Innovation networks and
alliance management
Lecture 5
Business alliances
1
Today
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A recap
What are alliances?
Alliance goals
Alliance failure
Key areas in alliance management
Alliance capabilities
The Toyota supplier network
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Course design

1.
2.
3.
4.
5.
Aim: knowledge about concepts in network theory, and
being able to apply them, in particular in a context of
innovation and alliances
Network theory and background
Business alliances as one example of network strategy
Assignment 1: analyzing an alliance network
Assignment 2: analyzing an alliance strategy
Final exam: content of lectures and slides plus literature
online
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Course design (detail)
1. Network theory and background
Introduction: what are they, why important …
Four basic network arguments
Small world networks and trust
Kinds of network data: collection (Part I)
Typical network concepts: calculation, UCINET software,
visualisation (Part II)
2. Business alliances as one example of network strategy
- Alliances, alliance failure, key areas in alliance
management and the Toyota supplier network.
- Legal aspects of alliances
- A networked economy
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What you have learned already...what is
a network?

Network
A set of ties among a set of actors (or “nodes”)

Actors
persons, organizations, business-units,
countries …

Ties
Any instance of ‘connection of interest’
between the actors
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What you have learned already the last time.....
Example: relations among organizations
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Firms as actors
Buys from, sells to, outsources
to
Has done business with
Owns shares of, is part of
Has a joint venture or alliance
with, has sales agreements with
Has had quarrels with
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4 Basic Social Network Arguments

Mark Granovetter: The strength of weak ties

James Coleman: Network closure as social capital

Ron Burt: Structural holes

J. Coleman/R. Burt: Diffusion of innovation through social
networks: cohesion versus structural equivalence
All good theories are portable (from one problem to another).
You have to take them to your problem.
This point is nicely illustrated in the paper of
Dyer and Nobeake, which will be discussed
later
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Granovetter: strenght of weak ties


You need weak ties
because they give you
better access to
information
Coser (1975) You need
bridging weak ties: weak
ties that connect to groups
outside your own clique
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Coleman: Network closure as social
capital


Closed network perspectivecohesion theorists
 Emphasizes
advantageous effect of
strong ties
 Redundancy of
information may
compensate for
uncertainty in
information provision
 Focus on trust, shared
norms of behavior, and
reduction of opportunism
Network closure is a
prerequisite to create social
capital
3
Network with closure
2
1
3
Network without
closure
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2
4
5
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Ron Burt:
Structural holes as social capital (2)
A
B
1
7
3
2
James
6
Robert
5
4
C
 Robert’s network is rich in structural holes
 James' network has fewer structural holes
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8
D
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Puzzling facts about alliances
From the late 1970s through the early
1990s, the number of strategic alliances
among the U.S., E.C., and Japanese firms
grew ___ fold?
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Puzzling facts about alliances
The failure rate for strategic alliances is
thought to be approximately ___%
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Examples of alliances


Sony Ericsson
 Sony does the marketing
and designing
 Ericsson does the
manufacturing
Philips and Sara Lee/DE
combined their knowledge in
respectively household
appliances and coffee to
create the successful Senseo
coffee concept
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Examples of alliances
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Coca Cola shares its
knowledge with McDonalds.
This allowed McDonalds to
enter more markets, faster
and more succesfully
Friesland foods manages the
inventory of some of its
buyers (Vendor managed
Inventory), enhancing
customer service and reducing
inventory costs
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Example of alliances
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
Helio, a cellphone venture targeted
at affluent young people, is a joint
venture between Internet-service
provider EarthLink of Atlanta and
South Korean wireless operator
SKI Telecom, entered a strategic
alliance with MySpace. Helio users
will be able to use their phones to
blog or access MySpace
Ghananian business firms only
work together with a few selected,
trusted partnerfirms.
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Examples of alliances
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Toyota works very closely with
a selected number of
suppliers, whereas American
companies like GM, Chrysler
and Ford work with arms
length suppliers.
Philips plugs its marketing gap
with alliances
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Philips (electronics) and NIke
combined their strength to
develop wearable electronics,
(MP3 related equipment)
Philips works together with
Robijn on ironing products
Philips works together with
IKEA
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Alliances and goals
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The examples of
alliances make
clear that
alliances can
serve multiple,
very diverse
goals for firms
Notice that some
goals are more
long term, and
strategic than
others
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Lets get formal: What is an alliance?
"A collaborative agreement (or several agreements) of an
enduring nature between two or more firms, which contribute
resources to a common endeavor of potentially important
competitive consequences, while maintaining their
individuality."
or,
"Any cooperative effort between two or more independent
organizations to develop, manufacture, or sell products or
services."
Alliances are:

Joint Ventures
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Co-marketing agreements
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Co-development agreements
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Buyer-seller relationships
Alliances are not:

Arms length supply
arrangements

Licensing or Franchising

Subsidiaries

Mergers or acquisitions
Source: Gulati, 2001
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Alliance: Nonequity and equity
Nonequity Alliance
Cooperating firms agree to
work together to develop,
manufacture, or sell products
or services, but they do not
take equity positions in each
other or form an independent
organizational unit to manage
their cooperative efforts.
Examples: supply
agreements, distribution
agreements, buyer-seller
relationships
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Equity Alliances
Cooperating firms supplement
contracts with equity holdings
in alliance partners.
Example: Joint ventures. In
a joint venture, cooperating
firms create a legally
independent firm in which
they invest and from which
they share any profits that
are created.
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Note


Roughly, you can divide
alliances in horizontal
(strategic) alliances and
vertical partnerships
(long term close ties
between firms that
perform adjacent steps
in the value chain).
In the following I will
solely refer to alliances in
general not make the
vertical and horizontal
alliances distinction.
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The age of collaboration?
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
Strategic
alliances are
increasingly
numerous
and
transnational
Alliances are
becoming
more
important for
revenues and
profit
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The age of collaboration?
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
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In a number of
industries,
competing with
alliances is “a way
of life.” e.g.
Biotechnology
Even companies
that were resourcerich, self sufficient,
and avoided
alliances, have
joined the
bandwagon, e.g.
Ford, IBM
The dawning of a
new age: The Age
of Collaboration?
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Number of alliances world wide

Europe and the others seem to be lacking
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Alliances in e-commerce proliferate
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Alliances lead to networks

In only two
years, 75% of
the industry
is directly or
indirectly
connected
Source: De Man, 2006,
Alliantiebesturing
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Networks compete
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In some
industries
networks of
former
competitors now
compete with
each other
Note, in the
airline sector it is
all about market
power and cost
savings.
Every network
member profits.
Stable technical
environment.
Mergers are
often not
possible
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Source: De Man, 2006,
Alliantiebesturing
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The economics of alliances
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Alliances must be assessed on two dimensions
 Cost-benefit analysis
 Against alternatives -- Opportunity cost analysis
Alternatives to alliances
 Develop activities in-house
 Acquire another firm
 Buy product or skill
in arm’s-length transactions
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-- ALLY
-- MAKE
-- MAKE
-- BUY
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Alternatives to alliances
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

There are vast
differences between
American and Japan
automakers in
organisation
(governance
structures)
As we we learn later on
these differences may
have performance
implications: Japanese
firms are superior at
creating and diffusing
production enhancing
knowledge
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Source: Gulati, 2002
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Cost and benefits of alliances
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Ongoing coordination costs
 Management time
 Legal time
 Conflict
Competitive costs
 Loss of key competitive advantage
 Creating competition
Relative rewards vis-à-vis partner
 Opportunistic behavior by partner
 Superior learning skills
 Superior bargaining skills/position
of partner
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
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Broad
 Increased revenues -- direct and
indirect
 Decreased costs -- direct and
indirect
 Risk reduction
Specific
 Instant access to technology
 New market
 Cheap production sources
 Important customers
 Cheaper than acquisitions or do-ityourself
 Sharing costs
 Access to resources
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Alliance often 'fail'
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The average success rate
of alliances is about 50%
The differences between
companies in their success
rates are vast: 16% of
companies report very low
success rates (<20%),
while a similar number
reports very high success
rates (>80%)
Source: de man, 2006
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Case: Taligent's downfall
PURPOSE: To create an
operating system that could
compete with Microsoft,
IBM, Apple, and later HP
allied in a joint venture
named Taligent
PROBLEMS: Difficulties in the
alliance arose from a
number of sources:
1) Taligent was producing
products that competed with
its parent companies’.
Namely, Taligent competed
with IBM’s OS/2.
2) Different companies
placed different levels on
input. Apple did little to
incorporate and prepare for
Taligent’s technology while
IBM created its software to
be highly compatible.
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Taligent downfall
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Taligent downfall


The downfall of
Taligent can be
mainly blamed
on strategic
and behavioral
reasons.
The `partners'
strategic goals
differed, and
they `cheated'
by not
providing the
best people
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Why do alliances fail?


Environmental reasons
 Failure to anticipate the
changing conditions in
tastes, technology,
economy
 Failure to consider
differences in national
culture, institutions,
government regulations
 Other ...
Strategic reasons
 Poor partner selection
 Changed partner goals and
strategy
 Achievement of partner’s
strategic goals
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Why do alliances fail

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Structural reasons
 Lack of flexibility in
contract
 Unclear goals
Cultural reasons
 Organizational cultures
mismatched
Process reasons
 Failure to adapt and adjust
to changing circumstances
 Lack of top visible
management commitment
 Poor systems for
information sharing,
conflict resolution, and
control
 Lack of trust between
organizations
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Another failed alliance: Integrion

An example of a
failed alliance
and the role
that
environmental,
structural,
strategy and
behavioral
reasons play.
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Why did Integrion fail?
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The alliance life cycle


Alliance
processes play
a role and
change during
the life cycle of
an alliance
The stages
define key
areas in
alliances
Source Gulati, 2002
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Key areas to asses in (strategic)
alliances
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Source Gulati, 2002
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Key areas to asses in (strategic)
alliances
Does it fit with our
strategic goals? Do
we really need one?
Is the partner
compatible e.g.
goals, capabilities,
culture, power
What contract? How
open, flexible should
the contract be?
What negotiating
style?
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Key areas to asses in (strategic)
alliances
Continuation
Termination
Appropriate
interfaces
Joint Problems
solving
arrangements/work
through conflict
Trust,
communication and
commitment
Incremental
Performance
measurement
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Alliance capabilities
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Some firms manage the
alliance process better than
others
Apparently those firms have
built up a capability in
managing alliances
Firms with a superior alliance
capabilities create more
shareholder value (Anand and
Khanna, 2000)
Star performers are HewletPackard, Nike, Intel, Benetton,
Disney, Cisco, Microsoft,
Toyota
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Alliance capabilities

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Sending staff to an alliance
training is especially useful for
firms that have no experience
with alliances
Alliances specialists raise the
success rates, particularly
when they are in
middlemanagement (not in
the staff and not too close to
operations)
Evaluation is a remarkably
strong tool for raising alliance
success. Especially the
comparison of different
alliances of one company is a
powerful learning tool which
increases alliances success
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Source Duijsters, 2006
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Philips is building up its alliance
capabilities
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It has defined corporate
alliances
It has defined different
alliance functions
 Corporate Executive
Sponsor
 Corporate Relationship
Manager
 Alliance specialist
It has created a Corporate
Alliance Website on its intranet
For managing the Microsoft
alliance, Philips has:
 Set up a database
containing all contracts,
projects, people
 Opened a Microsoft
program office next door to
Microsoft's head office
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Source: Kempen 2001
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The Toyata supplier network

Article by Dyer
and Nobeoka
"Creating and
managing a
hihg
performance
knowledgesharing
network: the
Toyota case"
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Knowledge sharing routines


Knowledge
 Explicit knowledge or information
 Tacit knowledge or know-how
Dilemmas associated with knowledge sharing
 how can self-interested network members openly share
valuable knowledge?
 how to prevent free-rider problems?
 how to maximize the efficiency of knowledge transfers?
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Overcoming knowledge sharing
dilemmas

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
Creating a network 'identity' through network-level
knowledge-sharing routines
Network `rules' for knowledge protection and value
appopriation
Creating multiple knowledge-sharing processes and subnetworks in the larger network
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Creating a network 'identity' through networklevel knowledge-sharing routines

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
Creating an `identity' for a collective means that the
individual members feel a shared sense of purpose
Toyota's network is known as the `Toyota group'.
Toyota promotes a philosophy within the group called
`coexistence and co-prosperty' (Kyoson kyoei).
Toyota creates a shared network identity by developing
network level acquisition, storage and diffusion processes.
 The supplier association
 Toyota's operations management consulting division
 Voluntary small group learning teams (jishuken)
 Interfirm employee transfers
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Supplier association



Toyota's supplier association (Kyohokai) established in 1943
 information exchange between members
 mutual development and training among member
companies
 Socializing events
To meet objectives, suppliers must be close to each other,
hence supplier associations divided into three regions
 Tokai (150 members)
 Kanto (65 members)
 Kansai (29 members)
The suppliers association primary objective is to develop ties
among members and transfer explicit knowledge through
multi-lateral knowledge transfers.
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Supplier association


Suppliers association has general (high level) meetings
every other month
Topic committees


Designed to facilitate knowledge transfer on topics that are
critical to all members in the network
F.i. quality committees.
• Regular committee picks a theme for the year (f.i. eliminating
supplier design defects)
• Association provides 12 days of quality training each year (for
100 engineers)
• Excellent plant tours allow network members to visit `best
practice' plants
• Quality management conference held once a year
– lectures from directors, senior managers + six success ful
supplier cases of quality improvement
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Consulting teams


Toyota's Operations Management Consulting Division
(OMCD): 6 senior executives, 50 consultants
Direct free `on-site' assistance for suppliers
 periods ranging from one day to many months
 on average suppliers are visited about 4 times a year with
an average visit lasting 3 days
 emergent problem solving: cross divisional problems
solving teams helping a supplier
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Voluntary learning teams





Operations Management Consulting Division organized (1977) a
group of 60 of its key suppliers into `voluntary study groups'
(Jishuken)
Each group consists of roughly 5-8 suppliers
 geographic proximity
 no direct competitors in the same group
 experience with Toyota
Groups are reorganized every 3 years
Each year the supplier meet with the responsible OMCD manager to
determine a theme. Basic idea is to help each other improve
productivity/quality
After determining theme, the group visits each member to develop
suggestions
 preliminary inspection
 diagnosis and experimentation
 presentation
 follow up/evaluation
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Voluntary learning teams (II)



Member of OMCD monitors (to assist and to learn)
To be considered for membership of PDA (American
equivalent of Jishuken), supplier must be member of
association for a year.
Jishuken are reported to be very valuable (especially in
transmitting tacit knowledge)
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Network rules for knowledge protection




How to solve the dilemma of motivating members to share
valuable knowledge, and free riding problems
Toyota solves this problem by simply eliminating the notion
that there is `propriety knowledge'
Toyota sets a norm/rule by sharing its own knowledge
Suppliers must be willing to open their plants to other
network members to other network members if they choose
to receive Toyota consulting assistance or participate in
Jishuken
 reciprocal obligations: We will help you, but in return, you
must agree to help the network.
 reciprocity norm is enforced by implicit threat of
withdrawal of business
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Network rules for knowledge protection


Tacit rule about value appropriation
 The recipient of knowledge may appropriate 100 percent
of the savings in the short run, but over time will be
expected to share a proportion of those savings with the
network
Compare this with the GM consultancy teams (PICOS)
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Creating multiple knowledge sharing processes
and sub-networks in the larger network

How to
maximize
efficiency?
Toyota
established
variety of
bilateral and
multilateral
processes,
each
designed to
facilitate
different
types of
knowledge
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The creation and evolution of Toyata's
US knowledge sharing network



Phase 1: Developing weak ties
Phase 2: Developing strong ties with Toyota
Phase 3: Developing strong ties among suppliers
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Developing weak ties



1988: Toyota
begins producing
cars in
Georgetown,
Kentucky
Suppliers had
virtually now
contact with each
other
1989 Toyota
initiates supplier
association
(BAMA)
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Phase 2: developing strong ties with
Toyota

Free of charge well
trained consultants
made available to
BAMA members
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Phase 3: Developing strong ties among
suppliers


Toyota divided
suppliers in small
learning teams
 no competitors
 rotation
 equal
capabilities
Toyota subsidizes
network activities
 financial
 valuable
knowledge
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Phase 3: developing strong ties among
suppliers

From a
network of
weak ties
with
multiple
structural
holes, to a
network of
strong ties
without
structural
holes
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Conclusion of Dyer and Nobeoka




Network can be more effective than firm in creating and
diffusion of knowledge
 Greater variety of knowledge
Creating an identity of a group, the collective can be an
effective way of dealing with free-riding/value appropriation
Cohesive interconnected network is very useful for
exploitation
However there may be risks...
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Takeaways






What are alliances?
Alliance goals
Alliance failure
Key areas in alliance management
Alliance capabilities
The Toyota supplier network
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