Global cooperation: Global cooperation: a profile of alliances a profile of alliances

Cooperate to succeed ?Cooperate to succeed ?

Prof. Dr. R. VeugelersProf. Dr. R. Veugelers

Where to get more information ?Where to get more information ?

Contractor & LorangeContractor & Lorange, C, Cooperative strategies in ooperative strategies in international businessinternational business, Lexington Books, 1988, Lexington Books, 1988

Oxley, 1997, Oxley, 1997, Appropriability hazards in Strategic Appropriability hazards in Strategic AlliancesAlliances, Journal of Law, Economics , Journal of Law, Economics OrganisationOrganisation

ModyMody, , Learning through alliancesLearning through alliances, Journal of , Journal of Economic Behavior and Organisations, 1993.Economic Behavior and Organisations, 1993.

……..

Why collaboration?Why collaboration?

Many critical technologies are interdependent Many critical technologies are interdependent Many critical technologies are firm and Many critical technologies are firm and

context-specific, based on systemic skills and context-specific, based on systemic skills and tacit know-howtacit know-how

To access this tacit and complex know-how To access this tacit and complex know-how requires collaboration with sourcerequires collaboration with source

Why collaboration?Why collaboration?

With uncertainty and tacit know-how : With uncertainty and tacit know-how : appropriability hazardappropriability hazard

holder of know-how may not deliverholder of know-how may not deliverreceiver of know-how may misusereceiver of know-how may misuse

Can collaboration better deal with Can collaboration better deal with appropriability hazard ?appropriability hazard ?

What is collaboration?What is collaboration?

Two or more firms pooling resources Two or more firms pooling resources to research, develop, produce, market to research, develop, produce, market

products and markets products and markets

to achieve common goals to achieve common goals

Collaboration is a hybrid form between arm’s length contracts and hierarchies

What is collaboration ?What is collaboration ?

collaboration distinguishes from integration/take-overs/FDI ininternational context; but collaboration has potential to providebasis for acquisitions; predecssor for unfamiliar market/tech entry;experience building tool;

includes contribution by partners of capital/technology… managerial problem of managing independent bodies (no full

control) not based on arm’s length contracting: distinguishes from sub-

contracting/licensingalthough they are often combined

Questions to be examinedQuestions to be examined

which firms will ally:

which firms benefit mostsize (big/small)technological origin/industrynationality (Japan, US, EC…followers/leaders)

and with whom to team up: mix or match

how to ally:

which organisational format, which activities… can be chosento max net benefits

Different forms of collaboration Different forms of collaboration

developmental vs distributionaldevelopmental vs distributional strategic vs operationalstrategic vs operational informal vs formalinformal vs formal individual vs network individual vs network

Developmental vs distributionalDevelopmental vs distributional

CREATION : competence leverageCREATION : competence leverage– jointly create new values, possibly in co-jointly create new values, possibly in co-

developmentdevelopment– utilize existing competences in unique utilize existing competences in unique

combinationscombinations ACCESS: competence acquisitionACCESS: competence acquisition

– transfer values between partners to create new transfer values between partners to create new values inside each partner (learning)values inside each partner (learning)

– market-to-market alliancesmarket-to-market alliances

““Strategic alliances” Strategic alliances” is a misnomer...is a misnomer...

Objective can be strategic:Objective can be strategic:– new market entry, significant growth or new market entry, significant growth or

improvement...improvement... Objective can be operational :Objective can be operational :

– filling out gaps, reducing costs...filling out gaps, reducing costs...

Strategic versus operationalStrategic versus operational

Varying levels of commitment Varying levels of commitment through specific investmentsthrough specific investments

joint venture: joint venture: separate entity that will perform separate entity that will perform R,D,P,D in which parents take participation and R,D,P,D in which parents take participation and

provide inputs)provide inputs) coordination and exchangecoordination and exchange

Formal versus informalFormal versus informal

Single versus multitudeSingle versus multitude

Individual alliance Individual alliance

versus versus evolution of a dynamic network of evolution of a dynamic network of

alliances over time :alliances over time : scope of diversity in networkscope of diversity in networkcompatibility of partnerscompatibility of partners management by nodal partnermanagement by nodal partner

Different types of partners : Different types of partners : mix or matchmix or match

direct competitors in same industrydirect competitors in same industryvs firms in related industries (suppliers, vs firms in related industries (suppliers, customers) vs unrelated firmscustomers) vs unrelated firms

small vs large firmssmall vs large firms national vs internationalnational vs international commercial vs non-commercial:commercial vs non-commercial:

research institutes, universities, government research institutes, universities, government agencies...agencies...

Different functional activitiesDifferent functional activities

Research (fundamental/applied)Research (fundamental/applied) DevelopmentDevelopment ProductionProduction DistributionDistribution ......

Exclusive or in combinationExclusive or in combination

Explaining benefits and costs of Explaining benefits and costs of collaboration from...collaboration from...

transaction-cost theorytransaction-cost theory resource-based theoryresource-based theory risk and option theoryrisk and option theory

Transaction cost theoryTransaction cost theory

Cooperation allows to minimize transaction Cooperation allows to minimize transaction costs /appropriation hazards throughcosts /appropriation hazards throughquid-pro-quo reciprocity in ongoing returnsquid-pro-quo reciprocity in ongoing returnsmutual hostage exchange through equity share as bondmutual hostage exchange through equity share as bondbetter control/monitoring than arm’s length contracts without better control/monitoring than arm’s length contracts without too heavy bureaucracy within hierarchiestoo heavy bureaucracy within hierarchies

Shared ownership allows control and provides Shared ownership allows control and provides incentivesincentives

Resource Based TheoryResource Based Theory

Collaboration allows to build up Collaboration allows to build up competences more effectively competences more effectively

by accessing and complementing (tacit) by accessing and complementing (tacit) know-how know-how

if firms have capacity for learning if firms have capacity for learning

Risk and Option TheoryRisk and Option Theory

Collaboration allows to share costs and Collaboration allows to share costs and risksrisks Collaboration allows to commit Collaboration allows to commit incrementally, to continuously reassess incrementally, to continuously reassess contribution to the venture: contribution to the venture: collaboration as option, learning experience collaboration as option, learning experience collaboration as pre-runner for acquisitioncollaboration as pre-runner for acquisition

In summary: In summary: Benefits vs Costs of CollaborationBenefits vs Costs of Collaboration

sharing of costs/riskssharing of costs/risks efficiencyefficiency

– economies of scaleeconomies of scale

– synergiessynergies access toaccess to

– marketsmarkets

– know-howknow-how

– productsproducts impact on competitionimpact on competition governmentgovernment

set-up costsset-up costs– search & negotiationssearch & negotiations– start-up investments & contributionsstart-up investments & contributions– foregone opportunitiesforegone opportunities

cost of management of cost of management of collaborationcollaboration

assessment of partner’s added assessment of partner’s added value: ex antevalue: ex ante

monitoring of partners & monitoring of partners & ventures contributionventures contribution

control know-how flowscontrol know-how flows

Alliances vs FDI/licensingAlliances vs FDI/licensing

better to control technology transfers than when licensing better to monitor the recipient than when licensing better to manage TC and opportunism than contracting through

quid pro quo/reciprocity quicker access to … then own development

vis-à-vis merger: not all functions need to be included

Benefits and costs of Benefits and costs of collaboration will depend oncollaboration will depend on

type of agreementtype of agreementtype of partnertype of partnertype of functional areatype of functional areatechnology/sectortechnology/sectorstage in technology-life cyclestage in technology-life cycle

Partners in alliances: Partners in alliances: mix or match?mix or match?

national versus international alliancesnational versus international alliances large versus small firmslarge versus small firms horizontal versus verticalhorizontal versus vertical commercial firms versus research institutescommercial firms versus research institutes

Differences between partners lead toHigher coordination costs

BUT ALSOHigher complementarity leading to•synergies•stability

Evidence on success...Evidence on success...

Problems of empirically assessing success:Problems of empirically assessing success:– subjective evaluation through questionnairessubjective evaluation through questionnaires– objective evaluation: objective evaluation:

» contribution of collaboration to overall performancecontribution of collaboration to overall performance

– event studies on stock market reactions to event studies on stock market reactions to announcements of cooperationannouncements of cooperation

– longitudional evaluation of survival of longitudional evaluation of survival of cooperationcooperation

Limited evidence on success Limited evidence on success suggests...suggests...

High incidence of failure, especially in early High incidence of failure, especially in early years:years:

E.g. Kogut (1989) manufacturing jvs in USE.g. Kogut (1989) manufacturing jvs in US

after 4 years: 33% terminationsafter 4 years: 33% terminations

after 6 years: 50% terminationsafter 6 years: 50% terminations

Problem areas in collaborationProblem areas in collaboration

unclear strategic objectivesunclear strategic objectives unclear organisational structureunclear organisational structure fluctuating commitmentfluctuating commitment properly evaluating partnerproperly evaluating partner coordinating cross-functional team effortscoordinating cross-functional team efforts overcoming “not invented here” syndromovercoming “not invented here” syndrom integrating newly sourced technology in integrating newly sourced technology in

mainstreammainstream

Problem areas in collaboration IIProblem areas in collaboration II

misjudging synergiesmisjudging synergies changing strategic objectives and needs;changing strategic objectives and needs;

– if only because of learning from collaborationif only because of learning from collaboration changes in complementaritieschanges in complementarities

– redundancy of partnersredundancy of partners loss of autonomy, strategic freedomloss of autonomy, strategic freedom loss of control, on transfer of know-howloss of control, on transfer of know-how

Problem areas in collaboration IIIProblem areas in collaboration III

managing cultural differences: managing cultural differences: – impedence mismatchimpedence mismatch

differences in commitmentdifferences in commitment inadequate internal structures & incentives inadequate internal structures & incentives

for cooperationfor cooperation

Some evidence on problem areasSome evidence on problem areas

Development of dependency on partnerDevelopment of dependency on partner 54%54% Costs of negotiations and transactionsCosts of negotiations and transactions 44%44% Assigning contributions/results to partnersAssigning contributions/results to partners 26%26% Secrecy problemsSecrecy problems 22%22% Problems of technology transfersProblems of technology transfers 20%20% Loss of own technological competenceLoss of own technological competence 11%11% Inhibition of own developmentInhibition of own development 11%11%

Survey results from Germany (Brockhoff, 1992)

Some data on alliancesSome data on alliances

Database on alliances reported in the Financial Times during theperiod ’93 – ’96. This database currently consists of 1366 alliancesbetween 2632 individual specific partners

FIRM CHARACTERISTICS nationality:1. dominance of Triad: EC, US, Japan2. Far East3. Eastern Europesize/ experience:1. Fortune 5002. most large companies are in more alliances:

Geographical distribution Geographical distribution

EU40%

EFTA2%

Eastern Europe4%

N-America26%

Japan9%

Far East17%

S-America2%

Some data on alliancesSome data on alliances

ALLIANCE CHARACTERISTICS

Organisational form:more JV versus coordination:Note:Japan more JV, services less JV, Eastern Europe more JV

Participation rate: clear dominance of one partner not important, predominance of more or less equal sharing (cf predominance of

2 partners only) equal sharing even among asymmetric partners (big vs small);

why ?

Functional activities in alliancesFunctional activities in alliances

Functional

activitie

0

5

10

15

20

25

30

Functional

activitie

Production

Distribution

Prod&Distr

R&D

Prod/Dist&R&D

Non-spec

% of all alliances

Sectoral distribution of alliancesSectoral distribution of alliances

chemicals6%

pharm.8%computer

4%

other51%

electronics8%

instruments2%

electrical mach.6%

aerospace5%

automotive 10%

All these aliance intensive sectors can be characterized according to elements proxying benefits of alliances: more scope for spreading of high investment costs, efficiency enhancement, competitive considerations, government intervention

Others: mainly services: bank&insurance, business services and airlines

National - international alliancesNational - international alliances

growth and dominance of international alliances benefits of reciprocal market access and technology-market

swap see also policy: anti-trust/trade/research but higher coordination costs

most alliances remain intra-regional (esp intra-EC)

international alliances more JVs (see Eastern Europe)

Size asymmetriesSize asymmetries

large vs small firms complementarity of partners: large firm has production/marketinginfrastructure & financial muscle; small firm has innovative potentialBUT higher coordination costs given difference in culture small firms risks being swallowed by large cie (large firms needs less the

small firm than vv: once development phase is over, the large firm has thestrongest alternative position ito own production/marketing)

POSSIBLE SOLUTION: selection of partner: reputation organisational structure: sharing rule, given enough to large firmlarge vs large

examples in computer & cars: all large, global players control of competition access to large technology bases

Inter vs intra-industry alliancesInter vs intra-industry alliances

vertical benefits: more synergies out of technol complementarity BUT higher coordination costs

horizontal benefits: scale economies&rationalisation; market sharing/access; monitoring of competition

BUT partners are direct competitors

Inter vs intra-industry alliancesInter vs intra-industry alliances

1. most alliances are horizontal (see also P/D dominance of marketaccess &control)

2. vertical alliances are more R&D and of the JV type (to exploitcomplementarity)

3. vertical alliances are more in core sectors 34, 25 and also 83(business services)

4. EC more in horizontal, intra-regional alliances than US/Japan5. service companies more in horizontal, intra-regional alliances