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7.3 Alliance Forms and Management Methods

For global businesses leveraging joint ventures, the economic value derived from the joint venture is an important consideration. Joint ventures require win–win situations that are beneficial to both the company and its alliance partners. Alliances include capital transactions with a partner company, as in the case of joint ventures, as well as agreement-based relationships, such as licensing or joint operating agreements, with local companies. In a discussion of whether a company should have a joint venture or a wholly owned subsidiary as per the preceding paragraphs, a comparison is made for capital transaction between the case of an alliance with another partner and that of external transactions where the acquiring company has an initiative. When creating a local entity that is a wholly owned subsidiary, they can do so via green-field investment or acquisition of a local entity. The latter is done as an external capital transaction and differs from a joint venture such that the transaction focuses on the acquiring company (Fig. 7.1).

Contract-based transactions sometimes require alliances with other companies and involve subcontracting or outsourcing while maintaining company focus.

Fig. 7.1 Comparison of business transaction types

Regarding the differences between capital transactions (joint ventures) and contract-based licensing and joint operating agreements, as was explained in the preceding paragraphs, the joint infusion of capital from a foreign and a local company to create an entirely new local entity is characteristic of joint ventures. On the other hand, a license agreement does not involve new entity creation, but is rather a way to launch a new business in partnership with a local company on contract basis. For example, a foreign company may provide the technology with which a local company manufactures products on the basis of a technology introduction agreement, and sells them to the local market. In doing so, as defined by the license agreement, the local company pays a certain percentage of revenue to the foreign company as a license fee. Joint operations, such as joint development or joint production, are managed by contract that decides capital splits and the attribution of results to achieve a specific operational goal held by multiple companies. We divide the management used to promote these alliances into three phases: (1) the alliance formulation phase, (2) the alliance structure design phase, and (3) the alliance execution phase (based on Kale and Singh (2009)).

The alliance formulation phase begins with a search for a joint operation partner. For example, let us consider a Japanese consumer electronics manufacturer that is intent on entering the Chinese market and is in search of an alliance partner. It is a fact that operations in China will reduce the cost of production; however, for this they will require the creation of distribution channels. The manufacturer realizes that a local partner is necessary as this will not be feasible with company resources alone. What are the requirements of an optimal partner? Having complementary business resources are certainly important in forming an alliance. The Japanese consumer electronics manufacturer possesses production technology with superior low-energy requirement and functionality. However, from a price perspective, selling these products will be difficult in China, therefore requiring the manufacturer to reduce production costs and trim functionality to localize the product. Furthermore, the company needs to establish distribution channels in the Chinese market. Integrating all of these requirements, we conclude that the optimal partner for this company will be a large consumer electronics manufacturer with a high market share and a certain amount of technical capability in China, thus creating a win–win situation for both parties. Assume that the Chinese consumer electronics manufacturer asks for technology that it does not possess currently, such as energy-saving technology, in exchange for its distribution channels. The Japanese manufacturer must carefully analyze and respond to these demands with caution, for the risk of losing the deal because of inadequate incentives to form an alliance with the foreign company.

Selecting an alliance partner in this manner requires identifying business resources that are complementary to both parties and finding a form of partnership that is beneficial to both. However, it is often the case that neither of the two parties fully understands the benefits of the alliance until it is operational. Thus, in addition to the complementarity of the business resources, consistency of management styles and a mutual commitment to the alliance is also important (Beamish 1987). For example, in terms of management styles, companies may choose to focus on shortterm profits or build long-term businesses, or several other areas, such as respond to environmental issues. When these fundamental management philosophies are aligned, companies will most likely not hold adversarial opinions in their partnership. In terms of commitment, it is ideal for both parties' managements to communicate regarding the alliance and work constructively toward the goals of the alliance when any differences in opinion arise.

Deal formulation takes place at the alliance structure design phase: should a company create a capital partnership or an agreement-based partnership, and what specifically should the contents of the agreement look like? Large capital investments by both parties of the joint venture require a strong commitment from both sides to jointly manage the business; this form of alliance has the benefit of engendering an awareness of both parties being “in the same boat” (Hennart 1988). In addition, the rules for distributing results generated by the alliance are made clear by the levels of investment made by each party. However, establishing the new joint venture company entails a large sunk cost, making it difficult to rectify major course corrections in managing operations and compromising flexibility. For example, after the initiation of joint venture operations, if the economic environment changes or results do not meet expectations, reaching an agreement to dissolve the joint venture can be difficult. Even for a single company, the decision to exit an unprofitable business is difficult and takes time. In the case of a joint venture, the decision must be made simultaneously by both companies.

On the other hand, efforts to create agreement-based alliances, such as those based on license agreements or joint operating agreements, enable a more flexible response to agreement changes or perhaps even dissolution of the joint operations. However, this flexibility comes with limitations: neither party commits to the alliance. For alliances, the fact that both parties work together to create new value is critical, and often, alliances do not work if neither party is committed. In other words, agreement-based alliances are effective when both parties have clear delineations of responsibility and results are expected in a relatively short timeframe. On the other hand, capital-based alliances with clear commitment from both parties are required for building cooperative relationships over a long timeframe and across broad areas.

Finally, we discuss the alliance execution phase, a period when the joint venture is established or a license agreement has been entered into, and the alliance shifts into the execution stage. Returning to the example of a Japanese consumer electronics manufacturer entering the Chinese market, it is expected that the local company alliance will extend into the long term. On the other hand, the Chinese economic environment is rapidly changing, and urbanization, along with lifestyle improvement among Chinese citizens, is resulting in a change in demand for consumer electronics products. Accordingly, the process of going ahead with a partnership may be accompanied by unforeseen circumstances after the alliance agreement is signed, and appropriate corrections will need to be made through mutual discussions to analyze the direction of the alliance. Trust between the parties is important in this case. Repeating the process of negotiation, mutual understanding, commitment to compromise, and the execution of compromise consistently are necessary to build this trust (Ring and Van de Ven 1994). Alliance partners share highly confidential information through this process, therefore, reducing the asymmetric nature of information among the parties. This results in clearer compromises on both parties and lesser indulgence in opportunistic behavior, which can be detrimental to the other party. Building trust among alliance partners is the most effective means to reduce the risk of entering into an agreement—one of the demerits of joint ventures.

So far we have discussed the management of different types of alliances; we conclude with the overall countermeasures that a company may undertake. As previously stated, alliance management differs by country, region, industry, and type of operation. Because alliances presuppose multiple parties, building effective relationships greatly influences partnership results. Thus, using company experiences and organizational efforts in a potential alliance is critical toward the overall improvement of the alliance. Building alliance knowhow organizationally requires a department specialized in alliance management (Anand and Khanna 2000). Western companies, such as Hewlett-Packard, Eli Lilly, and Philips, have established such departments, thereby increasing the success rate of their alliances (Kale and Singh 2009). In Japan, efforts are being made to create such departments that focus on alliance management, particularly among pharmaceutical companies; however, Japanese companies still lag behind Western companies. Creating a dedicated alliance function at the firm is an effective means to accumulate knowhow from existing partnerships and to use this knowhow in new potential alliances.

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