1 innovation networks and alliance management lecture 5 business alliances

Innovation networks and alliance management

Lecture 5

Business alliances

2TU/e - Innovation in networks and alliance management, 0ZM05/0EE10

A recap What are alliances? Alliance goals Alliance failure Key areas in alliance management Alliance capabilities The Toyota supplier network

Course design

Aim: knowledge about concepts in network theory, and being able to apply them, in particular in a context of innovation and alliances

1. Network theory and background2. Business alliances as one example of network strategy3. Assignment 1: analyzing an alliance network4. Assignment 2: analyzing an alliance strategy5. Final exam: content of lectures and slides plus literature

online

Course design (detail)

1. Network theory and background- Introduction: what are they, why important …- Four basic network arguments- Small world networks and trust- Kinds of network data: collection (Part I)- Typical network concepts: calculation, UCINET software,

visualisation (Part II)

2. Business alliances as one example of network strategy- Alliances, alliance failure, key areas in alliance management and the Toyota supplier network.- Legal aspects of alliances- A networked economy

What you have learned already...what is a network?

Network A set of ties among a set of actors (or “nodes”)

Actors persons, organizations, business-units,countries …

Ties Any instance of ‘connection of interest’between the actors

What you have learned already the last time..... Example: relations among organizations

Firms as actors

Buys from, sells to, outsources to

Has done business with Owns shares of, is part of Has a joint venture or alliance

with, has sales agreements with Has had quarrels with

Mark Granovetter: The strength of weak ties

James Coleman: Network closure as social capital

Ron Burt: Structural holes

J. Coleman/R. Burt: Diffusion of innovation through social networks: cohesion versus structural equivalence

All good theories are portable (from one problem to another). You have to take them to your problem.

4 Basic Social Network Arguments

This point is nicely illustrated in the paper of Dyer and Nobeake, which will be discussed later

Granovetter: strenght of weak ties

You need weak ties because they give you better access to information

Coser (1975) You need bridging weak ties: weak ties that connect to groups outside your own clique

Coleman: Network closure as social capital

Closed network perspective-cohesion theorists Emphasizes

advantageous effect of strong ties

Redundancy of information may compensate for uncertainty in information provision

Focus on trust, shared norms of behavior, and reduction of opportunism

Network closure is a prerequisite to create social capital

Network with closure

Network without closure

Ron Burt: Structural holes as social capital (2)

Robert

Robert’s network is rich in structural holes

James' network has fewer structural holes

Puzzling facts about alliances

From the late 1970s through the early 1990s, the number of strategic alliances among the U.S., E.C., and Japanese firms grew ___ fold?

Puzzling facts about alliances

The failure rate for strategic alliances is thought to be approximately ___%

Examples of alliances

Sony Ericsson Sony does the marketing

and designing Ericsson does the

manufacturing

Philips and Sara Lee/DE combined their knowledge in respectively household appliances and coffee to create the successful Senseo coffee concept

Coca Cola shares its knowledge with McDonalds. This allowed McDonalds to enter more markets, faster and more succesfully

Friesland foods manages the inventory of some of its buyers (Vendor managed Inventory), enhancing customer service and reducing inventory costs

Example of alliances

Helio, a cellphone venture targeted at affluent young people, is a joint venture between Internet-service provider EarthLink of Atlanta and South Korean wireless operator SKI Telecom, entered a strategic alliance with MySpace. Helio users will be able to use their phones to blog or access MySpace

Ghananian business firms only work together with a few selected, trusted partnerfirms.

Toyota works very closely with a selected number of suppliers, whereas American companies like GM, Chrysler and Ford work with arms length suppliers.

Philips plugs its marketing gap with alliances

Philips (electronics) and NIke combined their strength to develop wearable electronics, (MP3 related equipment)

Philips works together with Robijn on ironing products

Philips works together with IKEA

Alliances and goals

The examples of alliances make clear that alliances can serve multiple, very diverse goals for firms

Notice that some goals are more long term, and strategic than others

Lets get formal: What is an alliance?

Alliances are: Joint Ventures Co-marketing agreements Co-development agreements Buyer-seller relationships

Alliances are not: Arms length supply

arrangements Licensing or Franchising Subsidiaries Mergers or acquisitions

"A collaborative agreement (or several agreements) of anenduring nature between two or more firms, which contribute

resources to a common endeavor of potentially importantcompetitive consequences, while maintaining their

individuality."

or,"Any cooperative effort between two or more independent organizations to develop, manufacture, or sell products or

services."

Source: Gulati, 2001

Alliance: Nonequity and equity

Nonequity Alliance Equity Alliances

Cooperating firms agree to work together to develop,

manufacture, or sell products or services, but they do not take equity positions in each other or form an independent organizational unit to manage

their cooperative efforts.

Examples: supply agreements, distribution agreements, buyer-seller relationships

Cooperating firms supplement contracts with equity holdings

in alliance partners.

Example: Joint ventures. In a joint venture, cooperating firms create a legally independent firm in which they invest and from which they share any profits that are created.

Roughly, you can divide alliances in horizontal (strategic) alliances and vertical partnerships (long term close ties between firms that perform adjacent steps in the value chain).

In the following I will solely refer to alliances in general not make the vertical and horizontal alliances distinction.

The age of collaboration?

Strategic alliances are increasingly numerous and transnational

Alliances are becoming more important for revenues and profit

The age of collaboration?

In a number of industries, competing with alliances is “a way of life.” e.g. Biotechnology

Even companies that were resource-rich, self sufficient, and avoided alliances, have joined the bandwagon, e.g. Ford, IBM

The dawning of a new age: The Age of Collaboration?

Number of alliances world wide

Europe and the others seem to be lacking

Alliances in e-commerce proliferate

Alliances lead to networks

In only two years, 75% of the industry is directly or indirectly connected

Source: De Man, 2006, Alliantiebesturing

Networks compete In some

industries networks of former competitors now compete with each other

Note, in the airline sector it is all about market power and cost savings.

Every network member profits. Stable technical environment.

Mergers are often not possible

Source: De Man, 2006, Alliantiebesturing

The economics of alliances

Alliances must be assessed on two dimensions Cost-benefit analysis Against alternatives -- Opportunity cost analysis

Alternatives to alliances -- ALLY Develop activities in-house -- MAKE Acquire another firm -- MAKE Buy product or skill in

arm’s-length transactions -- BUY

Alternatives to alliances

There are vast differences between American and Japan automakers in organisation (governance structures)

As we we learn later on these differences may have performance implications: Japanese firms are superior at creating and diffusing production enhancing knowledge Source: Gulati, 2002

Cost and benefits of alliances

Ongoing coordination costs Management time Legal time Conflict

Competitive costs Loss of key competitive advantage Creating competition

Relative rewards vis-à-vis partner Opportunistic behavior by partner Superior learning skills Superior bargaining skills/position

of partner

Broad Increased revenues -- direct and

indirect Decreased costs -- direct and

indirect Risk reduction

Specific Instant access to technology New market Cheap production sources Important customers Cheaper than acquisitions or do-it-

yourself Sharing costs Access to resources

Alliance often 'fail'

The average success rate of alliances is about 50%

The differences between companies in their success rates are vast: 16% of companies report very low success rates (<20%), while a similar number reports very high success rates (>80%)

Source: de man, 2006

Case: Taligent's downfall

PURPOSE: To create an operating system that could compete with Microsoft, IBM, Apple, and later HP allied in a joint venture named Taligent

PROBLEMS: Difficulties in the alliance arose from a number of sources:

1) Taligent was producing products that competed with its parent companies’. Namely, Taligent competed with IBM’s OS/2.

2) Different companies placed different levels on input. Apple did little to incorporate and prepare for Taligent’s technology while IBM created its software to be highly compatible.

Taligent downfall

The downfall of Taligent can be mainly blamed on strategic and behavioral reasons.

The `partners' strategic goals differed, and they `cheated' by not providing the best people

Why do alliances fail?

Environmental reasons Failure to anticipate the

changing conditions in tastes, technology, economy

Failure to consider differences in national culture, institutions, government regulations

Other ... Strategic reasons

Poor partner selection Changed partner goals and

strategy Achievement of partner’s

strategic goals

Why do alliances fail

Structural reasons Lack of flexibility in

contract Unclear goals

Cultural reasons Organizational cultures

mismatched Process reasons

Failure to adapt and adjust to changing circumstances

Lack of top visible management commitment

Poor systems for information sharing, conflict resolution, and control

Lack of trust between organizations

Another failed alliance: Integrion

An example of a failed alliance and the role that environmental, structural, strategy and behavioral reasons play.

Why did Integrion fail?

The alliance life cycle

Alliance processes play a role and change during the life cycle of an alliance

The stages define key areas in alliances

Source Gulati, 2002

Key areas to asses in (strategic) alliances

Source Gulati, 2002

Does it fit with our strategic goals? Do we really need one?

Is the partner compatible e.g.

goals, capabilities, culture, power

What contract? How open, flexible should

the contract be? What negotiating

style?

Incremental

Performance measurement

Appropriate interfaces

Joint Problems solving arrangements/work through conflict

Trust, communication and commitment

Continuation

Termination

Alliance capabilities

Some firms manage the alliance process better than others

Apparently those firms have built up a capability in managing alliances

Firms with a superior alliance capabilities create more shareholder value (Anand and Khanna, 2000)

Star performers are Hewlet-Packard, Nike, Intel, Benetton, Disney, Cisco, Microsoft, Toyota

Alliance capabilities

Sending staff to an alliance training is especially useful for firms that have no experience with alliances

Alliances specialists raise the success rates, particularly when they are in middlemanagement (not in the staff and not too close to operations)

Evaluation is a remarkably strong tool for raising alliance success. Especially the comparison of different alliances of one company is a powerful learning tool which increases alliances success

Source Duijsters, 2006

Philips is building up its alliance capabilities

It has defined corporate alliances

It has defined different alliance functions

Corporate Executive Sponsor

Corporate Relationship Manager

Alliance specialist It has created a Corporate

Alliance Website on its intranet

For managing the Microsoft alliance, Philips has:

Set up a database containing all contracts, projects, people

Opened a Microsoft program office next door to Microsoft's head office

Source: Kempen 2001

The Toyata supplier network

Article by Dyer and Nobeoka "Creating and managing a hihg performance knowledge-sharing network: the Toyota case"

Knowledge sharing routines

Knowledge Explicit knowledge or information Tacit knowledge or know-how

Dilemmas associated with knowledge sharing how can self-interested network members openly share

valuable knowledge? how to prevent free-rider problems? how to maximize the efficiency of knowledge transfers?

Overcoming knowledge sharing dilemmas

Creating a network 'identity' through network-level knowledge-sharing routines

Network `rules' for knowledge protection and value appopriation

Creating multiple knowledge-sharing processes and sub-networks in the larger network

Creating a network 'identity' through network-level knowledge-sharing routines

Creating an `identity' for a collective means that the individual members feel a shared sense of purpose

Toyota's network is known as the `Toyota group'. Toyota promotes a philosophy within the group called

`coexistence and co-prosperty' (Kyoson kyoei). Toyota creates a shared network identity by developing

network level acquisition, storage and diffusion processes. The supplier association Toyota's operations management consulting division Voluntary small group learning teams (jishuken) Interfirm employee transfers

Supplier association

Toyota's supplier association (Kyohokai) established in 1943 information exchange between members mutual development and training among member

companies Socializing events

To meet objectives, suppliers must be close to each other, hence supplier associations divided into three regions Tokai (150 members) Kanto (65 members) Kansai (29 members)

The suppliers association primary objective is to develop ties among members and transfer explicit knowledge through multi-lateral knowledge transfers.

Supplier association

Suppliers association has general (high level) meetings every other month

Topic committees Designed to facilitate knowledge transfer on topics that are

critical to all members in the network F.i. quality committees.

• Regular committee picks a theme for the year (f.i. eliminating supplier design defects)

• Association provides 12 days of quality training each year (for 100 engineers)

• Excellent plant tours allow network members to visit `best practice' plants

• Quality management conference held once a year– lectures from directors, senior managers + six success ful

supplier cases of quality improvement

Consulting teams

Toyota's Operations Management Consulting Division (OMCD): 6 senior executives, 50 consultants

Direct free `on-site' assistance for suppliers periods ranging from one day to many months on average suppliers are visited about 4 times a year with

an average visit lasting 3 days emergent problem solving: cross divisional problems

solving teams helping a supplier

Voluntary learning teams

Operations Management Consulting Division organized (1977) a group of 60 of its key suppliers into `voluntary study groups' (Jishuken)

Each group consists of roughly 5-8 suppliers geographic proximity no direct competitors in the same group experience with Toyota

Groups are reorganized every 3 years Each year the supplier meet with the responsible OMCD manager to

determine a theme. Basic idea is to help each other improve productivity/quality

After determining theme, the group visits each member to develop suggestions

preliminary inspection diagnosis and experimentation presentation follow up/evaluation

Voluntary learning teams (II)

Member of OMCD monitors (to assist and to learn) To be considered for membership of PDA (American

equivalent of Jishuken), supplier must be member of association for a year.

Jishuken are reported to be very valuable (especially in transmitting tacit knowledge)

Network rules for knowledge protection

How to solve the dilemma of motivating members to share valuable knowledge, and free riding problems

Toyota solves this problem by simply eliminating the notion that there is `propriety knowledge'

Toyota sets a norm/rule by sharing its own knowledge Suppliers must be willing to open their plants to other

network members to other network members if they choose to receive Toyota consulting assistance or participate in Jishuken reciprocal obligations: We will help you, but in return, you

must agree to help the network. reciprocity norm is enforced by implicit threat of

withdrawal of business

Network rules for knowledge protection

Tacit rule about value appropriation The recipient of knowledge may appropriate 100 percent

of the savings in the short run, but over time will be expected to share a proportion of those savings with the network

Compare this with the GM consultancy teams (PICOS)

Creating multiple knowledge sharing processes and sub-networks in the larger network How to

maximize efficiency?Toyota established variety of bilateral and multilateral processes, each designed to facilitate different types of knowledge

The creation and evolution of Toyata's US knowledge sharing network Phase 1: Developing weak ties Phase 2: Developing strong ties with Toyota Phase 3: Developing strong ties among suppliers

Developing weak ties

1988: Toyota begins producing cars in Georgetown, Kentucky

Suppliers had virtually now contact with each other

1989 Toyota initiates supplier association (BAMA)

Phase 2: developing strong ties with Toyota

Free of charge well trained consultants made available to BAMA members

Phase 3: Developing strong ties among suppliers Toyota divided

suppliers in small learning teams no competitors rotation equal

capabilities Toyota subsidizes

network activities financial valuable

knowledge

Phase 3: developing strong ties among suppliers From a

network of weak ties with multiple structural holes, to a network of strong ties without structural holes

Conclusion of Dyer and Nobeoka

Network can be more effective than firm in creating and diffusion of knowledge Greater variety of knowledge

Creating an identity of a group, the collective can be an effective way of dealing with free-riding/value appropriation

Cohesive interconnected network is very useful for exploitation

However there may be risks...

Takeaways

What are alliances? Alliance goals Alliance failure Key areas in alliance management Alliance capabilities The Toyota supplier network

1 innovation networks and alliance management lecture 5 business alliances

innovation networks

alliance managementlecture

alliance networkassignment

social networks

withtue innovation

closure45tue innovation

context of innovation

latertue innovation

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