Strategic Alliances
K. Praveen Parboteeah
Objectives
What is a strategic alliance?
Why do companies form strategic
alliances?
What are some guidelines for
successful strategic alliances?
Why do strategic alliances fail?
Learning from strategic alliances
Other crucial issues
Case Study: Daewoo and GM
Formed an alliance in 1984 to
manufacture small cars in South Korea
Both invested $100m in a 50/50 JV
Day-to-day management left to South
Koreans
Both sides saw the JV very positively –
GM doubted that they could manufacture a
small car for cheaper in the US
Daewoo was getting access to engineering
skills of GM and US market
Evolution of Events
1987 – South Korea had become a
democracy – workers were asking for
wage increases
Frequent halt in the LeMans production
Daewoo responded by doubling wages
Suddenly cheaper to build Opels LeMans in
Germany
Problems with quality
GM was very frustrated with Daewoo
Other Events
Daewoo was however equally frustrated
with GM
Daewoo Group Chairman Mr. Kim complained
that he was treated shabbily and that GM
execs were arrogant
GM did not allow Daewoo to expand their
market in the US or Eastern Europe
Did not want to allow Daewoo to double
capacity
Alliance was dissolved and Daewoo
bought GM’s interest in 1992
In 2002, GM bought Daewoo
Strategic Alliances
Strategic alliances – partnerships
between two or more firms for the
attainment of mutually defined
goals
Stability and risk
Failure rate of 30 to 60 percent
Even profitable alliances can be torn by
conflict
Motivation: Why Strategic
Alliances?
To gain access to specific markets
Ex – Chrysler and Benz – to gain access to EU
where regulations favor local companies
Strategic alliances with Eastern European
companies
To increase market share
To avoid import barriers, licensing
requirements, and other protectionist
legislation
GM-Toyota venture – to avoid import quotas
Why Strategic Alliances?
Often represents the only legal way
to do business in a country
Many governments mandate that
foreign investors can operate within
their borders only in combination
with local equity with management
authority
Ex: China, Mexico, Brazil, India,
Indonesia, and Saudi Arabia
Benefits
To share the cost and risks of R&D
Ex: semiconductor industry – each new
generation of memory chips cost $1b – Intel &
Samsung (DRAM tech development); Sun
Microsystems with Fujitsu, TI, & Phillips
To reduce political risks while making
inroads in a new market
Ex: Maytag and JV with RSD, a Chinese
appliance manufacturer – Maytag stayed on
the right side of the Chinese government
To gain access to economies of scale and
synergy
Ex: MCI-World Com, Cable Industry, HP-
Compaq
What To Expect?
Collaboration is another form of
competition
Harmonious relationship is only
one form of success
Cooperation has limits
The goal is to learn from partners
Strategic alliances have important
implications for the firm’s overall
strategy
Guidelines for Successful Alliances
Choose the right partner – MOST
IMPORTANT
Strategic/objectives
complementarity
Skill/strengths complementarity
compatible management styles
Commensurate risks
Issues to Consider
The level of mutual dependency
The "anchor" partner
The "elephant and the ant" complex
Operating policy differences
Difficulties of cross-cultural
communication
Other Guidelines
Seek alliances where
complementary skills, products and
markets will result
Work out a plan how to deal with
proprietary technology and
competitively sensitive information
“Pre-nuptial” agreement
Recognize that alliances last only a
few years
Partner Selection Criteria:
Comparison of Korean and U.S
Executives
Korean Executives American Executives
1. Technical capabilities 1. Financial assets
2. Industry 2. Managerial capabilities
attractiveness
3. Special skills we can 3. Capability to provide
learn from partner quality products/services
4. Willingness to share 4. Complementarity of
expertise capabilities
5. Capability to provide 5. Unique competencies
quality products
Volvo & Renault alliance in 1990-
Failure
Culture/language – Anglo-Saxon/English;
Latin/French
Ownership – Public/Government owned
Size – Small/niche player, heavy in
trucks; Large and broad, weak in heavy
trucks
Core competencies – Safety, Styling
Management Structure –
Decentralized/informal, Centralized/formal
flow of information
Other Reasons Why Alliances Fail
JV develops its own identity –
difficult problems of
integration/coordination
Lack of clarity regarding
responsibilities
Corporate amnesia because of
turnover of expatriates
No plan if the venture ends
Other Success Issues: The Alliance
Structure
Dominant Parent
One parent controls strategic and
operational decision making
dominant parent often has majority
ownership
Shared management
Both parents contribute
approximately the same number of
managers to the board of directors,
the top management team, and
functional area management
The Strategic Alliance Structure
Split control - Partners usually share
strategic decision making and split
functional decision making
Independent management
IJV managers act 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
trains management talent and transfers
expertise
If The Alliance Does Not
Work
Negotiate an end or improve
implementation
Know when to quit/invest more
Avoid “escalation of commitment”
Plan end - “prenuptial agreements”
Death not always failure
Considerations for the end of the
alliance
Importance of the joint venture
Pricing the venture – how to
determine the value of the venture
and how to reallocate resources
Transferring resources – have
systems in place to transfer funds,
physical assets, personnel etc.
Creating and sharing value
Successful Lessons from GE
Careful planning and execution – from
every stage starting with negotiations to
implementation, both partners plan and
are committed
Assignment of key personnel –
Adopt an evolutionary perspective – start
on a small scale (e.g., distribution
agreement) and progressively grow in
other areas
Other Key Lessons
Need to try to learn from partners
Research has shown that Japanese
companies have benefited greatly
from strategic alliances with US
companies
Ex: GM and Toyota
Toyota has learned a lot from the
alliance
GM more reluctant to apply learning
Conclusion
The importance of international
strategic alliances
Most important decision: picking
the right partner
No set structure in ownership,
decision making control, or
management control
Have to work very hard to make it
work
