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International Strategic Alliances: Design and Management

Learn the steps for implementing successful international strategic alliances and understand how to link value chains. Explore the importance of choosing the right partners and assessing alliance performance.

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International Strategic Alliances: Design and Management

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  1. 8 International Strategic Alliances: Design and Management

  2. Learning Objectives • Know the steps for implementation of successful international strategic alliances • Understand how to link value chains in international strategic alliances • Understand the importance of choosing the right partners for alliances • Know the important characteristics to look for in potential alliance partners

  3. Learning Objectives • Know the differences between equity-based international joint ventures and other types of international cooperative alliances • Know the basic components of an international strategic alliance contract • Understand the control systems and management structures used in alliance organization

  4. Learning Objectives • Appreciate the unique problems in human resource management • Realize the importance of interfirm commitment and trust • Understand how companies assess the performance of their international strategic alliances • Know when companies should continue or dissolve their international strategic alliances

  5. Strategic Alliances Issues • Increasingly 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% • Even profitable alliances can be torn by conflict

  6. Exhibit 8.1: Implementing a Strategic-Alliance Strategy

  7. Where to Link in the Value Chain • Alliance combining same value-chain activities are to gain efficiencies, merge talents, or share risks • Upstream/downstream alliances serve the objective of low-cost supply/manufacturing • Operations/marketing alliances provide access to markets • Depends on the objective that the firm seeks to achieve

  8. Exhibit 8.2: Linking Value Chains in Strategic Alliances: Some Examples

  9. Exhibit 8.3: The Mixture of Value-Chain Links

  10. Choosing a Partner: The Most Important Choice? • Key criteria for picking an appropriate alliance partner • Seek strategic complementarity • Understand objectives and seek complementarity • Pick a partner with complementary skills • One that enhances but does not necessarily duplicate an alliance partner’s skills

  11. Criteria for Choosing Partners • Seek out companies with compatible management styles • Seek a partner that will provide the “right” level of mutual dependency • Avoid the “anchor” partner • Anchor partner: a partner that holds back the strategic alliance because it cannot or will not provide its share of the funding

  12. Criteria for Choosing Partners (cont.) • Be cautious of the “elephant-and-ant” complex • Occurs when two companies are greatly unequal in size • Assess operating-policy differences with potential partners • Assess the difficulty of cross-cultural communication with a likely partner

  13. Exhibit 8.4: International Strategic Alliances for Small Multinational Companies

  14. Exhibit 8.4: International Strategic Alliances for Small Multinational Companies

  15. Choosing an Alliance Type • Three main types of strategic alliances • Informal international cooperative alliances • Formal international cooperative alliances • International joint venture

  16. 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

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

  18. 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

  19. Exhibit 8.5: Types of Alliances

  20. Negotiating the Agreement • IJV negotiation issues • equity contributions • management structure • “prenuptial” agreements

  21. Exhibit 8.6: Selected Questions for a Strategic-Alliance Agreement

  22. 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 • IJV—Parent companies set up separate legal entity

  23. Decision-making Control • Majority ownership does not necessarily control • Operational decisions • Strategic decisions • In IJVs, strategic decision making takes place at the level of IJV’s board of directors or top management.

  24. Management Structures • Dominant parent: controls or dominates strategic 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

  25. Management Structures • Split control management control: partners usually share strategic decision making and split functional decision making • Independent management structure: alliance managers act more like managers from a separate company • IJVs often recruit managers from outside the parent companies

  26. Management Structures • Rotating management: key positions rotate among partners • Popular in developing countries • Trains management talent and transfers expertise

  27. Choosing a Strategic Alliance Management Structure • If partners have similar technologies or know-how and contribute equally • Shared management structure preferred • If partners have different technologies but contribute equally • Split management structure preferred • If one partner has dominant equity position • Dominant management structure more likely

  28. Human Resource Management in Strategic Alliances • HRM functions include recruiting and staffing for 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

  29. Critical HRM Problems and Issues • HRM planning: Employees need to know 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

  30. Critical HRM Problems and Issues • Staffing the alliance workforce • Assigning managers strategic or operations tasks • Performance assessment—needed for retention, promotion and salary decisions • Loyalty—managers may often feel dual loyalty • To parent and to alliance

  31. Critical HRM Problems and Issues • Career development—must provide clear information on how alliance assignments fit within careers • Cultural differences • Training

  32. Exhibit 8.7: HRM Issues in Strategic Alliances

  33. Exhibit 8.7: HRM Issues in Strategic Alliances

  34. Commitment and Trust • Commitment: putting forth extra effort to make the venture work • Attitudinal commitment: willingness to dedicate resources and efforts and face risks to make the alliance work • If partners demonstrate these aspects of commitment, alliance will develop based on fair exchange. • Occurs when partners believe that they receive benefits from the relationship equal to their contributions

  35. Calculative Commitment • Commitment also has a practical side: calculative commitment • Alliance partner evaluations, expectations, and concerns regarding potential rewards from the relationship • Businesses require tangible outcomes for a relationship to continue

  36. Trust • Commitment and trust go hand in hand • Credibility trust: confidence that the partner has the intent and ability to meet promised obligations and commitments • Benevolent trust: confidence that the partner will behave with goodwill and with fair exchange

  37. Exhibit 8.8: The Trust/Commitment Cycle

  38. Why Is Trust Important? • When there is no trust, partners hold back or take advantage of each other. • Formal contracts can never identify all issues that will arise • Technology and knowledge also include tacit elements that can only be learned through trust.

  39. Building and Sustaining Trust and Commitment • Pick your partner carefully • Know each side’s strategic goals • Seek win-win situations • Go slowly • Invest in cross-cultural training • Invest in direct communication • Find the right levels of trust and commitment

  40. Exhibit 8.9: The “Right” Levels of Trust and Commitment

  41. Assessing the Performance of an International Strategic Alliance • If strategic intent is to produce immediate results, standard financial and efficiency measures can be used. • Other strategic alliance provide indirect strategic benefits. • IJV and ICA performance criteria: often must include criteria other than financial, such as organizational learning.

  42. Exhibit 8.10: Selected Performance Criteria for Strategic Alliance

  43. Exhibit 8.10: Selected Performance Criteria for Strategic Alliance

  44. 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 end—“prenuptial agreements” • Death not always failure

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