international strategic alliance fma3093 international business management seminar

INTERNATIONAL STRATEGIC INTERNATIONAL STRATEGIC ALLIANCEALLIANCE

FMA3093FMA3093INTERNATIONAL BUSINESS INTERNATIONAL BUSINESS MANAGEMENT SEMINARMANAGEMENT SEMINAR

Cooperative strategyCooperative strategy

A strategy in which firms work together to A strategy in which firms work together to achieved a shared objectiveachieved a shared objective

Increase importance of cooperative Increase importance of cooperative strategies as a growth enginestrategies as a growth engine– ““in a global market tied together by the in a global market tied together by the

Internet, corporate partnerships and alliances Internet, corporate partnerships and alliances are proving a more productive way to keep are proving a more productive way to keep companies growing”companies growing”

Cooperative strategyCooperative strategy Increasingly, cooperative strategies are Increasingly, cooperative strategies are

formed by firms competing against one formed by firms competing against one another another – Example: FedEx and the US Postal Service Example: FedEx and the US Postal Service

(USPS), where FedEx transports roughly 3.5 (USPS), where FedEx transports roughly 3.5 million pounds of USPS packages daily on its million pounds of USPS packages daily on its planes and is allowed to place its drop boxes in planes and is allowed to place its drop boxes in post offices.post offices.

Types of cooperative strategies:Types of cooperative strategies:– Strategic alliances :- widely usedStrategic alliances :- widely used– Collusive strategies:- not frequently usedCollusive strategies:- not frequently used

Strategic AlliancesStrategic Alliances Increasingly popular Increasingly popular

– ““unprecedented number of strategic alliances between unprecedented number of strategic alliances between firms are being formed each year. These strategic firms are being formed each year. These strategic alliances are a logical and timely response to intense alliances are a logical and timely response to intense and rapid changes in economic activity, technology, and and rapid changes in economic activity, technology, and globalization, all of which have cast many corporations globalization, all of which have cast many corporations into two competitive races: one for the world and the into two competitive races: one for the world and the other for the future” other for the future”

(Doz & Hamel, 1998)(Doz & Hamel, 1998)

Strategic alliance is Strategic alliance is a cooperative strategy in a cooperative strategy in which firms combine some of their resources and which firms combine some of their resources and capabilities to create a competitive advantagecapabilities to create a competitive advantage

Strategic AlliancesStrategic Alliances Traditional JVsTraditional JVs

– Formed bet. a senior MNC Formed bet. a senior MNC in an industrialized country in an industrialized country and a junior local partner in and a junior local partner in a LDC or LICa LDC or LIC

– Primary goal: gain market Primary goal: gain market access for existing access for existing productsproducts

– Senior partner provides Senior partner provides existing products, junior existing products, junior partner provides local partner provides local marketing expertise, marketing expertise, overcomes protectionist overcomes protectionist barriers, governmental barriers, governmental contactscontacts

– Both partners benefited:- Both partners benefited:- Senior partner achieved Senior partner achieved increased sales volume, increased sales volume, local firm gained access to local firm gained access to new products and learn new products and learn new skills new skills

Modern form SAModern form SA– Increasingly formed Increasingly formed

between firms in between firms in industrialized countriesindustrialized countries

– Primary focus is the Primary focus is the creation of new products creation of new products and technologies rather and technologies rather than the distribution of than the distribution of existing onesexisting ones

– Often forged during Often forged during industry transition when industry transition when the competitive positions the competitive positions are shifting and the very are shifting and the very basic for building and basic for building and sustaining competitive sustaining competitive advantage is being advantage is being defineddefined

Strategic Alliances - MotivationStrategic Alliances - Motivation

4 key motivations that are driving the 4 key motivations that are driving the formation of SAformation of SA– Technology exchangeTechnology exchange– Global competitionGlobal competition– Industry convergenceIndustry convergence– Economies of scale and reduction of riskEconomies of scale and reduction of risk

Other motivationsOther motivations– Local partner’s knowledge of the marketLocal partner’s knowledge of the market

Normally foreign firms seek partners with similar Normally foreign firms seek partners with similar products who have good knowledge of local buyers products who have good knowledge of local buyers and local channels of distribution and local channels of distribution

Strategic Alliances - MotivationStrategic Alliances - Motivation

– Government requirementsGovernment requirements Especially in the developing economies, local Especially in the developing economies, local

governments often require joint ventures as a governments often require joint ventures as a condition of entry into the countrycondition of entry into the country

– To allow locals have an ownership positionTo allow locals have an ownership position– Often government itself a joint venture partner Often government itself a joint venture partner

– Low-Cost Raw Materials or LaborLow-Cost Raw Materials or Labor Partner from lesser developed country seeks the Partner from lesser developed country seeks the

technology, know-how, or capital investment from technology, know-how, or capital investment from the developed countriesthe developed countries

Partner from the developed country seeks an Partner from the developed country seeks an opportunity to benefit from the comparative opportunity to benefit from the comparative advantages of the lesser developed country – which advantages of the lesser developed country – which often include cheaper labor and untapped reserves of often include cheaper labor and untapped reserves of raw materialraw material

Technology ExchangeTechnology Exchange Technology transfer or R&D collaboration – major objective of Technology transfer or R&D collaboration – major objective of

over half the SA in recent yearsover half the SA in recent years Need to share technology resources – a single most powerful Need to share technology resources – a single most powerful

motivating factorsmotivating factors Why? Because in recent years, breakthroughs and major Why? Because in recent years, breakthroughs and major

innovations increasingly have been based on interdisciplinary innovations increasingly have been based on interdisciplinary and inter-industry advances that blur the formerly discrete and inter-industry advances that blur the formerly discrete boundaries between different industrial sectors and technologiesboundaries between different industrial sectors and technologies

The need to collaborate arises:The need to collaborate arises:– The necessary capabilities and resources are often beyond The necessary capabilities and resources are often beyond

the scope of a single firmthe scope of a single firm– Increasingly short product life cycles that increase both time Increasingly short product life cycles that increase both time

pressure and risk exposure, while reducing the potential pressure and risk exposure, while reducing the potential payback of massive R&D investmentspayback of massive R&D investments

Global CompetitionGlobal Competition

Increase global competition between Increase global competition between teams of players aligned in strategic teams of players aligned in strategic partnershipspartnerships

To level out the global playing field, To level out the global playing field, companies have to find partnerscompanies have to find partners

Allows coalition of smaller firms to Allows coalition of smaller firms to compete more effectively against compete more effectively against giant firmsgiant firms

Industry ConvergenceIndustry Convergence

Many high-technology industries are Many high-technology industries are converging and overlappingconverging and overlapping– Bio and chip technologiesBio and chip technologies– Computers and communicationComputers and communication

– High density television (HDTV)High density television (HDTV)

Economies of scale and Economies of scale and reduction of riskreduction of risk

Pool resources and concentrate Pool resources and concentrate activities to raise the scale of activity activities to raise the scale of activity

Share and leverage the specific Share and leverage the specific strengths and capabilities each of the strengths and capabilities each of the other participating firmsother participating firms

Sharing different complementary Sharing different complementary resources between companies also resources between companies also result in mutual gains and save each result in mutual gains and save each partner the high cost of duplication.partner the high cost of duplication.

General Strategic General Strategic Considerations Considerations

Strategic IntentStrategic Intent– major goal of all firms – PROFITmajor goal of all firms – PROFIT– Other goals – new technology, learning Other goals – new technology, learning

the market, etcthe market, etc Company CapabilitiesCompany Capabilities

– What can a company afford?What can a company afford?Capital, human resource, production Capital, human resource, production

capabilities, etc.capabilities, etc.

General Strategic General Strategic ConsiderationsConsiderations

Local Government RegulationsLocal Government Regulations– Complexities of legal system and Complexities of legal system and

government regulationsgovernment regulations Need for ControlNeed for Control

– How much control desired?How much control desired?Control over production, price, advertising, Control over production, price, advertising,

product and process R&D, etc.product and process R&D, etc.

Where to Link in the value ChainWhere to Link in the value Chain

Alliances that combine the same value-chain Alliances that combine the same value-chain activities often do so to gain efficient scales of activities often do so to gain efficient scales of operations, to merge compatible talents, or to operations, to merge compatible talents, or to share risks. Attractive when no one company is share risks. Attractive when no one company is big enough, has the necessary talent, or is willing big enough, has the necessary talent, or is willing to take on an enormously risky ventureto take on an enormously risky venture– R&D alliance of IBM, Toshiba, and Siemens – to come up R&D alliance of IBM, Toshiba, and Siemens – to come up

with next generation of computer chips with next generation of computer chips – Operations alliance – General Motors and Renault AS – to Operations alliance – General Motors and Renault AS – to

reach a profitable volume of activity, producing light reach a profitable volume of activity, producing light commercial truck for European marketcommercial truck for European market


Alliance that combines upstream and Alliance that combines upstream and downstream components of the downstream components of the value-chain can serve the objectives value-chain can serve the objectives of low-cost supply or manufacturing; of low-cost supply or manufacturing; operations/marketing alliance operations/marketing alliance


RESEARCH &DEVELOPMENT

INPUT LOGISTICRaw material supply

and acquisition

OPERATIONSManufacturing, assembly,

Facility operations

MARKETING & SALESPromotions & channel

relations

OUTPUT LOGISTICSDelivery

RESEARCH & DEVELOPMENT

INPUT LOGISTICRaw material supply

and acquisition

OPERATIONSManufacturing, assembly,

Facility operations

MARKETING & SALESPromotions & channel

relations

OUTPUT LOGISTICSDelivery

Operations

Delivery

Marketing

Production/marketing

Supply/production

R & D

COMPANY A COMPANY B

CHOOSING A PARTNER: THE MOST CHOOSING A PARTNER: THE MOST IMPORTANT CHOICE?IMPORTANT CHOICE?

Key criteria for picking an Key criteria for picking an appropriate alliance partner:appropriate alliance partner:– Seek Seek strategic complementaritystrategic complementarity

Good understanding of each other’s Good understanding of each other’s strategic objectivesstrategic objectives

Know what the other hopes to achieve from Know what the other hopes to achieve from the venture the venture

– Pick a partner with Pick a partner with complementary skillscomplementary skillsMore than money – must contribute some More than money – must contribute some

skills or resources that complement those of skills or resources that complement those of partnerspartners

CHOOSING A PARTNER: THE MOST CHOOSING A PARTNER: THE MOST IMPORTANT CHOICE?IMPORTANT CHOICE?

– Seek out companies with compatible Seek out companies with compatible management stylesmanagement stylesExample of failure – alliance of GEC with Example of failure – alliance of GEC with

Siemens; managers simply can not get Siemens; managers simply can not get alongalong

– Seek a partner that will provide the Seek a partner that will provide the ‘right’ level of mutual dependency‘right’ level of mutual dependency

– Be cautious of the Be cautious of the ‘elephant-and-ant’‘elephant-and-ant’ complexcomplex

– Assess the difficulty of cross-cultural Assess the difficulty of cross-cultural communication with a likely partner communication with a likely partner

Commitment and Trust: The Soft Side Commitment and Trust: The Soft Side of Alliance Managementof Alliance Management

Commitment – talking care of each other and put Commitment – talking care of each other and put forth extra effort to make the venture workforth extra effort to make the venture work– Committed partners are willing to dedicate resources Committed partners are willing to dedicate resources

and effort and face the risks to make the venture workand effort and face the risks to make the venture work Trust:- credibility and benevolent Trust:- credibility and benevolent

– Credible trust is the confidence that the partner has the Credible trust is the confidence that the partner has the intent and ability to meet their obligations and make intent and ability to meet their obligations and make their promised contributions to the alliancetheir promised contributions to the alliance

– Benevolent trust – the confidence that the partner will Benevolent trust – the confidence that the partner will behave with goodwill and with fair exchange.behave with goodwill and with fair exchange.

Trust and commitment usually go hand in hand.Trust and commitment usually go hand in hand.

If Alliance Does Not WorkIf Alliance Does Not Work

2 basic choices:2 basic choices:– Negotiate an end to the agreementNegotiate an end to the agreement– Improve their implementationImprove their implementation

Mergers and AcquisitionsMergers and Acquisitions

Corporate restructuring, commonly Corporate restructuring, commonly called the M&A initiatives being called the M&A initiatives being undertaken in many parts in the worldundertaken in many parts in the world

Many business organizations have Many business organizations have gone back to the drawing board in gone back to the drawing board in attempting to redefine their corporate attempting to redefine their corporate and commercial objectives, handle and commercial objectives, handle competition and satisfy their competition and satisfy their customers’ needscustomers’ needs

They see mergers as the chosen path to stay They see mergers as the chosen path to stay ahead of the competition. Merger is the ahead of the competition. Merger is the winning formulawinning formula

In Malaysia, mergers and acquisitions taking In Malaysia, mergers and acquisitions taking place in the banking industry, trading houses, place in the banking industry, trading houses, international oil companies, and recently in international oil companies, and recently in the plantation industry, which saw the the plantation industry, which saw the mergers of three large corporations – Guthrie mergers of three large corporations – Guthrie Group, Golden Hope Plantations and Sime Group, Golden Hope Plantations and Sime DarbyDarby



A A mergermerger typically refers to two or more typically refers to two or more companies coming together (usually companies coming together (usually through the exchange of shares) to through the exchange of shares) to become larger one.become larger one.

An An acquisitionacquisition typically has one company – typically has one company – the buyer – who purchases the assets or the buyer – who purchases the assets or shares of the seller, with the form of shares of the seller, with the form of payment being cash, the securities of the payment being cash, the securities of the buyer, or other assets of value to the buyer, or other assets of value to the seller.seller.

Reasons for M&A ExercisesReasons for M&A Exercises(Sherman, 1998)(Sherman, 1998)

For strategic reasons, such as the For strategic reasons, such as the obtaining of additional intellectual capitalobtaining of additional intellectual capital

To obtain a more sound and secure To obtain a more sound and secure financingfinancing

To cope with industry trends such as To cope with industry trends such as changing technology, to face fierce changing technology, to face fierce competitions, changing consumer competitions, changing consumer preferences, to control costs – all these preferences, to control costs – all these leading towards gains in efficiencyleading towards gains in efficiency

To transform corporate identity To transform corporate identity following a crisis to spread the risks following a crisis to spread the risks and cost of developing new and cost of developing new technology, research and gaining technology, research and gaining access to new frontiersaccess to new frontiers

To develop an international presence To develop an international presence and expanded market shareand expanded market share

For products and service lines to For products and service lines to remain competitiveremain competitive


To buy brand loyalty and customer To buy brand loyalty and customer relationships; and relationships; and

As an alternative to starting a new As an alternative to starting a new line of business. line of business.


Reasons for M&A ExercisesReasons for M&A Exercises(Gaughan, 2002)(Gaughan, 2002)

As a mean for firms to grow quickly;As a mean for firms to grow quickly; To experience economic gains as a result of To experience economic gains as a result of

economies of scale and scope;economies of scale and scope; The enlarged firm may have better access to The enlarged firm may have better access to

capital market with lower cost of capital enabling capital market with lower cost of capital enabling it to enjoy better financial benefits; andit to enjoy better financial benefits; and

In anticipation of gains which the merged firm In anticipation of gains which the merged firm may experience when applying its superior may experience when applying its superior management skills to the target business. management skills to the target business.

PNB’s M&A objectivePNB’s M&A objective

The entities should truly enhance The entities should truly enhance shareholder value and “postclosing shareholder value and “postclosing synergy” synergy” – The key premise to synergy is that “the The key premise to synergy is that “the

whole will be greater than the sum of its whole will be greater than the sum of its parts”parts”

SynergySynergy

Can be categorized into 3 aspects:Can be categorized into 3 aspects:

– Operating synergy Operating synergy The efficiency gains or operating economies The efficiency gains or operating economies

that are derived in horizontal or vertical that are derived in horizontal or vertical mergers. Operating synergy often comes from mergers. Operating synergy often comes from a reduction in costs that result form a corporate a reduction in costs that result form a corporate combination. These cost reductions may result combination. These cost reductions may result from economies of scale or the reductions in from economies of scale or the reductions in unit costs that result from an increase in the unit costs that result from an increase in the size or scale of a company’s operationssize or scale of a company’s operations

– Revenue-enhancing synergyRevenue-enhancing synergyThe ability of a combined entity to realize The ability of a combined entity to realize

more revenues than what the individual more revenues than what the individual companies would have if they remained companies would have if they remained independent. What this means is that, after independent. What this means is that, after a corporate combination, if the corporation a corporate combination, if the corporation has an increase in its revenues that is has an increase in its revenues that is beyond what is accomplished by merely beyond what is accomplished by merely adding together the revenues of the merger adding together the revenues of the merger partners, then perhaps revenue-enhancing partners, then perhaps revenue-enhancing synergies explain the gain. synergies explain the gain.

SynergySynergy

– Financial synergyFinancial synergyThe possibility that the cost of capital can be The possibility that the cost of capital can be

lowered by combining one or more lowered by combining one or more companies. In other words, financial companies. In other words, financial synergy is when a target company has synergy is when a target company has certain growth opportunities that it would certain growth opportunities that it would like to pursue but it is hampered by like to pursue but it is hampered by insufficient access to capital. One way this insufficient access to capital. One way this problem may be alleviated is with a merger problem may be alleviated is with a merger with a company that has better access to with a company that has better access to capital but that may not have the came capital but that may not have the came profit-making opportunities as the target profit-making opportunities as the target

SynergySynergy

Human Resource Management Human Resource Management Issue during IntegrationIssue during Integration

In the course of integration, the merging firms have to In the course of integration, the merging firms have to confront the following issues:confront the following issues:– Board level changesBoard level changes

May need to be revamped to align directorial May need to be revamped to align directorial expertise with the emerging needs of the post-expertise with the emerging needs of the post-merger business. The new board should be change merger business. The new board should be change leaders so that they can carry out the change leaders so that they can carry out the change process dictated by the mergerprocess dictated by the merger

– Who will do which senior job?Who will do which senior job? The choice of the right person for the right job is The choice of the right person for the right job is

important because otherwise the success of the important because otherwise the success of the merger will be jeopardized. Equally important, the merger will be jeopardized. Equally important, the choice often is a signal about the style, culture and choice often is a signal about the style, culture and intent of the new management intent of the new management

Head count reduction/workforce redundancy Head count reduction/workforce redundancy – In emphasizing on efficiency savings through In emphasizing on efficiency savings through

consolidation of duplicate functions or consolidation of duplicate functions or production sites, head count reduction is production sites, head count reduction is perhaps inevitable.perhaps inevitable.

Aligning performance measurement and reward Aligning performance measurement and reward systemssystems– Changing the performance evaluation and Changing the performance evaluation and

reward system may be a necessary element in reward system may be a necessary element in evolving a new culture because of their power evolving a new culture because of their power to motivate staff and influence their behaviorto motivate staff and influence their behavior


Key people retentionKey people retention– Uncertainty during merger often leads senior Uncertainty during merger often leads senior

managers to end it by leavingmanagers to end it by leaving– Key people retention may be achieved through Key people retention may be achieved through

devices such as ‘golden handcuffs’, i.e. special devices such as ‘golden handcuffs’, i.e. special bonuses or stock options, etc.bonuses or stock options, etc.

Managing conflicting expectationsManaging conflicting expectations– Mergers are characterized by expectational Mergers are characterized by expectational

ambiguity and incorrect assumptions about ambiguity and incorrect assumptions about thinking and behaviorthinking and behavior


Common Causes Why Mergers Fail Common Causes Why Mergers Fail

The price being paid is too highThe price being paid is too high– The failure to distinguish the target from The failure to distinguish the target from

the investment. Even the best company the investment. Even the best company can be a poor investment if the price paid can be a poor investment if the price paid exceeds the present value of its exceeds the present value of its anticipated future returnsanticipated future returns

Inadequate risk analysisInadequate risk analysis– Failure to rigorously assess the likelihood Failure to rigorously assess the likelihood

of success of a transaction or to consider of success of a transaction or to consider management discretion in future periodsmanagement discretion in future periods

Exaggerated synergiesExaggerated synergies– Anticipated revenue enhancements, Anticipated revenue enhancements,

cost reductions, operating efficiencies or cost reductions, operating efficiencies or financing benefits are overestimatedfinancing benefits are overestimated

Failure to integrate operations Failure to integrate operations quicklyquickly– With the price for synergies paid up With the price for synergies paid up

front, they must be achieved on time to front, they must be achieved on time to yield benefits and create valuesyield benefits and create values


Make-it-happen pressure from the Make-it-happen pressure from the executive levelexecutive level– The executives’ desire to move quickly or to The executives’ desire to move quickly or to

make their mark on the company without make their mark on the company without adequate analysis of effects of the adequate analysis of effects of the transaction on valuetransaction on value

Inadequate due diligenceInadequate due diligence– In a ore-combination phase, ineffective In a ore-combination phase, ineffective

strategic planning or assessment of value strategic planning or assessment of value drivers and risk drivers or pressure to win drivers and risk drivers or pressure to win negotiations prevail over sound decision negotiations prevail over sound decision makingmaking


Failure to accurately assess Failure to accurately assess customer reactioncustomer reaction– The newly combined company may The newly combined company may

force certain customers to seek a force certain customers to seek a different source of supply to avoid different source of supply to avoid buying from what has become a buying from what has become a competitor or to avoid excessive competitor or to avoid excessive reliance on one source of supply.reliance on one source of supply.


international strategic alliance fma3093 international business management seminar

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