Business Alliances and Networks
Gerrit Rooks
The alliance explosion
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
Examples of alliances
• 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
Example of alliances
• Helio, a cellphone venture
Internet-service provider
EarthLink of Atlanta and
South Korean wireless
operator SKI Telecom,
entered a strategic alliance
with MySpace.
• Ghananian business firms
only work together with a few
selected, trusted
partnerfirms.
Examples of alliances
•
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
–
–
–
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
Unexpected combinations
Unexpected combinations
Alliance networks: the Texas Instrument network
Alliances lead to networks
• In only two
years, 75% of
the industry is
directly or
indirectly
connected
Source: De Man, 2006,
Alliantiebesturing
Networks compete
• 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
Source: De Man, 2006,
Alliantiebesturing
Strategic alliances are a popular
management tool
Alliance goals
Strategic alliances are voluntary arrangements between firms
involving exchange, sharing, or codevelopment of products,
technologies, or services.
(Gulati, 1998)
Trend: more flexible alliance forms
Issues in Alliance Research
Research issue
Empirical questions
The formation of
alliances
Which firms enter in
Resource dependence
alliances, and whom are their Network as a repository of
partners?
partners
The governance
of alliances
Which ex-ante factors
influence the choice of
governance structure?
Transaction costs theory
Social networks
The evolution of
alliances
Which ex-ante factors and
processes influence the
development of alliances?
Social and behavioral
dynamics (e.g. Negotiation
processes)
The performance Which factors influence the
of alliances
performance of alliances?
The termination
of alliances
Which factors influence the
'survival' of alliances?
Theoretical perspectives
Transaction cost theory
Resource fit
Alliance management
Theoretical perspectives on alliances
(formation and termination)
Theoretical perspectives on alliances
• Resource dependency
• Transaction cost theory
• Social networks
• Alliance management
The general and specific environments
REGULATORY INSTITUTIONS
LEGISLATIVE INSTITUTIONS
COMPETITOR
SUPPLIER
EMPLOYEE
FIRM
DISTRIBUTOR
CUSTOMER
ECONOMIC INSTITUTIONS
OTHER INDUSTRIES
GOVERNMENT
Resource dependency
• Organizations are dependent on their
environments
– They need resources to survive and grow
• Environment becomes poor if:
– Important customers are lost or new
competitors enter
• Organizations manage their transactions with
the environment
– The goal: Ensure predictability of access to
resources, reduce uncertainty and
dependency
Interorganizational strategies for managing resource
dependence
• Two basic interdependencies in the specific
environment:
1) Symbiotic interdependence
• Exist among an organization and its suppliers and distributors
2) Competitive interdependence
• Exist among organizations that compete for scarce inputs and
outputs
• Strategies to reduce uncertainy / dependence
–
–
–
–
–
Reputation building
Strategic alliances / long term contracts
Co-optation
Merger / Acquisition
Collusion
Resource dependency explanation of
alliance instability
• Changes in 'resource fit' increase the
hazard of dissolution of business
relationships
• Changes in resource fit can result from:
– increases in a firm’s resource requirement
– a decrease in the firm’s partner resource
provisions
– increases in potential resource provisions by
alternative partners
Transaction cost theory (TCE)
• Tries to answer the fundamental question:
“Why do firms exist?” or alternatively "what
are the boundaries of the firm?"
• Transaction costs:
– Negotiating contracts,
– Monitoring contracts,
– Enforcing contracts,
• Transaction costs = friction within the
economy
Transaction cost theory (cont’d)
• The goal of the organization is to minimize
transaction costs (formally production
costs are also included)
– of exchanging resources in the environment
– of managing exchanges inside the
organization
– “Every dollar or hour of a manager’s time spent in
negotiating or monitoring exchanges with other
organizations or inside the organization is a dollar
or hour not used for creating value”
Sources of transaction costs
•
•
•
•
Uncertainty and bounded rationality
The environment is uncertain and complex
Transactions (especially R&D) are complex
People have a limited ability to process
infromation and to understand the environment
surrounding them
• The higher the level of uncertainty, the greater is
the difficulty of managing transactions between
organizations
Sources of transaction costs (cont’d)
• Opportunism and small numbers
• Though not all, some people behave
opportunistically — they cheat or exploit other
stakeholders in the environment
• When an organization is dependent on one
supplier or a small number of traders, the
potential for opportunism is higher
• The organization has to spend resources to
negotiate, monitor, and enforce agreements with
trading partners to protect itself (i.e., transaction
costs increase)
Sources of transaction costs (cont’d)
• Risk and specific assets
• Investments in skills, machinery,
knowledge, and information that
create value in one exchange
relationship but have no value in
any other exchange relationship
• Specific asset investments
increase risk in a business
relationship
• To counter such a risk, the
investing firm may try to negotiate
extensively and enforce terms of a
contract which increases
transaction costs
TCE and Linkage mechanisms
• Transaction costs are low when:
– Organizations are exchanging nonspecific
goods and services
– Uncertainty is low
– There are many possible exchange partners
• Transaction costs increase when:
– Organizations exchange more specific goods
and services
– Uncertainty increases
– The number of trading partners fall
Transaction cost logic
(i.e. risks)
Explaining alliance failure
(note we already discussed
resource dependency and
transaction costs theory)
Alliance instability and decay
Study
Sample
Instability
Beamish 1985
66 joint ventures
46% unstable
Harrigan 1988
895 strategic
alliances
45% mutually
assessed to be
successful
Economist 1995
Boston Consulting
Group Studies
< 40% of regional, and
< 30% of international
alliances are
successful
Dussage & Garrette
1997
197 alliances
between rival firms
Only 9% ended in a
natural end (objectives
achieved)
Pangarkar 2003
83 biotechnology
alliances
Average duration of
alliance  3 years
Harrigan 1988
895 strategic
alliances
Average duration of
alliance  3.5 years
.15
.2
.25
.3
The honeymoon effect
0
5
source MERIT-CATI
10
15
duration of alliance
20
25
Social network explanation: trust
• Opportunism problems are
fundamental problems in
alliances
– interfirm rivalry
– incomplete contracts
– learning races
• Transaction cost theory does
not consider the social
embeddedness of business
alliances
– past
– future expectations
– third parties
B
Social Embeddedness
€
Single firm
Only transactions
no relations
Dyad
Transactions often
take place within
relation
Network
Relations are
nested within
networks of
relations
Temporal
embeddedness
Network
embeddedness
Learning an conditional cooperation
Payoffs
Trustor
Trustee
No trust
Trustor
Punishment
0
Punishment
0
Sucker
-1
Temptation
5
Reward
3
Reward
3
Trust
Abuse trust
Trustee
Honor trust
Preference: Temptation > Reward > Punishment > Sucker
Alliance: 2 sided prisoners dilemma
Repeated games
• Suppose you play iterated prisoner’s
dilemma against a range of opponents…
What strategy should you choose, so as to
maximize your overall payoff?
• Axelrod (1984) investigated this problem,
with a computer tournament for programs
playing the prisoner’s dilemma
• Axelrod’s tournament: invited political
scientists, psychologists, economists, game
theoreticians to play iterated prisoners
dilemma
• Guess who won?
• Anatol Rapoport contribution 'Tit-for-Tat'
• The shadow of the future
– cooperation because of anticipated
sanctions
• The shadow of the past
– learning because of past interactions
Third parties and trust
• reputation effects
A
B
• Information diffusion
– selection
A
– for sanctioning
B
Combining social network theory and
resource dependence theory
Centrality and resources
• Resources = those tangible and intangible
assets which are tied semi-permanently to
the firm
• Ties are channels through which resources
can flow
• The more ties, i.e. the higher the degree, the
more resources a firm can acquire
• The better the resource fit of two firms, the more
stable the alliance
• Changes in resource fit can result from:
– increases in a firm’s resource requirement
– a decrease in the firm’s partner resource
provisions
– increases in potential resource provisions by
alternative partners
• Asymmetry in degree centrality can affect
resource fit
Difference in degree centralities change
resource fit
1.
2.
3.
increased resource
requirements of the
better connected
partner,
the less well connected
partner is less well able
to provide needed
resources,
the better connected
partner has more
alternative partners.
A
A
B
B
Alliance capabilities
• 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
Alliance capabilities
• 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
Source Duijsters, 2006
Philips is building up its alliance capabilities
•
•
•
•
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
Source: Kempen 2001
Alliance management techniques
Partner A
1
• Clear strategic intent
• Absorptive capacity
• Open culture /
Organizational form
• Infrastructure
Source: De Man , Koene en Rietkerken, 2001
Alliance
3
2
Partner B
3
1
• Complementary goals/create win-win
situation
• Matching targets & compensation
practices
• (Co-) location
• Managing cultural differences
• Choice of governance structure
• Personal Unions
• ‘Boundary
spanners’
• Staff rotation
• Debriefing
Communication is the key: multiple points of contact
Philips
Sara Lee/DE
Corporate
International Steering Committee
Corporate
level
level
Marketing & equity
meeting
DAP
PIM Meeting
Senseo
National Steering Committees
NSO's
Joint sales teams per
country
Core
Line
OPCO OPCO OPCO
Some rehearsal questions
•
What alternative is not a strategic alliance?
a) Two competing firms that secretly make price
agreements
b) Buyer A purchases exclusively from Supplier B
c) A firm manufactures an article under license
d) A+B
e) A+C
f) B+C
g) All
h) None