Strategic Alliances

K. Praveen Parboteeah
Objectives

What is a strategic alliance?

Why do companies form strategic
alliances?

What are some guidelines for
successful strategic alliances?

Why do strategic alliances fail?

Learning from strategic alliances

Other crucial issues
Case Study: Daewoo and GM

Formed an alliance in 1984 to
manufacture small cars in South Korea

Both invested $100m in a 50/50 JV

Day-to-day management left to South
Koreans

Both sides saw the JV very positively –
 GM doubted that they could manufacture a
small car for cheaper in the US
 Daewoo was getting access to engineering
skills of GM and US market
Evolution of Events

1987 – South Korea had become a
democracy – workers were asking for
wage increases
 Frequent halt in the LeMans production
 Daewoo responded by doubling wages
 Suddenly cheaper to build Opels LeMans in
Germany
 Problems with quality

GM was very frustrated with Daewoo
Other Events

Daewoo was however equally frustrated
with GM
 Daewoo Group Chairman Mr. Kim complained
that he was treated shabbily and that GM
execs were arrogant
 GM did not allow Daewoo to expand their
market in the US or Eastern Europe
 Did not want to allow Daewoo to double
capacity

Alliance was dissolved and Daewoo
bought GM’s interest in 1992

In 2002, GM bought Daewoo
Strategic Alliances

Strategic alliances – partnerships
between two or more firms for the
attainment of mutually defined
goals

Stability and risk
 Failure rate of 30 to 60 percent
 Even profitable alliances can be torn by
conflict
Motivation: Why Strategic
Alliances?

To gain access to specific markets
 Ex – Chrysler and Benz – to gain access to EU
where regulations favor local companies
 Strategic alliances with Eastern European
companies

To increase market share

To avoid import barriers, licensing
requirements, and other protectionist
legislation
 GM-Toyota venture – to avoid import quotas
Why Strategic Alliances?

Often represents the only legal way
to do business in a country

Many governments mandate that
foreign investors can operate within
their borders only in combination
with local equity with management
authority

Ex: China, Mexico, Brazil, India,
Indonesia, and Saudi Arabia
Benefits

To share the cost and risks of R&D
 Ex: semiconductor industry – each new
generation of memory chips cost $1b – Intel &
Samsung (DRAM tech development); Sun
Microsystems with Fujitsu, TI, & Phillips

To reduce political risks while making
inroads in a new market
 Ex: Maytag and JV with RSD, a Chinese
appliance manufacturer – Maytag stayed on
the right side of the Chinese government

To gain access to economies of scale and
synergy
 Ex: MCI-World Com, Cable Industry, HP-
Compaq
What To Expect?

Collaboration is another form of
competition

Harmonious relationship is only
one form of success

Cooperation has limits

The goal is to learn from partners

Strategic alliances have important
implications for the firm’s overall
strategy
Guidelines for Successful Alliances

Choose the right partner – MOST

IMPORTANT
 Strategic/objectives
complementarity
 Skill/strengths complementarity
 compatible management styles
 Commensurate risks
Issues to Consider

The level of mutual dependency

The "anchor" partner

The "elephant and the ant" complex

Operating policy differences

Difficulties of cross-cultural
communication
Other Guidelines

Seek alliances where
complementary skills, products and
markets will result

Work out a plan how to deal with
proprietary technology and
competitively sensitive information
 “Pre-nuptial” agreement

Recognize that alliances last only a
few years
Partner Selection Criteria:
Comparison of Korean and U.S
Executives

Korean Executives American Executives

1. Technical capabilities 1. Financial assets

2. Industry 2. Managerial capabilities

attractiveness
3. Special skills we can 3. Capability to provide
learn from partner quality products/services
4. Willingness to share 4. Complementarity of
expertise capabilities
5. Capability to provide 5. Unique competencies
quality products
Volvo & Renault alliance in 1990-
Failure

Culture/language – Anglo-Saxon/English;
Latin/French

Ownership – Public/Government owned

Size – Small/niche player, heavy in
trucks; Large and broad, weak in heavy
trucks

Core competencies – Safety, Styling

Management Structure –
Decentralized/informal, Centralized/formal
flow of information
Other Reasons Why Alliances Fail

JV develops its own identity –

difficult problems of
integration/coordination

Lack of clarity regarding
responsibilities

Corporate amnesia because of
turnover of expatriates

No plan if the venture ends
Other Success Issues: The Alliance
Structure

Dominant Parent
 One parent controls strategic and
operational decision making
 dominant parent often has majority
ownership

Shared management
 Both parents contribute
approximately the same number of
managers to the board of directors,
the top management team, and
functional area management
The Strategic Alliance Structure

Split control - Partners usually share
strategic decision making and split
functional decision making

Independent management
 IJV managers act like managers from a
separate company
 IJVs often recruit managers from outside the
parent companies

Rotating management
 Key positions rotate among partners
 popular in developing countries
 trains management talent and transfers
expertise
If The Alliance Does Not
Work

Negotiate an end or improve
implementation

Know when to quit/invest more

Avoid “escalation of commitment”

Plan end - “prenuptial agreements”

Death not always failure
Considerations for the end of the
alliance

Importance of the joint venture

Pricing the venture – how to
determine the value of the venture
and how to reallocate resources

Transferring resources – have
systems in place to transfer funds,
physical assets, personnel etc.

Creating and sharing value
Successful Lessons from GE

Careful planning and execution – from
every stage starting with negotiations to
implementation, both partners plan and
are committed

Assignment of key personnel –

Adopt an evolutionary perspective – start
on a small scale (e.g., distribution
agreement) and progressively grow in
other areas
Other Key Lessons

Need to try to learn from partners

Research has shown that Japanese
companies have benefited greatly
from strategic alliances with US
companies
 Ex: GM and Toyota
 Toyota has learned a lot from the
alliance
 GM more reluctant to apply learning
Conclusion

The importance of international
strategic alliances

Most important decision: picking
the right partner

No set structure in ownership,
decision making control, or
management control

Have to work very hard to make it
work