Growth Strategies:

Strengthening A Companys Competitive Position

Strategic Alliance

Learn about extending the scope of companys operations

Strategic benefits and risks of expanding the horizontal scope through
Mergers & Acquisitions, Strategic Alliances
Understand when and how Strategic Alliances can substitute for horizontal
M&A or vertical integration, and how they can facilitate outsourcing

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 Alternative Routes to Expansion

3 Ways

Acquire Build Ally

Godrej Consumer Reliances energy, Bharti-Walmart,

Products telecom, retail Toyota-GM,
Sara Lee, PT. Megasari ventures Nissan-Renault,
Makmur, Godrej Global
Mideast FZE, Kinky,
Biocon,
Frika, Rapidol, Tura, Solar power,
Darling, Issue, Argencos, Tata-SIA Airline
Cosmetica Nacional, Tata-Starbucks
Keyline Brands

Mode of entry depends on ..

Does the firm have the resources and

Resources & Capabilities
capabilities for internal development?

Entry Barriers Are there entry barriers to overcome?

Is speed an important factor in the firms

Speed
chances for successful entry?

What is the least costly mode, given the

Comparative Cost
firms objectives?

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Internal Development: Corporate New Venturing
(Intrapreneurship)

Advantages:
Allows entry into a new or emerging industry where no
suitable acquisition candidates are available
Avoids pitfalls and uncertainty associated with acquisition
Protects IP rights
Disadvantages:
Requires extensive investments in developing production
capacities and competitive capabilities
May fail due to internal organizational resistance to change
and innovation or external resistance (environmental issues)

When to engage in internal development?

Ample time to
develop and
launch
business Cost of
Availability of acquisition is
in-house skills higher than
and resources internal entry

Factors favoring Internal

Development

No head-to-head New capacity

competition in will not affect
targeted supply- demand
industry balance
Low resistance
of incumbent
firms to market
entry

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 Alliance
Agreement between two or more firms to jointly manage assets
and achieve strategic objectives. Some alliances may create a
separate jointly owned (legal) entity - called a joint venture.

Merger & Acquisition implies a controlling ownership interest,

whereas, an alliance or JV does not

Collaborative Strategies

Companies use strategic alliances (collaborative partnerships) to

complement their strategic initiatives and strengthen competitiveness.

Strategic Alliance is a formal agreement between two or more firms

to work cooperatively toward common objectives. Alliance may equity
or non-equity based.
Etihad Airways (Estb. 2003) has equity stakes in Air Berlin (29%), Air
Seychelles (40%), Air Lingus (3%), Jet Airways (24%), Air Serbia (49%),
Darwin Airlines (33.3%), Virgin Australia (19.9%)
Joint Venture - a equity based alliance in which partners set up an
independent entity that they own and control jointly
Tata Starbucks Ltd, Tata SIA Ltd,

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 How alliance is different from outsourcing?

Advantages of alliances over outsourcing:

The increased ability to exercise control over the partners
activities.
A greater commitment and willingness of the partners to make
relationship-specific investments as opposed to arms-length
outsourcing transactions.
Alliance is not a collusive strategy
cooperation is create and enhance competitive position of
each without reducing industry output,
In collusive strategy, cooperation among firms to reduce
industry output and raise prices. Collusion is illegal whether
formally agreed or not.

In a Strategic alliance, there is

Joint contribution of resources
Shared risk
Shared control
Mutual dependence
Knowledge acquisition, exploration or exploitation

Alliances help in
Reducing management costs
Alleviates agency problems in case of risky projects
Assets each party needs remain firm specific and only
a subset of these are held by its partner

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 Scope of Strategic Alliance
Alliances may involve joint marketing, joint sales & distribution, joint
production, design collaboration, joint R&D for new technologies or products

Inter-firm relationships

Kale & Singh, 2009

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 Classification along Knowledge Management

Alliances
Equity

Joint Venture or Equity Joint Venture or Equity

participation for existing participation for new
products and technologies products and
technologies

Licensing
Non-equity

R&D partnership for new

Franchising
Alliances

products and
Networks
technologies
Joint marketing
Joint production

Exploitation Exploration
(Source: Culpan, 2008)

Complex forms of Alliances

Invasive Partners share a significant amount of technology,

personnel and strategy. It requires elaborate governance and
management involvement
e.g. Bristol-Myers-Squibb and Cadus; Pfizer and Neurogen
Multi-function - encompassing multiple spots on the value chain
such as R&D, and marketing
e.g. Swatch & Mercedes-Benz for compact car; Glaxo & Pfizer for HIV
Multi-project - multiple alliances exist within a single company. It
gives partners a first look at each other's products or right of first
refusal. e.g. Microsoft and Hewlett-Packard; Roche and Genentech
Coopetition - cooperating with competitors has benefits sharing
of development costs, access to cross-pipeline expertise, reduction
in transaction costs
e.g. DuPont and Dow; IBM and Siemens; GlaxoSmithKline and Eli Lilly
Networks - multiple partners form a single group to access diverse
technologies & skills, build market momentum, bundle related
products into a full customer solution.
Journal of Business Strategy, Vol. 25 (2): 18 22, Apr 2004

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 https://www.msu.edu/~howardp/crosslicensing.pdf

How alliances strengthen firms competitiveness?

Strategic Alliances extend the scope, increase market power, allow

access to new resources, help cope with challenges by -
Rapid deployment by building presence quickly in different
markets
o Gain knowledge about unfamiliar markets and cultures
o Access skills concentrated in particular geographies
e.g. Etihad hired pilots from equity airlines on secondment basis to
meet shortage
o Establish a beachhead to participate in a target industry
Seizing opportunities in fast advancing technology
Mitigates investment risk through resource pooling & risk sharing
Providing flexible organizational forms that are adaptive to
changing conditions.
Filling the capability gaps in the technical and manufacturing
Blocking a competitive threat e.g. Microsoft-Intel

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 Major Strategic alliances in the global market

(Source: Culpan, 2008)

When to engage in a Joint Venture

Opportunity is too complex, uneconomical, or riskier for one

firm to pursue alone.
e.g. drug discovery - Biocon-Bristol Myers Squib JV for insulin

New opportunity requires competencies, know-how not

possessed by the firm now
e.g. Indian ventures of McDonald, Honda, P&G

When operations in a (foreign) country are required to have a

local partner by law
e.g. operating in UAE

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 Value creation & capture in Alliance

Value-creation - partners generate value from their

relationships by pursuing shared objectives and extending the
range of their value chain activities.
Value-capture - how much value a partner can extract from
the alliance relative to other partners.

(source: Lavie, 2009)

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 Alliance failure

More than 50% of alliances fail, but they still account for 26% of
revenues of Fortune 1000 in 2008. Why this paradox?

Journal of Business Strategy, Vol. 25 (2): 18 22, Apr 2004

Some prominent causes of alliance failure?

Inability of partners to work well together

Diverging objectives, intent and priorities of partners
Culture clash and integration problems due to different
management styles and practices.
Poor fit of partners resources and capabilities
Marketplace rivalry between allies
Changed conditions that render the purpose of alliance obsolete
Protection of proprietary technologies, knowledge bases, or trade
secrets from partners who are rivals.
Emergence of more alternative technological paths
Unequal sharing of benefits
Appropriation of the contribution-- which partner captures
resources and capabilities more easily
Differential absorptive capacity of the partner

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 Alliance Life Cycle and Key Success Factors

Kale & Singh, 2009

Kale & Singh, 2009

Create a system for managing the alliance.

Build trusting relationships with partners.
Set up safeguards to protect from the threat of opportunism by partners.
Make commitment to partners and see that partners do the same.
Make organizational learning part of the alliance management process.
Convert learning into alliance management capability (AMC) - ability to
capture, share, store and apply alliance management knowledge

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Ciscos Collaboration Strategy

CISCOs growth strategy has three components of innovation - build, buy, and partner. It
operates an extended enterprise - global ecosystem - that includes integration, channel,
technology, industry solution companies, service providers.

In an industry facing technological complexity & rapid changes, one company can not
develop all technological solutions .that customer desires. So, Cisco developed a
multifaceted partnering program to offer tangible business value.

http://www.cisco.com/en/US/prod/collateral/voicesw/c22-558396-00_value_partners_so.pdf

How CISCO is able to make alliance work?

Use the right framework that considers all stages of alliance life
cycle
Evaluating a strategy and potential partner
Form an alliance
Incubate the partnership
Operating the alliance
Transitioning to next level
Retiring the alliance
Develop the right organization people are important
Build the right relationship/ processes promote internal and
external communication
Right tools to store and share alliance knowledge

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How Cisco has been so successful?

It applies five criteria to go for a strategic alliance:

Partnership has be important to all parties and create significant

business impact & sustainable value over long time.
Broad and deep initiatives Partners have broad technical &
industrial expertise and depth of experience with customers
Strong organizational commitment
Substantial investment by parties in terms of staff, money, IP
Strategic alignment and fit alliance must have mechanisms to
overcome cultural differences among partners

Enterprise Services Alliances

HP Enterprise Services Alliances is a unique ecosystem of

partners. It provides applications, business processes and IT
solutions.

Agility Alliance
to innovate, operationalize and deliver technology solutions
with globally recognized companies such as Microsoft,
Oracle, Deloitte, PricewaterhouseCoopers, SAP, Symantec

Technology Alliance
to develop, implement and jointly market differentiated
services. Focus is on specific technologies or domains and
provide standards. Partners include Citrix, Red Hat, Tibco,
VMware

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 Dyer et al, 2001

End ..

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