International Strategic Alliances: Design and Management

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• International Strategic Alliances Design and
  Management

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Strategic Alliances Issues

• Popular strategy to develop new product and to
  expand into new markets
• However, strategic alliances are very risky and
  unstable
• Failure rate of 30 to 60

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Where to Link in the Value Chain

• Alliance combining same value-chain activities
  are to gain efficiencies, merge talents, or share
  risks
• In operations alliances MNC combine manufacturing
  activities to reach economies of scale
• Operations/marketing alliances provide access to
  markets

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Choosing a Partner The Most Important Choice?

• A key criteria is strategic complementarity
• Pick a partner with complementary skills that
  enhances but does not necessarily duplicate an
  alliance partners skills
• Seek out compatible management styles
• Seek a partner that will provide the right
  level of mutual dependency

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Criteria for Choosing Partners

• Avoid the anchor partner one that holds back
  the strategic alliance because it cannot or will
  not provide its share of the funding
• Be cautious of the elephant-and-ant complex
  that occurs when two companies are greatly
  unequal in size
• Assess operating-policy differences with
  potential partners
• Assess the difficulty of cross-cultural
  communication

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Choosing an Alliance Type

• Three main types of strategic alliances
• Informal international cooperative alliances
• Formal international cooperative alliances
• International joint venture

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1. Informal International Cooperative Alliance

• Non-legally binding agreements between companies
  from two or more countries
• Agreements of any kind
• Provide links anywhere on their value chains
• Limited involvement between companies

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2. Formal Cooperative Alliances

• Higher degree of involvement than informal
  alliances
• Formal contract
• Popular in high tech industries because of high
  costs and risks

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3. International Joint Ventures (IJV)

• Separate legal entity owned by two or more parent
  companies from different countries
• No need for equal ownership
• Equity based on cash or other contributions
• Ex. One partner brings technology while other
  partner brings financial contributions

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Negotiating the Agreement

• The formal agreement is not as important as the
  ability of managers to get along
• IJV negotiation issues
• equity contributions
• management structure
• prenuptial agreements

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Organizational Design in Strategic Alliances

• Depends on the type of alliance chosen
• Informal ICAs often have no formal design issues
• Formal ICAs may require separate organization
  unit housed in one company
• IJVParent companies set up separate legal entity

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Decision-making Control

• Two areas need to be considered
• Operational decisions (focus on day to day
  running)
• Strategic decisions (focus on long term survival)
• Majority ownership does not necessarily control
• In IJVs, strategic decision making takes place at
  the level of IJVs board of directors or top
  management.

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Management Structures

• Dominant parent controls or dominates strategic
  and operating decision making
• Often has majority ownership
• Treats the IJV as wholly owned subsidiary
• Shared management both parent companies
  contribute approximately the same number of
  managers to the alliance organization
• Split control management control partners
  usually share strategic decision making but split
  functional decision making

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Management Structures (Cont.)

• Independent management structure alliance
  managers act more 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
• Serves to train management talent and transfer
  expertise to developing country

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Choosing a Strategic Alliance Management Structure

• If one partner has dominant equity position then
• Dominant management structure more likely
• If partners have similar technologies or know-how
  and contribute equally then
• Shared management structure preferred
• If partners have different technologies but
  contribute equally then
• Split management structure preferred

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Human Resource Management in Strategic Alliances

• HRM functions include recruiting and staffing for
  all alliance positions
• The HRM functions of an IJV are more complex
• Managers (and sometimes workers) come from two or
  more firms or from two or more cultures

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Critical HRM Problems and Issues

• HRM planning Must communicate to all employees
  the strategic intent of alliance.
• Parent involvement As alliances get older and
  larger, they tend to develop their own HRM
  practices.
• Staffing the alliance management and technical
  personnel Crucial and risky decision. Must not
  unload unwanted managers to alliance.
• Staffing the alliance workforce Assess local
  labor supply
• Performance assessment Needed for retention,
  promotion and salary decisions. Avoid adopting
  the system of one partner.
• Loyalty Managers may often feel dual loyalty to
  parent and to alliance
• Career development Must provide clear
  information on how alliance assignments fit
  within careers. Career ladder must exist within
  the IJV
• Cultural differences
• Training

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Commitment and Trust

• Commitment and trust go hand in hand
• Commitment putting forth extra effort to make
  the venture work and taking care of each other
• Facets of commitment
• Attitudinal commitment willingness to dedicate
  resources and efforts and face risks to make the
  alliance work
• Calculative commitment the practical side
  related to the alliance partner evaluations,
  expectations, and concerns regarding potential
  rewards from the relationship

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Commitment and Trust

• Trust The confidence that the partner will
  deliver on the expected contributions to the
  alliance
• Two types
• Credibility trust confidence that the partner
  has the intent and ability to meet promised
  obligations and contributions to the alliance
• Benevolent trust confidence that the partner
  will behave with goodwill and with fair exchange

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Why Is Trust Important?

• When there is no trust, partners hold back or
  take advantage of each other (Opportunistic
  Behavior).
• Formal contracts can never identify all issues
  that will arise
• Technology and knowledge also include tacit
  elements that can only be learned through trust.

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Building and Sustaining Trust and Commitment

• Pick your partner carefully
• Know each sides strategic goals
• Seek win-win situations. Maintain a balance in
  which side gains from the alliance
• Go slowly problems will arise and take time to
  work out.
• Invest in cross-cultural training
• Invest in direct communication
• Find the right levels of trust and commitment

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Assessing the Performance of an International
Strategic Alliance

• If strategic intent is to produce immediate
  results, standard financial and efficiency
  measures can be used. (e.g., profit center)
• Some alliances provide indirect strategic
  benefits.
• IJV and ICA performance criteria
• Often must include criteria other than financial,
  such as organizational learning.

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If the Alliance Does Not Work

• Negotiate an end or improve implementation
• Know when to quit / invest more
• Avoid escalation of commitment
• Companies continue in an alliance longer than
  necessary because of financial and emotional
  investments.
• Plan endprenuptial agreements
• Death not always failure. Some alliance are
  suppose to be short term

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CONCLUSION

• Alliances are important and will continue to grow
• Key is to pick the right partner
• Partners negotiate the structure that support
  their strategic intent
• There must be agreement to HRM practices
• Trust and commitment are basic foundations for
  successful alliances
• Alliance performance is difficult to determine
• Usually learning and market penetration can be
  used as performance measures