Chapter 14 Outline

Making Alliances Work

The failure rate for international strategic alliances seems to be quite high. For example, one study of 49 international strategic alliances found that two-thirds run into serious managerial and financial troubles within two years of their formation, and that although many of these problems are solved, 33 percent are ultimately rated as failures by the parties involved.²⁶ Below we argue that the success of an alliance seems to be a function of three main factors: partner selection, alliance structure, and the manner in which the alliance is managed.

Partner Selection

One key to making a strategic alliance work is to select the right ally. A good ally, or partner, has three principal characteristics. First, a good partner helps the firm achieve its strategic goals, whether they are market access, sharing the costs and risks of new-product development, or gaining access to critical core competencies. The partner must have capabilities that the firm lacks and that it values. Second, a good partner shares the firm's vision for the purpose of the alliance. If two firms approach an alliance with radically different agendas, the chances are great that the relationship will not be harmonious, will not flourish, and will end in divorce. Third, a good partner is unlikely to try to opportunistically exploit the alliance for its own ends; that is, to expropriate the firm's technological know-how while giving away little in return. In this respect, firms with reputations for "fair play" to maintain probably make the best allies. For example, IBM is involved in so many strategic alliances that it would not pay the company to trample roughshod over individual alliance partners. This would tarnish IBM's reputation of being a good ally and would make it more difficult for IBM to attract alliance partners. Since IBM attaches great importance to its alliances, it is unlikely to engage in the kind of opportunistic behavior that Reich and Mankin highlight. Similarly, their reputations make it less likely (but by no means impossible) that such Japanese firms as Sony, Toshiba, and Fuji, which have histories of alliances with non-Japanese firms, would opportunistically exploit an alliance partner.

To select a partner with these three characteristics, a firm needs to conduct comprehensive research on potential alliance candidates. To increase the probability of selecting a good partner, the firm should:

1. Collect as much pertinent, publicly available information on potential allies as possible.

2. Collect data from informed third parties. These include firms that have had alliances with the potential partners, investment bankers who have had dealings with them, and former employees.

3. Get to know the potential partner as well as possible before committing to an alliance. This should include face-to-face meetings between senior managers (and perhaps middle-level managers) to ensure that the chemistry is right.

Alliance Structure

Having selected a partner, the alliance should be structured so that the firm's risks of giving too much away to the partner are reduced to an acceptable level. Figure 14.1 depicts the four safeguards against opportunism by alliance partners that we discuss here. (Opportunism includes the theft of technology and/or markets that Reich and Mankin describe.) First, alliances can be designed to make it difficult (if not impossible) to transfer technology not meant to be transferred. The design, development, manufacture, and service of a product manufactured by an alliance can be structured so as to wall off sensitive technologies to prevent their leakage to the other participant. In the alliance between General Electric and Snecma to build commercial air

Figure 14.1

Structuring Alliances to Reduce Opportunism

craft engines, for example, GE reduced the risk of excess transfer by walling off certain sections of the production process. The modularization effectively cut off the transfer of what GE regarded as key competitive technology, while permitting Snecma access to final assembly. Similarly, in the alliance between Boeing and the Japanese to build the 767, Boeing walled off research, design, and marketing functions considered central to its competitive position, while allowing the Japanese to share in production technology. Boeing also walled off new technologies not required for 767 production.²⁷

Second, contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner. For example, TRW, Inc., has three strategic alliances with large Japanese auto component suppliers to produce seat belts, engine valves, and steering gears for sale to Japanese-owned auto assembly plants in the United States. TRW has clauses in each of its alliance contracts that bar the Japanese firms from competing with TRW to supply US-owned auto companies with component parts. By doing this, TRW protects itself against the possibility that the Japanese companies are entering into the alliances merely as a means of gaining access to the North American market to compete with TRW in its home market.

Third, both parties to an alliance can agree in advance to swap skills and technologies that the other covets, thereby ensuring a chance for equitable gain. Cross-licensing agreements are one way to achieve this goal. For example, in the alliance between Motorola and Toshiba, Motorola has licensed some of its microprocessor technology to Toshiba, and in return, Toshiba has licensed some of its memory chip technology to Motorola.

Fourth, the risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment from its partner in advance. The long-term alliance between Xerox and Fuji to build photocopiers for the Asian market perhaps best illustrates this. Rather than enter into an informal agreement or a licensing arrangement (which Fuji Photo initially wanted), Xerox insisted that Fuji invest in a 50/50 joint venture to serve Japan and East Asia. This venture constituted such a significant investment in people, equipment, and facilities that Fuji Photo was committed from the outset to making the alliance work in order to earn a return on its investment. By agreeing to the joint venture, Fuji essentially made a credible commitment to the alliance. Given this, Xerox felt secure in transferring its photocopier technology to Fuji (see the Management Focus for details).²⁸

Managing the Alliance

Once a partner has been selected and an appropriate alliance structure has been agreed on, the task facing the firm is to maximize its benefits from the alliance. As in all international business deals, an important factor is sensitivity to cultural differences (see Chapter 3). Many differences in management style are attributable to cultural differences, and managers need to make allowances for these in dealing with their partner. Beyond this, maximizing the benefits from an alliance seems to involve building trust between partners and learning from partners.²⁹

Building Trust

Managing an alliance successfully seems to require building interpersonal relationships between the firms' managers. This is one lesson that can be drawn from the successful strategic alliance between Ford and Mazda. Ford and Mazda have set up a framework of meetings within which their managers not only discuss matters pertaining to the alliance but also have time to get to know each other better. The belief is that the resulting friendships help build trust and facilitate harmonious relations between the two firms. Personal relationships also foster an informal management network between the firms. (Chapter 13 discusses informal management networks.) This network can then be used to help solve problems arising in more formal contexts (such as in joint committee meetings between personnel from the two firms).

Learning from Partners

After a five-year study of 15 strategic alliances between major multinationals, Gary Hamel, Yves Doz, and C. K. Prahalad concluded that a major determinant of how much a company gains from an alliance is its ability to learn from its alliance partner.³⁰ They focused on a number of alliances between Japanese companies and Western (European or American) partners. In every case in which a Japanese company emerged from an alliance stronger than its Western partner, the Japanese company had made a greater effort to learn. Few Western companies studied seemed to want to learn from their Japanese partners. They tended to regard the alliance purely as a cost-sharing or risk-sharing device, rather than as an opportunity to learn how a potential competitor does business.

For example, consider the 10-year alliance between General Motors and Toyota constituted in 1985 to build the Chevrolet Nova. This alliance was structured as a formal joint venture, called New United Motor Manufacturing, Inc., and each party had a 50 percent equity stake. The venture owned an auto plant in Fremont, California. According to one Japanese manager, Toyota quickly achieved most of its objectives from the alliance: "We learned about US supply and transportation. And we got the confidence to manage US workers."³¹ All that knowledge was then transferred to Georgetown, Kentucky, where Toyota opened its own plant in 1988. On the other hand, possibly all GM got was a new product, the Chevrolet Nova. Some GM managers complained that the knowledge they gained through the alliance with Toyota has never been put to good use inside GM. They believe they should have been kept together as a team to educate GM's engineers and workers about the Japanese system. Instead, they were dispersed to various GM subsidiaries.

To maximize the learning benefits of an alliance, a firm must try to learn from its partner and then apply the knowledge within its own organization. It has been suggested that all operating employees should be well briefed on the partner's strengths and weaknesses and should understand how acquiring particular skills will bolster their firm's competitive position. Hamel, Doz, and Prahalad note that this is already standard practice among Japanese companies. For example, they made this observation:

We accompanied a Japanese development engineer on a tour through a partner's factory. This engineer dutifully took notes on plant layout, the number of production stages, the rate at which the line was running, and the number of employees. He recorded all this despite the fact that he had no manufacturing responsibility in his own company, and that the alliance did not encompass joint manufacturing. Such dedication greatly enhances learning.³²

For such learning to be of value, it must be diffused throughout the organization (as was seemingly not the case at GM after the GM - Toyota joint venture). To achieve this, the managers involved in the alliance should be used to educate their colleagues in the firm about the skills of the alliance partner.