Yoshino and Rangan, 1995
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Strategic Alliances

• Benefits
• Speed (vs. acquisition or greenfield)
• Access to key complementary assets
• Removal of potential competitor
• Maintain incentives for partner management

• Drawbacks
• Lack of control must share decision making
• Potential spillover of knowledge and capabilities
• Organizational clashes may impede ability to
  collaborate

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Mergers Acquisitions

• Benefits
• Speed (vs. greenfield)
• Full control over complementary assets
• Removal of potential competitor
• Upgrade corporate resources capabilities

• Drawbacks
• Cost of acquisition (premiums)
• Unnecessary adjunct businesses
• Organizational clashes may impede integration
• Major commitment

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MA Returns-Acquiring Firms
Source Bradley, Desai, Kim, 1988
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MA Returns-Targets
Source Bradley, Desai, Kim, 1988
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LEVERAGING THE RESOURCES OF PARTNERS
Remaining 250 Tier I Suppliers (10-15,000
Engineers
Top 35 Affiliated Suppliers (5-6,000 Engineers)
Toyota can leverage its value creation resources
by 5-15x by involving suppliers in the Extended
Enterprise
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Types of Costs that Vertical Alliances are
Designed to Reduce

• Transaction costs
• Quality costs
• Product development costs
• Logistics costs (warehousing and transportation)
• Inventory costs

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Three Key Sources of Inter-firm Competitive
Advantage
Dedicated Asset Investments
Knowledge- Sharing Routines
Inter-firm Trust
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CREATING EFFECTIVE PARTNERSHIPS

• Build trust
• Create multiple functional interfaces to
  facilitate system learning
• Make dedicated/customized investments

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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.

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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

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THE COST OF MISTRUST
47
Percent of face- to-face contact time with
suppliers
28
21
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Negotiating price/contract Assigning blame
for problems
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CREATING EFFECTIVE PARTNERSHIPS

• Build trust
• Create multiple interfaces to facilitate learning
  throughout the network
• Make dedicated/customized investments

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Toyotas Supplier - Customer Interface
Surface Contact vs. Multiple-Point
Contact (Correct)
Top Execu- tives
R D
R D
Top Execu- tives
Manufacturing
Manufacturing
Quality Assurance Quality Control
Quality Assurance Quality Control
Sales
Purchasing
Point Contact (Wrong)
Customer
Supplier
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Effective Partnerships at PG/Wal-Mart
Merchandising
Sales
Forecasting
Forecasting
Inventory Management
Inventory Management
Warehousing
Warehousing
Transportation
Transportation
Systems
Systems
Marketing
Marketing
Accounting/Finance
Accounting/Finance
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CREATING EFFECTIVE PARTNERSHIPS

• Build trust
• Create multiple functional interfaces to
  facilitate system learning
• Make dedicated/customized asset investments

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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)

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Toyota Plant Configuration in Japan
Motamachi, TC
Honsha, TC
3 miles
30 miles
1 mile
Tahara, Nagoya
Headquarters Technical Center
Tsutsumi, TC
Takaoka, TC
6 miles
28 miles
3 miles

• Affiliated Supplier Plants
• Avg. distance of 30 miles
• 43.5 weekly deliveries
• 10,635 man days of face-to-face contact
• 12.5 guest engineers
• 1992 All plants are in Toyota City (TC) or
  Nagoya

• Independent Supplier Plants
• Avg. distance of 87 miles
• 40.5 weekly deliveries
• 3,764 mandays of face-to-
  face contact
• 2.6 guest engineers

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GM Plant Configuration in the United States
Flint, MI
51 miles
55 miles
Lansing, MI
Hamtramck, MI
North Tarrytown, NY
85 miles
650 miles
2400 miles
Ypsilanti, MI
200 miles
Fremont, CA (Nummi)
Linden, NJ

• Internal Supplier Plants
• Avg. distance of 350 miles

• External Supplier Plants
• Avg. distance of 427 miles
• 7.5 Weekly deliveries
• 1,107 man days of face-to-face contact
• .17 guest engineers

Lordstown, OH
387 miles
Wilmington, DE
Van Nuys, CA
Bowling Green, KY
900 miles
Wentzville, MO
Kansas City, KS
Spring Hill, TN
1400 miles
455 miles
Arlington, TX
1991Passenger car plants only (Mileage from
1990 Rand McNally Road Atlas)
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The Relationship Between Plant Distance and
Automaker Inventory Costs
Chrysler
Ford
GM
Total Inventory as a Percentage of Sales
Nissan
Toyota
Average Distance Between Supplier and Automaker
Plants (In Miles)
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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

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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 theyre
  disbanded, leading to needless consumption of
  resources