STRATEGIC MANAGEMENT

FREEMOVE ALLIANCE

Annisa Muslim

Dwicky Syafroza Putra

Karel Okta Effendi

Ni Nyoman Sri Amandari

Setya Nurul Faizin

UNIVERSITAS BAKRIE

JAKARTA

2012

FREEMOVE ALLIANCE

I. Strategic Alliance Create Value

Types of Strategic Alliance

A Strategic Alliance is a relationship between two or more parties to pursue a set of agreed

upon goals or to meet a critical business need while remaining independent organizations. There

are three types of Strategic Alliances, they are:

1. Joint Venture : a strategic alliance in which two or more firms create a legally

independent company to share some of their resources and capabilities to develop a

competitive advantage.

2. Equity Strategic Alliance : an alliance in which two or more firms own different

percentages of the company they have formed by combining some of their resources and

capabilities to create a competitive advantage.

3. Non-Equity Strategic Alliance : an alliance in which two or more firms develop a

contractual-relationship to share some of their unique resources and capabilities to create

a competitive advantage (Licensing Agreements, Supply Agreements, Distributions

Agreements).

Strategic alliances may create value by exploiting opportunities and neutralize threats which

are to be faced by the companies. Here are some key important opportunities to be exploited in

order to create value:

a. Help the company in developing general operation performance

Exploit economic of scale

Learn from competitor

Manage risk and divide cost

b. Create competitive favorable environment to maximize performance

Facilitate the development of technology standard

Reduce violations

c. Facilitate entry and exit

Enter to the new low cost industry

Exit from the low cost industry

Manage uncertainty

Enter to the new low cost market

TITO-Alliance Implement Strategic Alliance through FreeMove

On April 2003, four European mobile operators: T-Mobile (TMO), Orange, Telecom Italia

Mobile (TIM) and Teleronica Moviles (TEM) became the founding members of an alliance.

They created a Non-Equity Strategic Alliance under the FreeMove alliance by enhancing their

products and services portfolio through stronger inter-operability and cooperation among their

networks. It created network with access to over 170 million mobile subscribers in Europe.

TITO-Alliance combined its product and service offering under joint FreeMove brand

compete with Vodafone, world’s leading mobile operator with 122.5 million customers. Their

initial focus was to grab highly attractive Multinational Corporations (MNCs) segment.

FreeMove partners had market share of 25% in this segment market. In the following four years,

FreeMove concentrated on gaining new customers through attractive packages with transparent

roaming schemes.

Here are some efforts of the alliance in order to create value:

a. Help the company in developing general operation performance: For the first time,

operational integration would take place without prior equity investments in the

respective partners (T-Mobile, Orange, Telecom Italia Mobile and Televonica Moviles).

They learn from competitor (Vodafone) how to manage huge market share in

order they would successfully gain the expected market share.

“Roaming-Alliance” , by focusing on the inter-operability of networks to enable

seamless voice and data roaming at transparent prices.

b. Create competitive favorable environment to maximize performance

Joint product development allowed their members’ won customers to access their

services abroad to developing joint services; product development would evolve

with time.

They sought to gain additional advantages through coordinated handset

specification, and thus influence the development of new 3G handsets according

to their requirements.

c. Facilitate entry and exit

The growth of the mobile industry in the period 2000-2007 had been rather

impressive with global penetration of only 12% hitting mere than 50% by early

2008.

II. Alliance Threat

FreeMove Membership

Launch of FreeMove in April 2003 had an operational integration would take place prior

equity investment in the representative partners, T-Mobile, orange, Telcom Italia Mobile (TIM)

and Telefonica Movile (TEM).

Application On Case:

Organization and Scope

When T-Mobile, Telefonica Movilles, TIM and Orange launched the Freemove Alliance,

they stressed that the alliance was “a brand rather than actual company”, which would reinforce

the partners brand and make the most of their pooled expertise. In this sense, Free Move had

established a strong virtual organization, as all experts working for FreeMove remained

employed by the partner organizations and were half- or full-time dedicated to FreeMove tasks.

The integration of networks to support joint joint enablers and the design of united tariffs

and service would be pursued by coordinates task force within each member company. The

FreeMove products and service offering targeted primarily the 170 million existing European

customer of the Alliance. Worldwide, the alliance had an additional 60 million customers,

mainly through TEM and TIM shareholdering in Latin amerika and T-Mobile USA which would

be targeted at a later stage.

An example: FreeMove alliance entered the Eastern European market through new acquisitions

made by telefonica ini the Czech Republic. Alliance footprint extended to incorporate the US

market via T-Mobile operation there. The program launched under the brand of worldview

covered network in the USA, the UK, France, Belgium, Switzerland and the Netherlands.

Whether individually or together with other freemove member, all operators involved in

the alliance were working continuously on improving their roaming schemes. The founding

members of the freemove alliance were increasingly reaping the benefits of their partnership.

Alliance Threat

When the partners (-Mobile, Telefonica Movilles, TIM and Orange) stresses that the

alliances was “a brand rather than actual company”. It will make the partners felt uncomfortable

from the alliance because they feel exploited by freemove. Each other take some advantages to

developed based their network and development roaming outside of European countries to boost

demand. And the threat generated by the partners called adverse selection which explains that

there is potential partners misrepresent the value of the skills and ability they bring to the

alliance.

Adverse selection in a strategic alliance is likely only when it is difficult or costly to observe

the resource capabilities that a partner bring to the alliance. Firms considering the alliance with

partners that bring intangible resources such as “knowledge of local conditions” or “contact with

key political figures”. This fact looks when the firm is seeking an alliance partner is in some

sense an indication that the firm has limited abilities to evaluate potential partners.

III. Strategic Alliances and Sustained Competitive Advantage

Rarety Strategic Alliance of Freemove

The rarety of strategic alliances does not only depend on the number of competing firms

that have already implemeted an alliance. It also depends on whether the benefits that firms

obtain from their alliance are common across firm competiting in an industry.

As the freemove as the alliance from the enormous telecomunication. It not only compile

the expertise inside but also the develop technology from each alliance company. This is

becomeing something rare for Freemove compared to other alliance communication. From this

alliances they could bring a certain company growth. Freemove could create value such as the

convinience for service to their customer which others alliance may not bring in the europe

especially and worldwide as well.

Imitability Strategic Alliance of Freemove

Based on the case described, the freemove as the alliance is hard to imitate. It is because

if the several companies are going to make an alliance againts the Freemove. They have to invest

a very big amount of money. It is quite difficult to imitate the service given, the coverage,

technology and others part of this alliance.

IV. Substitutes for Strategic Alliances

Going It Alone, firm choose “going it alone” when they attempt to develop all the

resources and capabilities they need to exploit market opportunities. Sometimes “going it alone”

can create the same or even more value than using alliances. But, there are three conditions when

Alliances will be preferred over “going it alone” when:

1. The level of transaction-specific investment required to complete an exchange is

moderate.

2. An exchange partner possesses valuable, rare, and costly-to-imitate resources and

capabilities.

3. There is great uncertainty about the future value of an exchange.

Acquisitions, the acquisition of other firms can also be substitutes for alliances. But,

there are four conditions that make alliances will be preferred to acquisitions when:

1. There are legal constraints on acquisitions.

2. Acquisitions limit a firm’s flexibility under conditions of high uncertainty.

3. There is substantial unwanted organizational “baggage” in an acquired firm.

4. The value of a firm’s resources and capabilities depends on its independence.

If we see the substitutes for Freemove alliances in the case is the firm that choose the

“going it alone” such as Vodafone, Sympac. They choose to “ going it alone” because the

Freemove didn’t possesses valuable, rare, and costly to imitate, because in fact, Vodafone was

world second larger operator, and the largest pure play mobile operator.

V. Organizing to Implement Strategic Alliances

One of the most important determinants of the success of strategic alliances is their

organization. The primary purpose of organizing a strategic alliance is to enable partners in the

alliance to gain all the benefits associated with cooperation while minimizing the probability that

cooperating firm will cheat on their cooperative agreements.

A variety of tools and mechanisms can be used to help realize the value of alliance and

minimize the threat of cheating. These include contracts, equity investments, firm reputations,

joint ventures, and trust.

Explicit Contracts and legal Sanctions

One way to avoid cheating in strategic alliances is for the parties to an alliance to

anticipate the ways in which cheating may occur (including adverse selection, moral hazard, and

hold up) and to write explicit contracts that define legal liability if cheating does occur. Writing

the explicit contract were called nonequity alliances. This contract may require parties in a

strategic alliance to make available to the alliance certain proprietary technologies or processes.

Equity Investments

The effectiveness of contracts can be enhanced by having partners in an alliance make

equity investments in each other. When Firm A buys a substantial equity positions in its alliance

partner, Firm B, the market value of Firm A now depends to some extent, on the economic

performance of that partner. The incentive of firm A to cheat Firm B falls, for to do so would be

to reduce the economic performance of Firm B and thus the value of Firm A’s investment in its

partner. These kinds of strategic alliances are called equity alliances. Many firms use cross-

equity investments to help manage their strategic alliances.

Firm Reputations

A third constraint on incentives to cheat in strategic alliances exists in the effect that a

reputation for cheating has on a firm’s future opportunities. Information about an alliance partner

that has cheated is likely to become widely known. A firm with a reputation as a cheater is not

likely to be able to develop strategic alliances with other partners in the future, despite any

special resources or capabilities that it might be able to bring to an alliance.

Substantial evidence suggests that the effect of reputation on future business

opportunities is important. Firm go to great lengths to make sure that they do not develop a

negative reputation. Nevertheless, this reputational control of cheating in strategic alliances does

have several limitations.

Joint Ventures

A fourth way to reduce the threat of cheating is for partners in a strategic alliance to

invest in a joint venture. Creating a separate legal entity, in which alliance partners invest and

from whose profits they earn returns on their investments, reduces some of the risk of cheating in

strategic alliances. When a joint venture is created, the ability of partners to earn returns on their

investments depends on the economic success of the joint venture.

Trust

Trust, in combination with contracts, can help reduce the threat of cheating. More

important, trust may be enable partners to explore exchange opportunities that they could not

explore if only legal and economic organizing mechanisms were in place. Commitment,

coordination, and trust are all important determinants of alliance success. Strategic alliance is a

relationship that evolves over time.

APPLICATION ON CASE: FreeMove Strategic alliance

On April 7, 2003, Teleronica Moviles (TEM) of Spain, T-Mobile International (TMO) of

Germany and TIM (Telecom Italia Mobile) signed a memorandum of understanding to set up

an alliance to provide their customers with the opportunity to access all their products and

services abroad. They were also joined by Orange, France’s incumbent mobile operator. The

initial focus of the newly created alliance was the highly attractive Multinational Corporation

(MNC) segment.

In the beginning, this alliance was based on memorandum of understanding which a kind

of agreement among the partners. This agreement is a writing contract which contains points of

dealing in order to make collaboration among partners. However, in our opinion, memorandum

of understanding could not explain more depth in legal sanctions because it could not define the

legal liability if cheating does occur.

From 1990s, many European Telco sought to broaden their geographical footprint in

order to do internationalization. The most commonly used means was the acquisition of equity

stakes in the newly emerging operators. The launch of FreeMove in April 2003 heralded the

beginning of an unprecedented level of cooperation between European mobile operators. But for

the first time, operational integration would take place without prior equity investment in the

respective partners.

To reduce cheating in form of strategic alliance, many firms should set up equity

alliances which the firms buy a substantial equity positions in their alliance partner. For the

FreeMove members, there was no equity investment agreement in their contracts. This will lead

to increasing in risk among partners because another partner will potentially cheat the others.

When T-Mobile, Telefonica Moviles, TIM, and Orange launched the FreeMove Alliance,

they stressed that the alliance was “ a brand rather than an actual company”, which would

reinforce the partners’ brands and make the most of their pooled expertise. In this sense, Free

Move had established a strong virtual organization, as all experts working for FreeMove

remained employed by the partner organizations and were half- or full-time dedicated to

FreeMove tasks.

FreeMove was registered as a legally incorporated entity and had defined a clear

corporate governance structure consisting of both a Management Board and A Supervisory

Board with a semi-annually rotating presidency. The Supervisory Board included the CEOs of all

four member operators. Operationally, the integration of networks to support joint enablers and

the design of unified tariffs and services would be pursued by coordinated task forces within

each member company. A specific set of key performance indicators was established to monitor

the progress of the alliance.