Strategic Alliances and
Partnerships
BM499 Strategic Management
David J. Bryce
October 1, 2002
AlliancesHow far have we come?
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“If you think you can go it alone in today’s global
economy, you are highly mistaken” (Jack Welch,
CEO of GE)
“Microsoft can’t make it alone, but together anything
is possible.” (Bill Gates, Chairman of Microsoft)
“Our approach is to develop long term relationships
with companies that offer a unique advantage with
General Motors. The Alliance Strategy is our major
thrust.” (John F. Smith, Jr., Chairman & CE of
General Motors)
Corporate Evolution
and Alliances
Moving from Managing a
Portfolio of Products...
 To Managing a Portfolio of
Businesses...
 To Managing a Portfolio of
Relationships

Alliances Growing as a Source of Revenue
Alliances as a Percentage of Revenue for
Top 1,000 U.S. Public Corporations
30%
25%
20%
15%
10%
5%
0%
1980
1985
1990
Source: Columbia University, European Trade Commission, Studies by BA&H,
AC.1983-1987, 1988-1993, 1994-1996, 1999
1995
1998
Growth in Mergers & Acquisitions
vs. Alliances
14,000
12,000
M&A
Alliances
10,000
8,000
6,000
4,000
2,000
0
1996
Source: Thomas Financial, reported in Forbes, May
21, 2001, p. 27.
1997
1998
M&A Transactions
JV/Alliances
Strategic Alliances are More Important for Growth
-Forbes
1999
2000
The Scope of Inter-firm
Relationships
Contractual Agreements
Traditional
Contracts
Nontraditional
Contracts
Equity Arrangements
No New Firm
Arm’s-length
Buy/Sell
Contracts
Joint Research
Minority
Equity
Investments
Franchising
Joint Product
Development
Equity
Swaps
Licensing
Long-term
Sourcing
Agreements
Crosslicensing
Joint Manufacturing
Creation of Entity
Nonsubsidiary JV
JVs
Subsidiaries
of MNCs
Fifty-fifty
Joint Ventures
Unequal
Equity
Joint
Ventures
Joint Marketing
Shared
Distribution/
Service
Standard Setting/
Research Consortia
Based on: Yoshino and Rangan, 1995
Strategic Alliances
Dissolution
of Entity
Mergers and
Acquisitions
Strategic Alliances
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Benefits:
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Speed (vs. acquisition or
greenfield)
Access to key
complementary assets
Removal of potential
competitor
Maintain incentives for
partner management

Drawbacks:
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Lack of control; must
share decision making
Potential spillover of
knowledge and
capabilities
Organizational clashes
may impede ability to
collaborate
Mergers & Acquisitions
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Benefits:

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
Speed (vs. greenfield)
Full control over
complementary assets
Removal of potential
competitor
Upgrade corporate
resources & capabilities
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Drawbacks:
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Cost of acquisition
(premiums)
Unnecessary adjunct
businesses
Organizational clashes
may impede integration
Major commitment
Cumulative abnormal returns
M&A Returns-Acquiring Firms
0.035
0.03
0.025
0.02
0.015
Single Bidder
Multiple Bidders
0.01
0.005
0
-0.005
-15 -10 -5
0
5
10 15 20 25 30
-0.01
-0.015
Event day
Source: Bradley, Desai, & Kim, 1988
M&A Returns-Targets
Cumulative abnormal returns
0.5
0.45
0.4
0.35
0.3
Single Bidder
Multiple Bidder
0.25
0.2
0.15
0.1
0.05
0
-15
-10
Source: Bradley, Desai, & Kim, 1988
-5
0
5
10
Event day
15
20
25
30
LEVERAGING THE RESOURCES OF PARTNERS
Toyota
Engineering
(7,000 Engineers)
Top 35
Affiliated Suppliers
(5-6,000 Engineers)
Remaining 250
Tier I Suppliers
(10-15,000 Engineers
Toyota can leverage its value creation resources by 5-15x
by involving suppliers in the Extended Enterprise
Types of Costs that Vertical Alliances
are Designed to Reduce
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Transaction costs
Quality costs
Product development costs
Logistics costs (warehousing and
transportation)
Inventory costs
Three Key Sources of Inter-firm
Competitive Advantage
Dedicated
Asset
Investments
Knowledge
- Sharing
Routines
Inter-firm
Trust
CREATING EFFECTIVE PARTNERSHIPS
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Build trust
Create multiple functional interfaces
to facilitate system learning
Make dedicated/customized
investments
BUILDING TRUST
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Formal Mechanisms such as long term contracts, stock
ownership, collateral bonds, are often necessary to
signal a credible long term commitment to a partner.
Interorganizational Trust is often built on processes, not
people. A partner is trustworthy if its
interorganizational processes are understandable and
predictable.
Informal Mechanisms such as reputation, personal trust,
relational norms, are key to creating value over the long
term. Formal mechanisms alone do not produce
information sharing which is critical to partnering
success.
THE VALUE OF TRUST
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Increases learning (greater
information sharing)
Increases customized investments
(willingness to risk tailored
investments)
Increases speed to quickly respond
to market changes
Lowers transaction costs
THE COST OF MISTRUST
50%
40%
Percent of faceto-face contact
time with suppliers
47%
30%
28%
20%
21%
21%
10%
0%
GM
Ford
Chrysler
Negotiating price/contract
Assigning blame for problems
Toyota
CREATING EFFECTIVE PARTNERSHIPS
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Build trust
Create multiple interfaces to facilitate
learning throughout the network
Make dedicated/customized
investments
Toyota’s Supplier - Customer Interface
Surface Contact vs. Multiple-Point Contact
(Correct)
Top
Executives
R&D
R&D
Manufacturing
Manufacturing
Quality Assurance
Quality Control
Quality Assurance
Quality Control
Sales
Purchasing
Customer
Point Contact
(Wrong)
Supplier
Top
Executives
Effective Partnerships at P&G/Wal-Mart
Merchandising
Sales
Forecasting
Forecasting
Inventory Management
Inventory Management
Warehousing
Warehousing
Transportation
Transportation
Systems
Systems
Marketing
Marketing
Accounting/Finance
Accounting/Finance
CREATING EFFECTIVE PARTNERSHIPS
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Build trust
Create multiple functional interfaces
to facilitate system learning
Make dedicated/customized asset
investments
TYPES OF DEDICATED ASSETS
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Dedicated Site Investments (locating plants
in close proximity to economize on
inventory, transportation, coordination
costs).
Dedicated Physical/Process Investments
(making relation-specific capital
investments in machinery, tools,
processes)
Dedicated Human Investments (dedicating
personnel to develop relation-specific
know-how and improve communication/
coordination)
Toyota Plant Configuration in Japan*
Motamachi, TC
Honsha, TC
3 miles
1 mile
Tahara, Nagoya
Headquarters &
Technical Center
Takaoka, TC
Tsutsumi, TC
6 miles
3 miles
Affiliated Supplier Plants
• Avg. distance of 30 miles
• 43.5 weekly deliveries
• 10,635 man days of face-to-face contact
• 12.5 guest engineers
* 1992 All plants are in Toyota City (TC) or Nagoya
Independent Supplier Plants
• Avg. distance of 87 miles
• 40.5 weekly deliveries
• 3,764 mandays of face-toface contact
• 2.6 guest engineers
GM Plant Configuration in the United States*
Flint, MI
51 miles
55 miles
Lansing, MI
Hamtramck, MI
North
Tarrytown, NY
650 miles
2400 miles
Fremont, CA
(Nummi)
Ypsilanti, MI
200 miles
Linden, NJ
Internal Supplier Plants
• Avg. distance of 350 miles
387 miles
Van Nuys, CA
External Supplier Plants
•Avg. distance of 427 miles
•7.5 Weekly deliveries
•1,107 man days of face-toface contact
•.17 guest engineers
Lordstown, OH
Wilmington,
DE
Bowling Green,
KY
Kansas City, KS
900 miles
Wentzville, MO
Spring Hill, TN
1400 miles
455 miles
* 1991Passenger car plants only
(Mileage from 1990 Rand McNally Road Atlas)
Arlington, TX
Total Inventory as a Percentage of Sales
The Relationship Between Plant Distance and
Automaker Inventory Costs
0.12
Chrysler
0.1
GM
Ford
0.08
Nissan
0.06
0.04
Toyota
0.02
0
0
100
200
300
400
500
600
Average Distance Between Supplier and Automaker Plants (In Miles)
Horizontal Alliances
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Benefits
Facilitates access to technologies or customers,
especially when these needs may be only temporary
 Provides opportunities to rapidly reach scale in
needed capabilities
 Supplies opportunities for learning that can be put to
later use
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Horizontal Alliances
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Drawbacks
May transfer technologies or know-how that turns a
partner into a competitor
 The capabilities of a partner may come to substitute
for important strategic capabilities that the firm
should actively nurture internally
 Alliances are sometimes difficult to focus and/or
they outlive their usefulness before they’re
disbanded, leading to needless consumption of
resources
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