Strategic Alliances

Studying this chapter should provide you with the knowledge to:

  1. Differentiate among strategic alliances, vertical integration, and arm’s-length supplier relationships.
  2. Explain the different types of strategic alliances, how they are governed, and the conditions under which each type is preferred.
  3. Describe the different ways value is created in alliances.
  4. Discuss the two potential dangers of strategic alliances and three ways that firms can protect themselves against these dangers.
  5. Describe the importance of building an alliance management capability.

Excited tourists who enter Tokyo Disneyland are immediately transported into a uniquely American dream world. Nearly every- thing at Tokyo Disneyland is a replica of the original Disneyland in Anaheim, California, from Sleeping Beauty’s castle to Disneyland’s famous “Main Street” attraction. Signs are printed in English, with only small Japanese subtitles. When the park opened in 1984, only 2 of its 27 restaurants even sold Japanese foods.1 Instead, visitors snacked on hot dogs, popcorn, and “spaceburgers” between rides. The only observable Japanese touch is an enormous roof-covering over Main Street, a symbol reminding visitors that they truly are in Japan, rainy season included.

Despite all appearances, the interesting thing about Tokyo Disneyland is that the Walt Disney Company is not involved in the day-to-day operations of the park. It simply collects a licensing fee from Oriental Land Company (OL), a Japanese real estate firm that financed, built, and runs both Tokyo Disneyland and its neighboring park, Tokyo DisneySea. Walt Disney and Oriental Land came together in 1979 to form a strategic alliance and make the Tokyo Disney dream a reality. OL had what Disney did not: 115 acres of open real estate on the outskirts of Tokyo, financial resources, and knowledge of Japanese and Asian culture that could make the venture a success. Disney had its brand, park design, and management capabilities, and a host of movie characters that people would pay just to stand next to and snap a photo with, as outlined in Table 8.1.
A Disney resort in Japan seemed to make sense, given that Japanese tourists flocked to Disneyland in the United States. Further- more, since there are almost no imports or exports between foreign markets in the leisure industry, there would be none of the negative side effects typically associated with Japanese–American licensing agreements. But there were still risks involved. Would Japanese and other Asians want to go to a Disneyland that wasn’t in America? Would a theme park work in Tokyo’s cold, humid, rainy climate? Disney’s two US parks in Florida and southern California are both “vacation destination” parks with warm weather.
Moreover, back in the late 1970s, Disney was hurting finan- cially. It didn’t have the capital to make the investment needed to build a park in Japan. Disney received more than 20 offers from


TABLE 8 . 1 Disney–Oriental Land Co. Alliance
Disney Resources and Capabilities OLC Resources and Capabilities
Disney brand Land for the park near Tokyo
Disney theme park rides and designs Financial resources to build the park
Park management processes Relationships with construction firms to build the park
Ongoing stream of Disney characters from movies Knowledge of Japanese culture and how to manage Japanese workers
Disney consumer products to sell at the park

Japanese firms vying for the chance to become its partner in build- ing and running the park. So Disney did its due diligence of poten- tial partners in Japan and eventually decided that OL would be the best partner.
Forming the partnership was not necessarily a walk in the park. Negotiating a satisfactory partnership agreement required that both sides overcome cultural barriers and major disagreements. OL want- ed Disney to contribute funds to build the park, but Disney refused to contribute in any way toward the initial investment. Disney also required a 50-year contract, a time commitment that frightened OL when so many unknowns remained. Moreover, Disney demanded a high licensing fee of 10 percent of all gross revenues; OL wanted to pay 5 percent. OL initially called Disney’s terms a “servile agree- ment,”2 and it took more than four years of negotiating for the two to reach common ground in 1979. In the end, Disney paid a sum of less than 1 percent of the initial investment and received a license fee of

10 percent of gate receipts, but did lower its license fee to 5 percent on nongate receipt sales.3
Despite the difficult negotiations, Tokyo Disneyland has been a smashing success. Even though it had to pay high interest costs from the $1.53 billion upfront investment required to build the park, as well as the average 7.5 percent license fee to Disney, OL was able to make the project profitable in just four years after the park opened in 1983. The firms continued their partnership, working together to build Tokyo DisneySea in 2001. Together with Tokyo Disneyland and a number of Disney-branded hotels, the two parks make up the Tokyo Disney Resort. Disney’s Imagineering unit continues to design and develop new theme concepts and attractions for the parks. In fact, in 2016 the two companies announced a large-scale expansion that will include a castle and village from “Beauty and the Beast,” a new “Big Hero 6” themed attraction, and a full-scale indoor theater for live performances.

All in all, Disney’s support through providing its image, know-how, and design skills has been invaluable, and Oriental Land’s management and execution is unmatched by Disney’s other international partners. The Tokyo Disney Resort has received more than a half billion total visitors since Tokyo Disneyland opened in 1983, with more visitors each year than either of Disney’s US parks. The annual number of visitors has never dropped below 10 million, and it reached a high of 17 million visitors in 1997. OL, which runs few destinations other than the Tokyo Disney parks, is now ranked as the second-largest tourism-leisure firm in the world, just behind Disney itself.4 In one recent year, Tokyo Disney Resort generated revenues of approxi- mately US$4.15 billion. That translated to about US$690 million in operating profits for OL. Disney received about $300 million from its licensing fees, a sum that is basically pure profits for Disney, since it has negligible costs associated with Tokyo Disneyland and no investment in assets.
There are currently no plans for a third park in Japan, but Disney has confirmed that if another park was planned, Disney would be happy to work with Oriental Land to make it a success.5

strategic alliance A cooperative arrangement in which two or more firms combine their resources
and capabilities to create new value; sometimes referred to as a partnership.

What Is a Strategic Alliance?
The Walt Disney–Oriental Land Company alliance illustrates how strategic alliances can be a vehicle for achieving important strategic objectives—such as lowering costs, creating new sources of differentiation, or entering new markets. A strategic alliance—sometimes referred

to as a partnership between firms—is a cooperative arrangement in which two or more firms combine their resources and capabilities to create new value.6 Strategy scholars sometimes refer to these types of arrangements, in which firms cooperate to create competitive advantage through their collaboration, as cooperative strategy or a relational advantage.7
Strategic alliances have grown dramatically in importance during the past 25 years. Stra- tegic alliances accounted for only about 5 percent of the revenues of Fortune 1000 companies in 1980, but by 2010 it is estimated that they accounted for almost one-third of the revenues of Fortune 1000 companies. In Walt Disney’s case, Tokyo Disneyland contributed almost 20 per- cent of Disney’s total theme park profits in 2011.8
Today, many companies are increasingly using alliances to achieve strategic objectives. The basic logic for alliances can be summed up in the adage, “Two heads are better than one.” Sometimes it just makes sense to combine the resources and capabilities of two companies to solve certain problems or achieve particular objectives.
Companies can choose to cooperate at any stage along the value chain, from research and development to manufacturing to the marketing, sales, or service of products or services. For example, BMW and Toyota are doing R&D together to develop new fuel-cell technology to increase fuel efficiency.9 Intel and Micron have teamed up to manufacture flash memory together.10 Target and Neiman Marcus have partnered to sell affordable luxury brands.11 In these instances, firms collaborate to improve their performance at common stages of the value chain. In other instances, a firm might team up with a firm at a different stage of the value chain. For example, Apple and AT&T teamed up to sell the iPhone—Apple provided the phones and AT&T provided the cellular network.12 Although there are different ways to categorize alliances, perhaps the most common way to distinguish one type of alliance from another is by the mechanism used to govern the alliance. We explain these different types of alliances in the next section.

Choosing an Alliance
Companies have three choices—summarized as make, buy, or ally—when it comes to conducting any particular activity that needs to be done to offer a product or service to a customer.
• First, they can make, or conduct the activity themselves within the firm.
• Second, they can buy, or purchase, the activity or input from another firm, using an “arm’s-length relationship,” in which the buyer purchases an input with no obligation to have a long-term relationship with the supplier. Companies that send out a “bid” to numerous suppliers and then buy from the supplier that offers the lowest price have an arm’s-length relationship with those suppliers. The winner of the bid this month might lose next month.
• Finally, they can ally, or access, the activity or input from another firm, using an exclusive partnership with that firm.
As discussed in Chapter 7, companies want to conduct those activities internally that are most important to delivering the unique value they hope to offer. Disney prefers to create its own stories and characters for its movies, make its own movies, and run its own stores. These activities are most important to its success with customers, and therefore it wants to have con- trol over those activities.
However, companies can’t do everything, so they buy many inputs from other companies using an arm’s-length relationship. Arm’s-length relationships work just fine for purchasing commodities, inputs that aren’t differentiated on anything but price. For example, Disney doesn’t have a partnership with suppliers that provide fabric for its character’s costumes or hot dogs and buns for its theme park restaurants. It can purchase those inputs from whatever sup- plier offers the lower price. Similarly, automakers need to purchase basic inputs such as nuts and bolts from suppliers to put their cars together, but they usually don’t have a partnership with those suppliers.

Other inputs or activities, however, do require a partnership, a long-term relationship in which both parties work closely to create new value together. Four kinds of inputs and activities might qualify as “strategic” inputs that merit forming an alliance relationship.

  1. Inputs that can differentiate your product in the minds of customers. Automakers are much more likely to want to partner with a supplier that provides important engine or drivetrain components that influence engine performance or reliability than one that provides fas- teners. For example, truck manufacturers often partner with Cummins, a respected maker of truck engines and components, in the manufacture of their trucks.
  2. Inputs that influence your brand or reputation. Volvo, a Swedish manufacturer of cars and trucks, has tried to develop a reputation on the safety of its cars. Consequently, it has worked closely with key suppliers, including Autoliv, a Swedish supplier of seat belts and airbags, to put pioneering safety technology into its vehicles.

Strategy in Practice
Walt Disney and Oriental Land: Why Ally? case, Disney solved most of its problems by partnering with OL. That
company provided high-value resources; it owned the land and took One might reasonably ask why Disney didn’t just build Tokyo virtually all of the investment risk. Disney didn’t have to risk much Disneyland on its own. Disney obviously knew how to run a theme park. capital investment and was able to deploy its capital elsewhere. OL It owned and operated two theme parks in the United States without runs the park, so Disney didn’t have to learn how to manage a Japa- the involvement of a partner. Disney could have captured the $690 nese workforce. Disney gets 10 percent return on gate receipts re- million that went to the Oriental Land Company in a recent year, as gardless of the profitability of the park. The two companies are able well as the $300 million it did get. Why share the profits with a partner? to share ideas on how to best localize the Disneyland park within the
The first question that Disney certainly must have asked with Japanese environment.
regard to Tokyo Disneyland was whether it could “make” another In the end, the park proved successful, and both OL and Disney park: Do we have the resources and capabilities to build Tokyo received value from the partnership. It is possible that Disney might Disneyland on our own? The answer to that question was not entirely have been just as successful if it had built and run the park on its straightforward. Building a theme park in a new, foreign environment own. But it’s also possible that, without OL as a partner, Disney came with a host of risks. Tokyo is not a warm-weather “vacation might have made different decisions about how to build or run the destination,” as are California or Florida. Disney had absolutely no park that would have hurt performance. Indeed, when Disney built experience in hiring, training, and managing a Japanese workforce. EuroDisney (now Disneyland Paris) in France, it experienced a host Would Oriental Land Company have sold Disney the 115 acres of land of problems, and the park struggled for years.13 In particular, Disney required for the park? If so, at what price? Did Disney have the $2.0 didn’t take into account important local preferences such as serving billion investment required to buy the land and build the park? If it wine with meals in the park, and the marketing was described as chose to make the investment in Japan, what other opportunities “too Americanized” and not tailored to the needs of customers in would it have to forgo? Finally, and maybe most importantly, how individual European countries.14 The alliance with OL clearly mitigat- confident was Disney that Tokyo Disneyland would succeed? ed many of the risks associated with the venture, and OL’s resources
When companies face an opportunity that comes with risks, they and capabilities likely increased the probability of success.
might look to a partner to share or mitigate the risks. In this particular

  1. High-value inputs or activities that make up a high percentage of your total costs. Companies that make refrigerators are more likely to partner with the supplier who provides the compressor—the component that costs the most and cools the refrigerator—than with the suppliers of plastic trays or fixtures.
  2. Inputs or activities that require significant coordination in order to achieve the desired fit, quality, or performance. Whenever you need to coordinate closely with another firm to get the desired performance from their input or activity, you probably want a partnership rela- tionship. For example, automakers must typically work closely with the supplier that pro- vides the HVAC system (heating, ventilation, and air conditioning) for a vehicle, because the supplier must know the geometric constraints in the dashboard, as well as where to run the lines to the vents throughout the car, and because the HVAC system influences, and is influenced by, the catalytic converter and other engine components.
    The Strategy in Practice feature explores the factors that helped Disney make the “make, buy, or ally” decision about Tokyo Disneyland.

Types of Alliances
As Figure 8.1 shows, there are three basic types of alliances. Each is governed in a different way, in order to split the gains from the alliance and protect each partner’s interests.

Nonequity or Contractual Alliance
The first type is a contractual or nonequity alliance, in which two or more firms write a con- tract to govern their relationship.15 The contract specifies what each party is to do in the alliance—and what each party should receive if it fulfills its duty in the alliance. For example, when Disney wants to promote the characters from a new movie, it will often create promo- tional materials such as figurines or games and partner with McDonald’s to put them into Happy Meals for kids. Then Disney and McDonald’s jointly pay for TV commercials to advertise the movie and the Happy Meal promotional materials. Combining meals and toys creates value for both Disney and McDonald’s, who create a contract to govern the relationship.
Different types of nonequity alliances include:
• Licensing agreements, in which one firm receives a license, or permission to use a resource, such as a brand or a patent, from another firm in return for a percentage of the revenues or profits.16
• Supply agreements, in which a supplier might agree to develop certain customized inputs for a customer.
• Distribution agreements, in which a distributor or retailer might agree to provide certain customized services in order to help sell a product.17
As the name nonequity alliance suggests, companies do not take equity positions in each other. They also do not form a joint venture. Companies tend to choose nonequity alliances when it is easy to specify what each party is supposed to do in the relationship, as well as the rewards that should come from meeting those obligations. Nonequity alliances tend to be less complex and to require less interdependence and coordination between the companies than alliances that involve equity. When an alliance requires the joint creation of new resources and capabilities by the partners, companies often tend to opt for equity alliances or joint ventures.

contractual or nonequity alliance Two or more firms write a contract to govern their
relationship. Ownership is shared between the companies.

Preferred When:

• Interdependence between partners is low (e.g., pooled).
• It is easy to measure the contributions of each partner and write it in a contract.

• Interdependence between firms is moderate (e.g., sequential).
• Firms bring knowledge or difficult-to-measure contributions, but they can perform their roles separately.

• Interdependence between firms is very high (e.g., reciprocal).
• Firms bring knowledge or difficult-to-measure contributions that must be combined into a single organization to coordinate effectively.

FIGURE 8.1 Types of Strategic Alliances

equity alliance The collaborating firms in an alliance supplement contract with equity holdings in their alliance partners.

joint venture An alliance in which collaborating firms
create and jointly own a legally independent company.

vertical alliance An alliance between firms that are positioned at different stages along the
value chain, such as a supplier and a buyer.

Equity Alliance
In an equity alliance, the collaborating firms often supplement contracts with equity holdings in their alliance partners.18 For example, Toyota owns between 5 and 49 percent of the equity of its 10 largest Japanese suppliers, who all work very closely with Toyota in the development and production of its automobiles.19 The fact that Toyota owns some equity in these suppliers aligns their incentives with Toyota’s needs and encourages the suppliers to make investments that benefit Toyota. For example, Toyota’s equity investments encourage its suppliers to locate their manufacturing plants next to Toyota’s assembly plants to reduce the costs of shipping and inventory.
In situations where the parties to an alliance need incentives to bring their best resources to the alliance, equity is often preferred to contracts as a way to align the incentives of partners. For example, many large pharmaceutical companies, such as Eli Lilly, Merck, and Pfizer, own equity positions in start-up biotechnology companies. The large pharmaceutical firms’ equity positions give them the option to be part owners of new biotechnology drugs the start-ups develop. This option of owning a stake of a potentially profitable new drug creates incentives for companies such as Eli Lilly to provide financial resources to help develop a drug, as well any other support that might increase its probability of success. For instance, if a new drug looks promising, Lilly will use its sales force and distribution channels to sell it around the world.20

Joint Venture
The final form of alliance, a joint venture, is one in which collaborating firms create and jointly own a legally independent company. The new company is created from resources and assets contributed by the parent firms.21 The parent firms jointly exercise control over the new venture and consequently share revenues, expenses, and profits.
Joint ventures are preferred when firms need to combine their resources and capabilities in order to create a competitive advantage that is substantially different from any they possess individually. For example, Intel makes microprocessors and Micron makes advanced semicon- ductors, but both companies saw an opportunity in flash memory, the type of memory used in flash drives and increasingly used in mobile devices such as MP3 players and smartphones. Both companies had some relevant skills and assets, so they decided to each put in $1.2 billion in cash and assets and create IM Flash, a new company jointly owned by Intel and Micron.22 The new company focused on the flash memory market and didn’t deflect the attention of Intel and Micron from their core businesses.
In similar fashion, when GM wanted to enter the Chinese market, it teamed up with SAIC, a Shanghai-based automobile company, to create Shanghai-GM, a joint venture that brings together GM’s expertise and technology for making cars with Shanghai’s knowledge about the Chinese market and experience managing a Chinese workforce.23
Typically, partners in a joint venture own equal percentages and contribute equally to the venture’s operations, as was the case with IM Flash. However, in some cases one party might bring more resources to the venture, which will lead to a higher equity stake. Moreover, over time, a firm’s priorities might change, which can lead to one partner purchasing the equity stake of the partner. For example, in 2012 Intel decided that IM Flash was less of a priority so it sold $600 million of its stake in the company to Micron.24 Many joint ventures end with one partner selling some or its entire ownership stake in the joint venture to the other partner.

Vertical and Horizontal Alliances
In addition to distinguishing alliances by the type of governance arrangement (e.g., nonequity, equity, joint venture), alliances are sometimes categorized as either vertical alliances or hori- zontal alliances.
A vertical alliance is an alliance between firms that are positioned at different stages along the value chain, such as a supplier and a buyer.25 Toyota’s relationships with its top

Strategy in Practice
Bose: Working with Suppliers in Vertical Alliances
Bose Corporation, known for its sound systems and pioneering innovations in acoustic technology, has also been a pioneer in establishing what it calls “JIT II Partnerships” with some of its suppliers. A JIT II partnership (named after Toyota’s Just-In-Time delivery practice with suppliers) is a relationship with a supplier that involves the following characteristics:26
• Bose selects a supplier that it believes has the best capabil- ities to meet its needs and agrees to give that supplier all of its business.
• The supplier must give Bose its best pricing on products. Bose can bid a product on the market if it doesn’t think it is getting the best prices.
• Bose gives the supplier an “evergreen” contract, meaning that as long as the supplier performs according to expectations, the contract rolls over for another year.
• The supplier agrees to provide at least one “in-plant repre- sentative” who will work at Bose for 30 to 40 hours per week. This person replaces the Bose buyer and production planner

and essentially works for Bose procurement and logistics. Duties involve placing purchase orders, monitoring materials requirements, and assisting with manufacturing planning. Bose interviews and approves the “in-plant rep” and essen- tially treats the rep as a Bose employee—the “in-plant” has access to Bose facilities, personnel, and computer systems, and even gets a performance review.
Lance Dixon, Bose director of procurement and logistics, ini- tiated JIT II partnerships when he realized that by working more closely with key suppliers, both Bose and the suppliers could reduce costs. Dixon said, “Suppliers are normally outside of your company trying to see through the window into what you are doing. We open the door and let them in to do the work together.”27
G&F Industries, a Bose supplier of plastic components for Bose speakers, has been a JIT II supplier for 20 years. G&F’s “in-plant rep” Chris LaBonte said that working inside Bose every day gives him the information he needs to help G&F better meet Bose’s needs. “Being here onsite at Bose allows me to get the right jobs running at the right times with the right quantities,” said LaBonte, “It’s a real posi- tive, open, trusting, and nonadversarial, yet direct, relationship.”28

How JIT II Partnerships Create Value at Bose Corp.

Traditional Process

Partnership Process

“The major advantage isn’t having a customer rep at our location—rather it’s that the customer rep is ‘empowered’ to use our system, thereby replacing the planner, buyer, and salesman.”
Sherwin Greenblatt, President, Bose Corp.

JIT partnerships have lowered Bose’s administrative costs by more than 20 percent. Bose simply doesn’t have to hire as many people, because its supplier partners do the work that employees previously did. Bose claims it also reduced inventory and logistics costs by more than 25 percent as a result of its JIT II partnerships, because of better planning and increased supplier

efficiency, with suppliers delivering components exactly when Bose needs them. Suppliers enjoy having a partnership with Bose because they have guaranteed sales and they can plan more effectively for their own production runs. Both Bose and its partner suppliers are better off, which is the primary goal of an effective partnership.

10 suppliers are considered vertical alliances—the output of one of the firms in the relationship is the input of the other. Vertical alliances are usually formed to combine unique resources, cre- ate new alliance-specific resources, or lower transaction costs between two companies that are already transacting. The Strategy in Practice feature describes the details of how Bose handles vertical alliances with its suppliers.
In contrast, a horizontal alliance is between two firms that do not have a supplier–buyer relationship and are typically positioned at a common stage of the value chain (e.g., competitors).

horizontal alliance An alliance between two firms that do not have a supplier–buyer relationship and are typically positioned at a common stage of the value chain.

The Shanghai-GM partnership is a horizontal alliance. The partners conduct activities at a common stage along the value chain, which means they conduct similar activities internally. In this case, both of them manufacture automobiles. Horizontal alliances can also occur between companies that don’t do the same activities but do complementary ones, such as Electronic Arts developing games for the Sony PlayStation. Horizontal alliances are often created to pool similar resources, or to combine complementary knowledge. We discuss these different ways to create value in alliances in the next section.

Ways to Create Value in Alliances
Alliances are a vehicle that allows a company to access the resources and capabilities of another firm in order to create value by either lowering its costs or differentiating its offer- ings. How can managers determine if accessing the resources and capabilities of a partner really will help their company create value? Alliances can create value if they do any these four things:29

  1. Combine unique resources
  2. Pool similar resources
  3. Create new alliance-specific resources
  4. Lower transaction costs
    We will examine each of these different ways to create value in partnerships, but it is worth noting that these are not mutually exclusive ways for creating value in an alliance. Alliance partners might use several of these ways of creating value in a single alliance.

Combine Unique Resources
The first way that firms create value through an alliance is by combining unique resources to create an even more powerful offering. This is what Pixar and Disney did to dominate computer-animated films.30 As described in Chapter 3, Pixar contributed computer-generated animation (CGA) and story-writing skills that brought to life unique stories in films such as Toy Story, Finding Nemo, Cars, and The Incredibles. Disney contributed worldwide film distribution to the partnership and sold products involving Pixar’s movie characters—such as Woody and Buzz Lightyear—at its Disney stores and theme parks. No other film distri- butor could bring Pixar characters to stores or theme parks like Disney. By combining their unique resources, Pixar and Disney created synergy that increased profits for both firms. In fact, Disney eventually acquired Pixar in order to gain full control over Pixar’s unique resources.31
In similar fashion, Target decided to team up first with high-end designer Missoni, and later with Neiman Marcus, in contractual alliances to bring high-end fashion to the masses. Target had long been playing a unique tune among box-store discounters, differentiating itself from Walmart as a place for the younger generation to get affordable fashion. It hoped that partnerships with designers could boost the image of “Tar-zhay,” as more upscale con- sumers like to call Target. When Target first teamed with Missoni in 2011 to offer a line of Missoni-designed products through its 1,700-plus stores,32 the demand for Missoni prod- ucts at Target quickly swept up every available item, leaving many customers disappointed that they had missed out. The sheer volume of traffic online caused the Target website to crash for nearly a whole day.33 This led to a similar partnership with high-end retailer Neiman Marcus in July 2012—with the idea to bring a larger number of designers to the masses. Target brought size, scale, and distribution to these partnership relationships, and Missoni and Neiman Marcus brought a chic factor that Target simply could not replicate on its own.34

Strategy in Practice
Google and Luxottica’s Learning Alliance “We are thrilled to announce our partnership with Google,”
said Andrea Guerra, chief executive officer of Luxottica Group. “We “Google’s futuristic eyewear is on its way back, and with an Italian fla- live in a world where technological innovation has dramatically vor this time,” read the introductory line of a Fortune article on “tech changed the way in which we communicate and interact in every- wearables.”35 Google Glass, the “smart eyewear” technology devel- thing that we do. More importantly, we have come to a point where oped by Google, had not taken off as planned. The eyewear design we now have both a technology push and a consumer pull for wear- was viewed as clunky and expensive, and it wasn’t clear exactly what able technology products and applications. We believe it is high
problem the glasses were solving for consumers. Moreover, Google time to combine the unique expertise, deep knowledge and quality wasn’t particularly skilled at selling consumer products. So Google of our Group with the cutting edge technology expertise of Google
and Luxottica Group, a leader in the design, manufacture, distribu- and give birth to a new generation of revolutionary devices.”36
tion, and sales of premium, luxury, and sports eyewear (e.g., Ray-Ban, The two corporations will establish a team of experts devoted to Oakley) announced that they had agreed to join forces to design, working on the design, development, tooling, and engineering of Glass develop, and distribute a new breed of eyewear for Glass. products that straddle the line between high fashion, lifestyle, and inno-
Google’s objective with the alliance appears to be to tap into vative technology. “Luxottica has built an impressive history over the last the design capabilities at Luxottica as well as to better understand 50 years designing, manufacturing and distributing some of the most suc- the process for manufacturing and distributing eyewear. For its part, cessful and well-known brands in eyewear today,” said Google vice presi- Luxottica is interested in understanding technology and how it can dent and head of Google X, Astro Teller. “We are thrilled to be partnering be embedded in eyewear. Luxottica added that the two major propri- with them as we look to push Glass and the broader industry forward into etary brands of the Group, Ray-Ban and Oakley, which have a 10-year the emerging smart eyewear market.”37 Time will tell whether the part- heritage in wearable technology that has evolved from MP3 to HUD nership will bear fruit, but a partnership like this was viewed by many as devices, will be a part of the collaboration with Google Glass. one of the few ways that Google could make Glass a success.
Companies typically combine unique resources to create new products, enter new markets, or avoid the costs of entering different stages of the value chain. For example, Pixar decided not to invest in movie distribution, instead relying on the distribution resources and capabilities that Disney had already built.
Sometimes, the unique resources that the partners combine are intangible resources in the form of knowledge. Such “learning alliances” are increasingly popular. The goal is for each alliance partner to learn something that it believes will be a valuable addition to its capabilities in the future. The Strategy in Practice feature describes an example of a learning alliance bet- ween Google and Luxottica Group.
In a similar fashion, when Visa wanted to learn about how to bring financial literacy, and credit cards, to a younger crowd, it turned to an unlikely partner—Marvel Comics. Visa and Marvel jointly developed a unique comic book addressing money-management issues, star- ring Marvel characters The Avengers and Spiderman. Imagine Spiderman and Hulk discussing different options for financing Spiderman’s new big-screen TV! That will grab the attention of teenagers. Through the partnership, Marvel learned to use its comic books for educational pur- poses, and Visa learned about a unique way to educate potential customers. This was a case where both partners also brought unique resources to the relationship.

Pool Similar Resources
A second way that alliances create value is by pooling similar resources to achieve economies of scale that neither firm could achieve on its own. For example, as described earlier, Intel and Micron wanted to get into manufacturing flash memory—a business that required billions of dollars of investment in a plant and equipment. So they decided to create IM Flash, a joint ven- ture designed to produce flash memory products. By splitting the cost of the plant and equip- ment, the two companies were able to build a much larger plant and, through economies of scale, produce flash memory at a lower cost per unit.38 This value didn’t necessarily require combining unique resources, just the pooling of total resources to achieve economies of scale in the R&D and production of flash memory.
In addition to achieving economies of scale, another reason firms pool similar resources is to share the risks associated with conducting a particular activity. BP and Statoil formed a joint

venture, pooling their financial resources and knowledge to share the expense and lower the risks associated with costly international oil exploration and production activities.39 By sharing the costs of the drilling equipment and the other fixed assets, the two firms were each able to lower their fixed costs per barrel of oil.

Create New, Alliance-Specific Resources
A third way alliances create value is through new, alliance-specific resources. Alliance-specific resources are those that are created specifically to help the partners achieve the alliance objec- tives. Alliance-specific resources can be owned by one partner or jointly held. Firms typically create alliance-specific resources to increase the efficiency of doing business together or to expand the available resources of all the partners.
The alliance between Toyota Boshoku and Toyota is an example of building new resources in order to improve efficiency, and the ability of the partners to coordinate their joint work. Toyota Boshoku, which supplies automobile seats to Toyota, built its factory next door to Toyota’s assembly factory.40 Because seats are bulky and costly to ship, building the plant nearby lowered Toyota Boshoku’s costs of inventory and shipping to Toyota. Then, to further reduce shipping costs, Boshoku decided to build a conveyer belt to take seats directly from its factory into Toyota’s. The factory plant and the conveyor belt were both new resources that were created to support Boshoku’s transactions with Toyota. These investments substantially lowered transportation costs, inventory costs, and the costs associated with having face-to-face meetings. In comparison, General Motors does not have alliance relationships with its seat sup- pliers. As a result, the suppliers have not built their factories nearby. Not surprisingly, GM and its seat suppliers have higher inventory and transportation costs, which give Toyota and Boshoku a cost advantage over GM and its suppliers.41
Visa represents an example of alliance partners creating a jointly held alliance-specific resource. In the 1970s, Bank of America and a group of other financial institutions decided to form a joint venture company with the purpose of building a credit card business. Credit cards were new at the time, and the banks hoped to get customers to widely use them. The new joint venture company was named “Visa,” and the company then built the Visa brand with customers through marketing and advertising. The Visa brand was perhaps the most valuable resource created through the alliance, because it allowed member banks to issue credit cards that were immediately recognizable to customers. Over time, many other banks and financial institu- tions wanted the benefits of issuing a Visa credit card, so they joined the private membership association that owned Visa. Visa finally became a public company in 2007, but its primary owners are still the banks that were part of the original private membership association that established Visa.42

Lower Transaction Costs
A fourth way that alliances create value is by lowering transaction costs. Alliances that create value through lower transaction costs are primarily trying to increase efficiency and lower the costs between transactors in the value chain: buyers and suppliers.
By transaction costs, we mean all of the costs associated with making a transaction happen.43 In most companies, purchasing personnel, sales personnel, and attorneys are primarily responsible for finding and negotiating agreements with suppliers of inputs and buyers of outputs. If alliance partners can create relationships with suppliers or buyers based on mutual trust, then they don’t have to employ as many purchasing or sales per- sonnel. They also don’t have to employ as many lawyers to write costly contracts to protect their interests.44
One study of Toyota and General Motors found that Toyota’s procurement and legal costs were half those of General Motors.45 The study concluded that General Motors and its sup- pliers had higher transaction costs because they didn’t trust each other; so they spent a lot of time negotiating agreements and writing legal contracts. In contrast, Toyota had developed

relationships with its supplier partners that were based on mutual trust. One thing that Toyota did to build trusting relationships with some suppliers was to purchase a minority stock owner- ship stake in the supplier. Because Toyota owned part of the suppliers’ stock, suppliers felt that Toyota would behave in a trustworthy manner.

The Risks of Alliances

The issue of protecting one’s interest in an alliance is real—alliances are not without risks.46 When a company agrees to an alliance, it loses some of its independence. It must rely on its partner to produce and perform as expected. Just as there are incentives to cooperate in alliances, there are also incentives for companies to act opportunistically, to take advantage of a partner if the situation presents itself. So managers need to be aware of the two major ways that partners can take advantage of one another in an alliance: hold-up and misrepresentation. (You can remember these two forms of opportunism as H&M.)

Hold-up occurs when one partner tries to exploit the alliance-specific investments made by another partner.47 In the case where Toyota Boshoku built its factory next to Toyota’s, this created an opportunity for Toyota to “hold up” Boshoku by opportunistically renegotiating lower prices after Boshuku made the investment. After Toyota Boshoku built its factory next door to Toyota, it was highly committed to Toyota; its investments could not be easily redeployed to serve other customers. It was important for Boshuku to make sure that Toyota would be trustworthy and not try to negotiate lower prices after Boshoku built its factory next door. So it created an equity alli- ance with Toyota, in which Toyota owned 49 percent of Toyota Boshoku’s stock.48
Managers must be aware that whenever they make investments in equipment, facilities, or processes that are customized to a partner—and therefore not easily redeployable to other uses—there is the potential for the partner to hold up their company.

Misrepresentation occurs when one partner in an alliance creates false expectations about the resources it brings to the relationship or fails to deliver what it originally prom- ised.49 For example, suppose a start-up biotechnology company is developing a new drug to fight Alzheimer’s disease. It needs additional resources to conduct clinical trials in order to get approval for this new drug. To convince a pharmaceutical company to provide the necessary resources, the biotech start-up could misrepresent how far along the drug is in the development pipeline. Or it could overstate the effectiveness of the drug in initial clini- cal trials.
A company that considers entering into an alliance with a firm that brings intangible resources to an alliance—such as local market knowledge or relationships with key political figures—needs to research its partner thoroughly to guard against this form of opportunism. Ultimately, however, misrepresentation is a hazard that firms face when doing business with others of questionable moral character. The only true way to protect against misrepresentation is to partner with trustworthy individuals and firms.

Building Trust to Lower the Risks of Alliances
The bottom line is that, while alliances have the potential to create value, they are also fraught with challenges and risks. Alliances cause independent firms to be- come interdependent, which means they must work effectively together to succeed.

hold-up When one partner tries to exploit the alliance- specific investments made by another partner.

misrepresentation When one partner in an alliance creates false expectations about the resources it brings to the relationship
or fails to deliver what it originally promised.

Ethics and Strategy
The Blame Game in Strategic Alliances that BP jeopardized the rig through risky cost-saving moves, and
Halliburton said its work on the rig was done “under BP’s direction On April 20, 2010, disaster struck on a BP oil rig in the Gulf of Mexico. and according to their plan.” However, Halliburton eventually An explosion claimed 11 lives and resulted in a sea-floor gusher that admitted that it did destroy critical post-spill test results in the flowed for 87 days—spilling 210 million gallons of oil into the Gulf. aftermath of the 2010 Gulf of Mexico oil spill. BP and Halliburton BP took a thrashing in the press and agreed to a record-setting fine are now spending millions pointing the finger at each other.
of $4.5 billion. But not long after agreeing to the fine, BP decided The now-defunct partnerships among BP, Transocean, and to go on the offensive with multibillion-dollar lawsuits seeking to Halliburton highlight a key ethical dilemma in strategic alliances. shift the blame to its partners—Transocean, owner of the ill-fated The dilemma has to do with the fact that alliance partners are rig, and Halliburton, the company that supplied the cement that interdependent—which means they must trust and rely on each didn’t hold. BP sued rig-owner Transocean for more than $40 billion other to accomplish key objectives. When things go wrong, partners because of failures in the rig’s safety system. That’s a remarkable have strong incentives to blame the other party—even if it might be figure because it comes close to what BP estimates will be its entire their fault—because the interdependencies between the two parties liability for paying claims and cleaning up in the wake of the spill. make it difficult to assign blame. The blame game is clearly going BP sued Halliburton for an estimated $10 billion, contending that on with BP and its former partners. When this happens, parties Halliburton’s “unstable” cement job failed to block the spill. BP also often have strong incentives to misrepresent or hide information accused Halliburton of destroying post-spill test results to cover up to avoid blame. This is a key ethical dilemma faced by BP and its the cement contractor’s culpability. In response, Transocean and former partners as they look to the courts to divvy up their financial Halliburton each filed lawsuits of their own. Transocean claimed responsibility for the spill.

This might explain why some studies of alliances have found that trust between partners is the most important ingredient for alliance success. Next we examine four ways that companies attempt to protect themselves from opportunism and build trust with their alliance partners.

Personal Trust The first way to prevent against opportunism by a partner is to initiate partnerships only with people who you know to be trustworthy. These would likely be indi- viduals you have known for a long time, such as family, friends, classmates, or others within your social network. Of course, you need to know them well enough to be able to judge their character—and you need to be accurate at evaluating their character. This type of trust is some- times called goodwill trust, because you are relying on the goodwill of the other party to protect your interests.
Some research has shown that compared to US firms, Japanese firms are much more likely to rely on personal trust to govern their alliances.50 As a result, managers often partake in a long “honeymoon” period of meetings, dinners, and even activities such as singing karaoke, to get to know individuals in the other firm before deciding whether they think they can trust the firm enough to enter into a partnership. This is often frustrating for US firms who are more willing to write contracts to govern their alliances than to rely on personal trust.

Legal Contracts In most cases, when firms initiate a partnership, they write a legal contract to protect their interests. Legal contracts are usually used to help protect the interests of alliance partners and to spell out the obligations and expectations of the partners.
A contract is a substitute for personal trust. If someone violates personal trust, there is no real economic recourse other than ending your friendship or relationship. But if someone violates a contract, you can sue the other party in court to get some economic recourse. This threat of a lawsuit can be an important incentive for partners to perform according to legally established obligations and expectations. As detailed in Table 8.2, most contracts have clauses that clarify three categories of issues:

  1. Governance issues, such as how decisions will be made, how profits will be split and how disputes will be resolved

TABLE 8 . 2 Common Clauses in Alliance Contracts
Governance Clauses
Residual rights clauses In contractual alliances, parties often specify how the profits or assets created from the alliance are to be split among the partners.
Equity/ownership clauses Equity alliances or joint ventures must specify what percentage of equity is owned by each of the partners.
Voting rights clauses Specify the number of votes for decision making assigned to each partner in an alliance. In equity alliances, voting rights usually correspond to equity ownership.
Minority protection clauses Specify the kinds of decisions that can be vetoed, if any, by firms with a minority interest in the alliance.
Dispute resolution clauses Specify the process by which disputes among partners will be resolved.
Operating Clauses
Performance clauses Specify the specific duties and obligations of each of the partners, including warranties and minimum performance levels required to satisfy the contract.
Noncompete clauses Specify product markets or businesses that partners are restricted from entering.
Intellectual property right protection clauses Specify intellectual property or confidential information brought to the alliance by the partners that is not to be used by other partners or shared outside of the alliance without the partner’s written consent.
Intellectual property rights creation clauses Specify ownership rights to intellectual property (such as patents) created as a result of the alliance.
Exit/Termination Clauses
Preemption rights clauses Specify that if one partner wishes to sell its equity, it must first offer to sell the equity to the other partner.
Initial public offering (IPO) clauses Specify conditions under which partners in equity alliances or a joint venture will pursue an initial public stock offering.
Call/put option clauses Specify the conditions under which one partner can force another partner to sell (or buy) its shares and at what price.
Termination clauses Specify under what conditions the contract can be terminated and the consequences of termination for each partner.

  1. Operating issues, such as what performance is expected, and how intellectual property will be shared and protected
  2. Exit/termination issues, including the conditions under which partners can exit the alliance or the contract can be terminated

Shared Ownership/Financial Collateral Bonds When one partner owns a financial stake in another partner, as Toyota does with some of its supplier partners, it has an incentive to cooperatively help the partner be as financially successful as possible because it shares in the partner’s profits. By having your partner purchase a stake in your organization, you align the incentives of both partners to work together.
Another way to align incentives and build trust is by having a partner post a financial collateral bond that it will lose if it doesn’t perform according to a specified contract. For example, fast-food chains such as McDonald’s will often partner with franchisees, individuals who purchase a franchise from McDonald’s that gives them the right to operate a McDonald’s outlet at a particular location. The franchise fee is essentially put into something like an escrow account, while McDonald’s monitors the franchisee to ensure that it operates the outlet according to McDonald’s guidelines. If the outlet fails to provide McDonald’s quality food or service (which McDonald’s checks by sending in inspectors), McDonald’s can keep the franchise fee and take away the franchise.

Building an Alliance Management Capability
Strategic alliances have become a fast and flexible way to access complementary resources and capabilities that reside in other firms. They are also profitable. One study found that a com- pany’s stock price jumped roughly 1 percent, on average, with each announcement of a new alliance, which translated into an average increase in market value of $54 million per alliance.51 Yet, as we’ve seen, alliances are fraught with risks. Indeed, almost half of them fail.52 In such an environment, the ability to form and manage alliances more effectively than competitors can itself become an important source of competitive advantage. In Chapter 3, we discussed the im- portance of a firm building internal resources and capabilities, which can be used to accomplish key strategic objectives. One of those capabilities is an alliance capability—the focus of the final section of this chapter.
How do some firms develop a capability for successfully forming and managing alliances? Professors Jeff Dyer, Prashant Kale, and Harbir Singh conducted an in-depth study of 200 cor- porations and their 1,572 alliances to learn how firms can systematically manage alliances to maximize success.53 Although all companies seem to generate some value from alliances, some companies—such as Eli Lilly, Oracle, and Hewlett-Packard—systematically generate much more than other firms.
How do they do it? By building a dedicated strategic alliance function within the company. Companies such as these appoint a vice president or director of strategic alliances with his or her own staff and resources. The dedicated function coordinates all alliance-related activity within the firm and is charged with creating processes to share and leverage prior alliance management experience. Companies with such an alliance function achieved a 25 percent higher long-term success rate with alliances than companies that did not have a dedicated function. They also generated almost four times as much stock market wealth whenever they announced the formation of a new alliance.
The research showed that an effective dedicated alliance function develops a firm’s capa- bility to perform four key functions: It improves knowledge management efforts, increases external visibility, provides internal coordination, and eliminates accountability and interven- tion problems.54

Improves Knowledge Management
A dedicated function acts as a focal point for learning, helping the company leverage lessons and feedback from prior and ongoing alliances. It systematically establishes a series of routine processes to articulate, document, codify, and share know-how about the key phases of the alli- ance lifecycle. Many companies with dedicated alliance functions have codified explicit alliance- management knowledge by creating guidelines and manuals to help them manage specific aspects of the alliance lifecycle, such as partner selection and alliance negotiation and contract- ing. For example, Hewlett-Packard has developed 60 different tools and templates, included in a 300-page manual that can be used to guide decision making in specific alliance situations. The manual includes such tools as a template for making the business case for an alliance, a partner evaluation form, a negotiations template outlining the roles and responsibilities of dif- ferent departments, a list of ways to measure alliance performance, and an alliance termination checklist. Figure 8.2 lists more of the guidelines and tools companies have developed.

Increases External Visibility
A dedicated alliance function can keep the market apprised of new alliances and about successful events in ongoing alliances. Such external visibility can enhance the reputation of the company in the marketplace and create the perception that alliances are adding value. The creation of a dedicated alliance function sends a signal to the marketplace that the company is committed to its alliances and to managing them effectively.


FIGURE 8.2 Example of Tools to Use Across the Alliance Lifecycle

In addition, when a potential partner wants to contact a company about a potential alliance, a dedicated alliance function makes an easy, highly visible point of contact. The alliance function typically screens potential partners, and brings in the appropriate internal parties if a partnership looks attractive. For instance, Oracle has an “Alliance Online” website that actually puts the partnering process online. Oracle describes the terms and conditions of different “tiers” of partnership on its website, allowing potential partners to choose which level fits them best. Alliance Online has emerged as Oracle’s primary vehicle for recruiting and devel- oping partnerships, with more than 7,000 tier I partners. It has also conserved human resources, allowing Oracle’s strategic alliance function to focus the majority of its human resources on its 12 higher-profile and more strategically important tier III partners.

Provides Internal Coordination
One reason alliances fail is because of the inability of one partner or another to mobilize inter- nal resources to support the alliance initiative. Visionary alliance leaders might lack the power or organizational authority to access key resources that might be necessary to ensure alliance success. One alliance executive at a firm without a dedicated alliance function explained, “We have a difficult time in supporting our alliance initiatives because many times the various resources and skills needed to support a particular alliance are located in different functions around the company. You have to go begging to each unit and hope that they will support you. But that’s time consuming, and we don’t always get the support we should.”
A dedicated alliance function helps solve this problem in two ways. First, it has the orga- nizational legitimacy to reach across business units and request the resources necessary to support the alliance. If a particular business unit is not responsive, it can quickly elevate the issue to a senior executive. Second, over time, individuals within the alliance function develop networks of contacts throughout the organization. These networks engender a degree of trust between alliance managers and employees throughout the organization, thereby allowing them to engage in reciprocal exchanges in support of alliance initiatives.

Facilitates Intervention and Accountability
Alliance failure is the culmination of a chain of escalating events. Signs of distress are often visible early on. If alliances are adequately monitored, the alliance function can step in and

intervene appropriately—much like a marriage counselor. However, only 50 percent of all companies that form alliances have any kind of formal metrics in place to assess how well the alliance performs. In contrast, 76 percent of companies with a dedicated alliance function have formal alliance metrics to keep tabs on how the alliance is performing.55
To illustrate, Eli Lilly’s alliance function does an annual “health check” of its key alliances, surveying both Lilly employees and the partner’s alliance managers. After the survey, an alli- ance manager sits down with the leader of a particular alliance to discuss the results and offer suggestions for improvement. When serious conflicts arise, the alliance function can help resolve the dispute. In some cases, Lilly found that it needed to replace its alliance leader. One executive at Lilly commented, “Sometimes an alliance has lived beyond its useful life. You need someone to step in and either pull the plug or push it in new directions.”56
The bottom line is that developing processes to effectively form and manage alliances builds a capability for generating value through strategic alliances.

• A strategic alliance is a cooperative arrangement in which two or more firms combine their resources and capabilities to create new value.
• There are three basic types of alliances, each structured differently to split the gains from the alliance and protect each partner’s inter- ests. In a nonequity or contractual alliance, the firms write a contract to govern the relationship. In an equity alliance, collaborating firms often supplement contracts with equity holdings in their alliance partners. In situations where alliance parties need incentives to bring their best resources to an alliance, equity is often preferred to contracts as a way to align the incentives of partners. In a joint venture, the collaborating or “parent” firms combine their resources to create a jointly owned but legally independent company.
• The primary strategic objective of firms is to offer unique value to customers, either through low cost or differentiation. Alliances are a

vehicle for accessing the resources and capabilities of another firm that will help you lower costs or differentiate your offering.
• There are four primary ways to create value with an alliance partner:

  1. Combine unique resources
  2. Pool similar resources
  3. Create new alliance-specific resources
  4. Lower transaction costs.
    • As partners work together to create new value, they have to build trust to ensure that they cooperate effectively. There are four primary ways that partners build trust in alliance relationships: (1) personal trust,
    (2) legal contracts, (3) shared equity/financial collateral bonds, or (4) reputation. The ability to build trust with a partner has often been viewed as the single most important contributor to alliance success.

Key Terms
contractual or nonequity alliance 137 equity alliance 138
hold-up 143

horizontal alliance 139
joint venture 138
misrepresentation 143

strategic alliance 134
vertical alliance 138

Review Questions

  1. What is a strategic alliance?
  2. Describe and give examples of the three different types of strategic alliances. Identify the conditions under which each type is preferred.
  3. What is the difference between a vertical alliance and a horizontal alliance?
  4. What are four primary ways in which firms create value through stra- tegic alliances?
  5. Describe the two potential dangers of strategic alliances summa- rized by the initials H&M, and four ways that firms in alliance can build trust to minimize the risk of these dangers.
  6. What is a strategic alliance function? Identify at least two ways that a strategic alliance function helps a firm be more successful with its alliances.

Application Exercises
Exercise 1: Look for a story in a news source such The Wall Street Journal, Forbes, Fortune, or Bloomberg Businessweek about two companies that have announced
an alliance or partnership. As you read the announcement of the alliance, answer the following questions

  1. What are the strategic objectives of each alliance partner?
  2. Is this a vertical alliance or a horizontal alliance?
  3. What resources and capabilities are brought to the alliance by each partner? In your opinion, which partner seems to bring the more valuable resources?
  4. Which type of alliance is this: contractual, equity, or joint venture? Does the article describe how the partners will split the gains from the alliance? If so, does the split seem reasonable?
  5. How do you think the firms will create value in the alliance? Is value mostly created by combining complementary resources, pooling simi- lar resources, creating entirely new resources, or reducing transaction costs/increasing efficiency between the two organizations?
    Exercise 2: Brainstorm opportunities to create partnerships—and value—with other companies
  6. Identify a target company that you understand well—either because you have worked for the company or have read a lot about it. To

illustrate, let’s assume you select Marriott Corporation, the hotel and time-share resort company.

  1. Identify three to four other companies in other industries that might be related in some way to the target company’s industry. Gather data about the strategy of each company, using public sources such as the company website or its annual reports, public articles, and your own experience. In our example, you might choose, and gather data about Disney (entertainment), Apple (computers, tablets, music, phones) and Nike (shoes).
  2. Work with three to four classmates to brainstorm ways in which each of the other companies you chose could create new value with the target company. To continue the Marriott example, perhaps Marriott could create Disney-themed rooms at its timeshare resorts, such as a Disney Princess or Pirates of the Caribbean room. Or maybe Marriott could turn an elevator shaft into a “Tower of Terror” ride. Per- haps Apple could provide each Marriott room with Apple technology and products. When guests check in to the hotel, perhaps they could do it on their iPhone (and even have an electronic key sent to their phone to open the door). Or maybe the room would be equipped with an iPad filled with music and movies to try out. Perhaps Nike could help design Marriott’s workout room and provide a variety of Nike athletic footwear or apparel products for guests to purchase. Have fun and be creative as you brainstorm ways that companies can combine their resources and capabilities to create new value.

Strategy Tool
When to Choose an Alliance Versus an Acquisition
Alliances and acquisitions are alternative vehicles for accessing important resources or capabilities that reside in another firm. Each approach might be preferable in different situations, and managers must carefully analyze several key factors before deciding whether to ally with a company or acquire it. These factors include the following:

  1. Type of synergies or interdependence between the firms. Man- agers should assess the nature of the coordination and interde- pendencies that will be required to generate synergies through the collaboration. When interdependencies are low (pooled/ modular), nonequity alliances are preferred. As interdepen- dencies increase and become sequential and reciprocal in nature, managers should consider first equity alliances/joint ventures and then acquisitions (see Chapter 7 discussion of pooled, sequential, and reciprocal interdependencies).
  2. Nature of resources being combined. Managers should assess whether they must create the synergies they desire by combining hard resources, like a product, equipment, manufacturing plants, or patents or soft resources, such as people, relationships, or unpatented intellectual property. When the synergy-generating resources are hard, acquisitions are typically a better option because it’s easier to value the assets you are purchasing. When companies have to generate synergies by combining human resources, it’s a good idea to avoid acquisitions because people often walk out the door after acquisitions.
  3. Extent of redundant resources. When two companies can team up to create value by essentially eliminating redundant resources that each has then acquisitions are the preferred option. For example, companies might have redundant R&D activities, man- ufacturing plants, or sales/services forces and want to leverage the best of each firm while eliminating redundancies. When com- panies want to create value by eliminating redundant resources, acquisitions are preferable to alliances.
  4. Degree of market uncertainty. When a company estimates that there is high uncertainty or high risk about whether a particular collaboration will yield positive results, it should enter into a nonequity or equity alliance rather than acquire the would-be partner. An alliance will limit the firm’s exposure since it has to invest less time and money than it would in an acquisition. If the collaboration doesn’t yield results, the company can withdraw from the alliance. It might lose money and prestige, but that will be nowhere near the costs of a failed acquisition.
  5. Degree of competition for partner’s resources. There’s a well- developed market for mergers and acquisitions, so it is wise to check if you have rivals for potential partners before pursuing a deal. If a company has several suitors, you might have no choice but to buy it in order to preempt the competition. When there are many suitors for a partner’s resources, we recommend you acquire those resources to gain full control.

Given the factors described, the following evaluation tool can be used as a guide to assess whether an alliance or acquisition is likely to be more appropriate in a particular situation. Evaluate your collabo- ration partner on each of the five factors below and then add up the point total to assess whether acquisition or alliance would be preferred.

If your point total is 11–15, then acquisition is likely the preferred option. If your point total is 8–11, then an equity alliance might be your best option. If your point total is below 8, then a nonequity alliance is likely to be your best option. You can change the weighting of the factors if you think a particular factor is more important in your particular situation.

Factor Vehicle Point Value

  1. Type of Interdependence That Will Generate Synergies
    Modular Nonequity alliance 1
    Sequential Equity alliance 2
    Reciprocal Acquisition 3
  2. Nature of Resources That Will Generate the Synergies
    Relative value of hard to soft resources
    Low Nonequity alliance 1
    Medium Equity alliances 2
    High Acquisition 3
  3. Extent of Redundant Resources Between Two Firms
    Low Nonequity alliance 1
    Medium Equity alliance 2
    High Acquisition 3
  4. Degree of Market Uncertainty
    Low Acquisition 3
    Low/Medium Equity alliance 2
    High Nonequity alliance 1
  5. Level of Competition for Partner’s Resources and Capabilities
    Low Nonequity alliance 1
    Medium Equity alliance 2
    High Acquisition 3

1J. S. DeMott, S. Chang, and Adam Zagorin, “Mickey Mouse on Tokyo Bay,” Time 121 (16) (1983).
2M. Misawa, Tokyo Disneyland and the Disney Sea Park. Harvard Business Review. Asia Case Research Center, Hong Kong, 2006.
4“Leisure Facilities Industry Profile: Global. 2009.” Leisure Facilities Industry Profile: Global, 1.
5Y. Hayashi, Oriental Land’s Disney Parks May Be Running Out of Dreams, WSJ Online (2005),
/SB111627336795434912, accessed February 19, 2013.
6J. H. Dyer, P. Kale, and H. Singh, “How to Make Strategic Alliances Work,” MIT Sloan Management Review (Summer 2001).
7R. P. Nielson, “Cooperative Strategy,” Strategic Management Journal
9 (5) (1988): 475–492.
8Walt Disney Company, 2011 Annual Report, http://thewaltdisney, accessed July 31, 2017.
9A. Webb, “BMW Extends Toyota Cooperation to Fuel Cells, Sports Cars,” Bloomberg Online (June 29, 2012),
-sports-cars.html, accessed July 31, 2017.

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