1 innovation networks and alliance management lecture 5 business alliances
TRANSCRIPT
1
Innovation networks and alliance management
Lecture 5
Business alliances
2TU/e - Innovation in networks and alliance management, 0ZM05/0EE10
Today
A recap What are alliances? Alliance goals Alliance failure Key areas in alliance management Alliance capabilities The Toyota supplier network
3TU/e - Innovation in networks and alliance management, 0ZM05/0EE10
Course design
Aim: knowledge about concepts in network theory, and being able to apply them, in particular in a context of innovation and alliances
1. Network theory and background2. Business alliances as one example of network strategy3. Assignment 1: analyzing an alliance network4. Assignment 2: analyzing an alliance strategy5. Final exam: content of lectures and slides plus literature
online
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Course design (detail)
1. Network theory and background- Introduction: what are they, why important …- Four basic network arguments- Small world networks and trust- Kinds of network data: collection (Part I)- Typical network concepts: calculation, UCINET software,
visualisation (Part II)
2. Business alliances as one example of network strategy- Alliances, alliance failure, key areas in alliance management and the Toyota supplier network.- Legal aspects of alliances- A networked economy
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What you have learned already...what is a network?
Network A set of ties among a set of actors (or “nodes”)
Actors persons, organizations, business-units,countries …
Ties Any instance of ‘connection of interest’between the actors
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What you have learned already the last time..... Example: relations among organizations
Firms as actors
Buys from, sells to, outsources to
Has done business with Owns shares of, is part of Has a joint venture or alliance
with, has sales agreements with Has had quarrels with
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Mark Granovetter: The strength of weak ties
James Coleman: Network closure as social capital
Ron Burt: Structural holes
J. Coleman/R. Burt: Diffusion of innovation through social networks: cohesion versus structural equivalence
All good theories are portable (from one problem to another). You have to take them to your problem.
4 Basic Social Network Arguments
This point is nicely illustrated in the paper of Dyer and Nobeake, which will be discussed later
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Granovetter: strenght of weak ties
You need weak ties because they give you better access to information
Coser (1975) You need bridging weak ties: weak ties that connect to groups outside your own clique
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Coleman: Network closure as social capital
Closed network perspective-cohesion theorists Emphasizes
advantageous effect of strong ties
Redundancy of information may compensate for uncertainty in information provision
Focus on trust, shared norms of behavior, and reduction of opportunism
Network closure is a prerequisite to create social capital
21
3
Network with closure
21
3
Network without closure
4 5
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Ron Burt: Structural holes as social capital (2)
Robert
A B
C
1
23
45
6
7
James
Robert’s network is rich in structural holes
James' network has fewer structural holes
89
D
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Puzzling facts about alliances
From the late 1970s through the early 1990s, the number of strategic alliances among the U.S., E.C., and Japanese firms grew ___ fold?
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Puzzling facts about alliances
The failure rate for strategic alliances is thought to be approximately ___%
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Examples of alliances
Sony Ericsson Sony does the marketing
and designing Ericsson does the
manufacturing
Philips and Sara Lee/DE combined their knowledge in respectively household appliances and coffee to create the successful Senseo coffee concept
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Examples of alliances
Coca Cola shares its knowledge with McDonalds. This allowed McDonalds to enter more markets, faster and more succesfully
Friesland foods manages the inventory of some of its buyers (Vendor managed Inventory), enhancing customer service and reducing inventory costs
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Example of alliances
Helio, a cellphone venture targeted at affluent young people, is a joint venture between Internet-service provider EarthLink of Atlanta and South Korean wireless operator SKI Telecom, entered a strategic alliance with MySpace. Helio users will be able to use their phones to blog or access MySpace
Ghananian business firms only work together with a few selected, trusted partnerfirms.
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Examples of alliances
Toyota works very closely with a selected number of suppliers, whereas American companies like GM, Chrysler and Ford work with arms length suppliers.
Philips plugs its marketing gap with alliances
Philips (electronics) and NIke combined their strength to develop wearable electronics, (MP3 related equipment)
Philips works together with Robijn on ironing products
Philips works together with IKEA
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Alliances and goals
The examples of alliances make clear that alliances can serve multiple, very diverse goals for firms
Notice that some goals are more long term, and strategic than others
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Lets get formal: What is an alliance?
Alliances are: Joint Ventures Co-marketing agreements Co-development agreements Buyer-seller relationships
Alliances are not: Arms length supply
arrangements Licensing or Franchising Subsidiaries Mergers or acquisitions
"A collaborative agreement (or several agreements) of anenduring nature between two or more firms, which contribute
resources to a common endeavor of potentially importantcompetitive consequences, while maintaining their
individuality."
or,"Any cooperative effort between two or more independent organizations to develop, manufacture, or sell products or
services."
Source: Gulati, 2001
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Alliance: Nonequity and equity
Nonequity Alliance Equity Alliances
Cooperating firms agree to work together to develop,
manufacture, or sell products or services, but they do not take equity positions in each other or form an independent organizational unit to manage
their cooperative efforts.
Examples: supply agreements, distribution agreements, buyer-seller relationships
Cooperating firms supplement contracts with equity holdings
in alliance partners.
Example: Joint ventures. In a joint venture, cooperating firms create a legally independent firm in which they invest and from which they share any profits that are created.
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Note
Roughly, you can divide alliances in horizontal (strategic) alliances and vertical partnerships (long term close ties between firms that perform adjacent steps in the value chain).
In the following I will solely refer to alliances in general not make the vertical and horizontal alliances distinction.
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The age of collaboration?
Strategic alliances are increasingly numerous and transnational
Alliances are becoming more important for revenues and profit
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The age of collaboration?
In a number of industries, competing with alliances is “a way of life.” e.g. Biotechnology
Even companies that were resource-rich, self sufficient, and avoided alliances, have joined the bandwagon, e.g. Ford, IBM
The dawning of a new age: The Age of Collaboration?
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Number of alliances world wide
Europe and the others seem to be lacking
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Alliances in e-commerce proliferate
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Alliances lead to networks
In only two years, 75% of the industry is directly or indirectly connected
Source: De Man, 2006, Alliantiebesturing
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Networks compete In some
industries networks of former competitors now compete with each other
Note, in the airline sector it is all about market power and cost savings.
Every network member profits. Stable technical environment.
Mergers are often not possible
Source: De Man, 2006, Alliantiebesturing
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The economics of alliances
Alliances must be assessed on two dimensions Cost-benefit analysis Against alternatives -- Opportunity cost analysis
Alternatives to alliances -- ALLY Develop activities in-house -- MAKE Acquire another firm -- MAKE Buy product or skill in
arm’s-length transactions -- BUY
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Alternatives to alliances
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There are vast differences between American and Japan automakers in organisation (governance structures)
As we we learn later on these differences may have performance implications: Japanese firms are superior at creating and diffusing production enhancing knowledge Source: Gulati, 2002
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Cost and benefits of alliances
Ongoing coordination costs Management time Legal time Conflict
Competitive costs Loss of key competitive advantage Creating competition
Relative rewards vis-à-vis partner Opportunistic behavior by partner Superior learning skills Superior bargaining skills/position
of partner
Broad Increased revenues -- direct and
indirect Decreased costs -- direct and
indirect Risk reduction
Specific Instant access to technology New market Cheap production sources Important customers Cheaper than acquisitions or do-it-
yourself Sharing costs Access to resources
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Alliance often 'fail'
The average success rate of alliances is about 50%
The differences between companies in their success rates are vast: 16% of companies report very low success rates (<20%), while a similar number reports very high success rates (>80%)
Source: de man, 2006
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Case: Taligent's downfall
PURPOSE: To create an operating system that could compete with Microsoft, IBM, Apple, and later HP allied in a joint venture named Taligent
PROBLEMS: Difficulties in the alliance arose from a number of sources:
1) Taligent was producing products that competed with its parent companies’. Namely, Taligent competed with IBM’s OS/2.
2) Different companies placed different levels on input. Apple did little to incorporate and prepare for Taligent’s technology while IBM created its software to be highly compatible.
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Taligent downfall
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Taligent downfall
The downfall of Taligent can be mainly blamed on strategic and behavioral reasons.
The `partners' strategic goals differed, and they `cheated' by not providing the best people
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Why do alliances fail?
Environmental reasons Failure to anticipate the
changing conditions in tastes, technology, economy
Failure to consider differences in national culture, institutions, government regulations
Other ... Strategic reasons
Poor partner selection Changed partner goals and
strategy Achievement of partner’s
strategic goals
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Why do alliances fail
Structural reasons Lack of flexibility in
contract Unclear goals
Cultural reasons Organizational cultures
mismatched Process reasons
Failure to adapt and adjust to changing circumstances
Lack of top visible management commitment
Poor systems for information sharing, conflict resolution, and control
Lack of trust between organizations
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Another failed alliance: Integrion
An example of a failed alliance and the role that environmental, structural, strategy and behavioral reasons play.
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Why did Integrion fail?
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The alliance life cycle
Alliance processes play a role and change during the life cycle of an alliance
The stages define key areas in alliances
Source Gulati, 2002
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Key areas to asses in (strategic) alliances
Source Gulati, 2002
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Key areas to asses in (strategic) alliances
Does it fit with our strategic goals? Do we really need one?
Is the partner compatible e.g.
goals, capabilities, culture, power
What contract? How open, flexible should
the contract be? What negotiating
style?
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Key areas to asses in (strategic) alliances
Incremental
Performance measurement
Appropriate interfaces
Joint Problems solving arrangements/work through conflict
Trust, communication and commitment
Continuation
Termination
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Alliance capabilities
Some firms manage the alliance process better than others
Apparently those firms have built up a capability in managing alliances
Firms with a superior alliance capabilities create more shareholder value (Anand and Khanna, 2000)
Star performers are Hewlet-Packard, Nike, Intel, Benetton, Disney, Cisco, Microsoft, Toyota
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Alliance capabilities
Sending staff to an alliance training is especially useful for firms that have no experience with alliances
Alliances specialists raise the success rates, particularly when they are in middlemanagement (not in the staff and not too close to operations)
Evaluation is a remarkably strong tool for raising alliance success. Especially the comparison of different alliances of one company is a powerful learning tool which increases alliances success
Source Duijsters, 2006
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Philips is building up its alliance capabilities
It has defined corporate alliances
It has defined different alliance functions
Corporate Executive Sponsor
Corporate Relationship Manager
Alliance specialist It has created a Corporate
Alliance Website on its intranet
For managing the Microsoft alliance, Philips has:
Set up a database containing all contracts, projects, people
Opened a Microsoft program office next door to Microsoft's head office
Source: Kempen 2001
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The Toyata supplier network
Article by Dyer and Nobeoka "Creating and managing a hihg performance knowledge-sharing network: the Toyota case"
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Knowledge sharing routines
Knowledge Explicit knowledge or information Tacit knowledge or know-how
Dilemmas associated with knowledge sharing how can self-interested network members openly share
valuable knowledge? how to prevent free-rider problems? how to maximize the efficiency of knowledge transfers?
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Overcoming knowledge sharing dilemmas
Creating a network 'identity' through network-level knowledge-sharing routines
Network `rules' for knowledge protection and value appopriation
Creating multiple knowledge-sharing processes and sub-networks in the larger network
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Creating a network 'identity' through network-level knowledge-sharing routines
Creating an `identity' for a collective means that the individual members feel a shared sense of purpose
Toyota's network is known as the `Toyota group'. Toyota promotes a philosophy within the group called
`coexistence and co-prosperty' (Kyoson kyoei). Toyota creates a shared network identity by developing
network level acquisition, storage and diffusion processes. The supplier association Toyota's operations management consulting division Voluntary small group learning teams (jishuken) Interfirm employee transfers
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Supplier association
Toyota's supplier association (Kyohokai) established in 1943 information exchange between members mutual development and training among member
companies Socializing events
To meet objectives, suppliers must be close to each other, hence supplier associations divided into three regions Tokai (150 members) Kanto (65 members) Kansai (29 members)
The suppliers association primary objective is to develop ties among members and transfer explicit knowledge through multi-lateral knowledge transfers.
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Supplier association
Suppliers association has general (high level) meetings every other month
Topic committees Designed to facilitate knowledge transfer on topics that are
critical to all members in the network F.i. quality committees.
• Regular committee picks a theme for the year (f.i. eliminating supplier design defects)
• Association provides 12 days of quality training each year (for 100 engineers)
• Excellent plant tours allow network members to visit `best practice' plants
• Quality management conference held once a year– lectures from directors, senior managers + six success ful
supplier cases of quality improvement
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Consulting teams
Toyota's Operations Management Consulting Division (OMCD): 6 senior executives, 50 consultants
Direct free `on-site' assistance for suppliers periods ranging from one day to many months on average suppliers are visited about 4 times a year with
an average visit lasting 3 days emergent problem solving: cross divisional problems
solving teams helping a supplier
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Voluntary learning teams
Operations Management Consulting Division organized (1977) a group of 60 of its key suppliers into `voluntary study groups' (Jishuken)
Each group consists of roughly 5-8 suppliers geographic proximity no direct competitors in the same group experience with Toyota
Groups are reorganized every 3 years Each year the supplier meet with the responsible OMCD manager to
determine a theme. Basic idea is to help each other improve productivity/quality
After determining theme, the group visits each member to develop suggestions
preliminary inspection diagnosis and experimentation presentation follow up/evaluation
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Voluntary learning teams (II)
Member of OMCD monitors (to assist and to learn) To be considered for membership of PDA (American
equivalent of Jishuken), supplier must be member of association for a year.
Jishuken are reported to be very valuable (especially in transmitting tacit knowledge)
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Network rules for knowledge protection
How to solve the dilemma of motivating members to share valuable knowledge, and free riding problems
Toyota solves this problem by simply eliminating the notion that there is `propriety knowledge'
Toyota sets a norm/rule by sharing its own knowledge Suppliers must be willing to open their plants to other
network members to other network members if they choose to receive Toyota consulting assistance or participate in Jishuken reciprocal obligations: We will help you, but in return, you
must agree to help the network. reciprocity norm is enforced by implicit threat of
withdrawal of business
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Network rules for knowledge protection
Tacit rule about value appropriation The recipient of knowledge may appropriate 100 percent
of the savings in the short run, but over time will be expected to share a proportion of those savings with the network
Compare this with the GM consultancy teams (PICOS)
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Creating multiple knowledge sharing processes and sub-networks in the larger network How to
maximize efficiency?Toyota established variety of bilateral and multilateral processes, each designed to facilitate different types of knowledge
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The creation and evolution of Toyata's US knowledge sharing network Phase 1: Developing weak ties Phase 2: Developing strong ties with Toyota Phase 3: Developing strong ties among suppliers
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Developing weak ties
1988: Toyota begins producing cars in Georgetown, Kentucky
Suppliers had virtually now contact with each other
1989 Toyota initiates supplier association (BAMA)
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Phase 2: developing strong ties with Toyota
Free of charge well trained consultants made available to BAMA members
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Phase 3: Developing strong ties among suppliers Toyota divided
suppliers in small learning teams no competitors rotation equal
capabilities Toyota subsidizes
network activities financial valuable
knowledge
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Phase 3: developing strong ties among suppliers From a
network of weak ties with multiple structural holes, to a network of strong ties without structural holes
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Conclusion of Dyer and Nobeoka
Network can be more effective than firm in creating and diffusion of knowledge Greater variety of knowledge
Creating an identity of a group, the collective can be an effective way of dealing with free-riding/value appropriation
Cohesive interconnected network is very useful for exploitation
However there may be risks...
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Takeaways
What are alliances? Alliance goals Alliance failure Key areas in alliance management Alliance capabilities The Toyota supplier network