Strategic Alliances and Networks

MPM703
Week 8
Strategic Alliances and Networks
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Unit Learning Outcomes (ULOs)
Upon completion of this unit, successful students can:
ULO 1: Analyse systematically the internal an external business environments of a firm to inform
managerial and business decisions
ULO2: Apply appropriate theories, concepts, and analytical tools in strategy
development, implementation and evaluation across diverse business contexts
ULO3: Recommend relevant and sustainable strategic business decisions
in addressing various business issues
ULO4: Contribute to building a cohesive and productive team with effective business skills
GLO1: Discipline-specific
knowledge and capabilities (
in
Strategic Management
)
Deakin’s Graduate Learning
Outcomes GLOs
GLO2: Communication
GLO5: Problem solving
ULO5: Communicate effectively, in oral or written form, the results of
managerial analysis of various business issues and relevant recommendations
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GLO7: Teamwork
Managerial challenge:
How can a strategic thinker – manager like you, leverage some business
ties and relationships towards building or enhancing the competitive
advantage of your business?
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Outline
Strategic Alliances and Networks
What are strategic alliances?
Motivation for strategic alliance formation
How strategic alliances create value?
Strategic alliances within the strategy tripod
Strategic Alliance in a Global Business Environment
How strategic alliances enable firms to do business beyond borders successfully?
Liability of Foreignness
CAGE Distance
The LLL (3L) Framework of Entrepreneurial Strategies: Building on Networks and
Relationships
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Defining Strategic Alliances and Networks
Strategic alliances are “voluntary agreements between firms”
Strategic alliances are compromises between pure market transactions
and mergers and acquisitions
Alliances fall into two broad categories: contractual (non-equity) and
equity-based
Strategic networks are strategic alliances formed by multiple firms to
compete against other networks and singular firms
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The “Strategy Tripod”
Three Leading Perspectives on
Strategy
Figure 1.4
This is our
focus tonight
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The Variety of Strategic Alliances
Strategic Alliances
A compromise between short-term, pure market transactions (e.g., spot
transactions) and long-term, pure organizational solutions (e.g., mergers and
acquisitions)
The Variety of Strategic Alliances
Acquisitions
Mergers
and
(M&A)
Transactions
Market
Figure 7.1
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Common forms of strategic alliances
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Form of Strategic Alliance
Co-marketing Also known as cooperative marketing;
formal agreement of two firms to promote/market each other’s products
R&D contract Agreement where one firm seeks the service of another firm for R&D purposes
Turnkey projects A firm pays a contractor to design and construct new facilities or projects and train
personnel for a period of time and then turn over the project to the partner
Joint venture Setting up of a new business entity by pooling the resources/investments (equity)
of two firms
Joint venture is different from a merger.
Combining/pooling of resources and expertise of two otherwise unrelated
companies for a particular project or undertaking

Licensing
the granting of permission by the licenser (e.g. your firm in India) to the licensee (a firm in target
foreign market in Indonesia) to use intellectual property rights, such as trademarks, patents,
brand names, or technology, under defined conditions FOR a fee (e.g. licence fee , royalty
premium)
the possibility of licensing makes for a flatter world, because it creates a legal vehicle for taking a
product or service delivered in one country and providing a nearly identical version of that
product or service in another country.
under a licensing agreement, the multinational firm grants rights on its intangible property to a
foreign company for a specified period of time.
the licenser is normally paid a royalty on each unit produced and sold.
although the multinational firm usually has no ownership interests, it often provides ongoing
support and advice.
most companies consider this market-entry option of licensing to be a low-risk option because
there’s typically no up-front investment
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Licensing
Advantages
the company’s products will be manufactured and made available for sale in the foreign country (or countries)
where the product or service is licensed
the multinational firm doesn’t have to use its own resources to manufacture, market, or distribute the goods.
limited risk exposure to foreign markets
expanded revenue base
Disadvantages
lower potential returns, because the revenues are shared between the parties.
loss of control over its product
Lose intellectual property
licensee may become a competitor
threat to brand name and reputation of products (if lousy licensee)
Limited exposure to foreign markets
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Franchising
Similar to a licensing agreement, under a franchising agreement, the
multinational firm grants rights on its intangible property, like
technology or a brand name, to a foreign company for a specified
period of time and receives a royalty in return.
The difference is that the franchiser provides a bundle of services and
products to the franchisee.
For example, McDonald’s expands overseas through franchises. Each
franchise pays McDonald’s a franchisee fee and a percentage of its
sales and is required to purchase certain products from the franchiser.
In return, the franchisee gets access to all of McDonald’s products,
systems, services, and management expertise.
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Franchising
Used by many firms, especially service industries, to develop a
worldwide presence
Examples: Subway, The UPS Store, and Hilton Hotels
Franchisee uses brand name, products, & processes in exchange for an upfront payment
(franchise fee) & a percentage of revenues (royalty fees)
Attractive, requires little investment by the franchisor.
But, only get a small portion of the profits made under its brand
name
Franchises are only successful if franchisees are provided with a
simple and effective business model. “Franchise formula” must be
perfected
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Franchising
Advantages
Market entry carries less financial, legal and political risk.
Economies of scale are achievable through ordering with the owner
and other franchisees.
Partners can see the business up close, first hand.
Disadvantages
The licensor/franchisor has little direct control
Increased opportunity for competitor – franchisee may become a
competitor on its own
Limited exposure to foreign markets
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Contractual agreements: R&D Contracting
A strategy of outsourcing one’s research and development activity,
function or project to another firm (in another country) that has the
necessary resources, capabilities or expertise
A firm from Australia signs an R&D agreement with an Indian firm for
an IT project
An effective way to access global resource, capability, talent or
innovation at a lower cost than doing it in-house
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Contractual agreements: R&D Contracting
Advantages
access to better capabilities, expertise and innovation at lower cost
limited exposure to foreign market risks
work with leading firms in foreign markets – most likely
Disadvantages
difficult to arrange and manage contracts
exposure to potential competitors – knowledge spillover to others
potential information leakage – contractor leaking information to others
Intellectual Property issues later on
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Contractual agreements: Turnkey Projects
An arrangement where a firm agrees to develop a product or deliver a service, design and
construct a facility in a foreign market and train its employees and managers on behalf of another
Example is when Yarra Trams in Melbourne ventures into a foreign market and agrees and enters
into a contract with a firm in Malaysia to construct trams in Penang
Yarra will build the tram system and train personnel
After a period of time, Yarra Trams will “turnover” the management of the facility (hence, turning over the
key) to the Malaysian firm
Also known as BOT – build, operate and transfer scheme
Often involves large scale projects like dairy farms, dams, roads, railway system, power plants,
etc.)
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Contractual agreements: Turnkey Projects
Advantages
lucrative projects in foreign markets
often, well-supported by formal institutions like government
opportunity to build one’s reputation globally
Disadvantages
very limited time frame
may create future competitors
exposure to country risks (e.g. exposed to government instability while building a power
plant)
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Contractual agreements: Co-marketing
Joint marketing and promotion of product or service by two or more firms in a
foreign market
In a co-marketing partnership, both companies promote a piece of content or
product, and share the results of that promotion.
By levering the relationship and reach of a partner, co-marketing campaigns are
designed to deliver more leads, buzz, and awareness, with less work.
Co-marketing helps brands of partner firms build a new audience, and get a new
type of content in front of their audience.
The most common form of co-marketing is for two companies who have similar
audiences to work together on a piece of content, and promote that content to both
audiences
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Contractual agreements: Co-marketing
Advantages
Building relationship with other firms
Access or develop new knowledge from partners
Build on success of partners
Access to wider markets
Disadvantages
Difficulty in coordination
Power asymmetry – e.g. working with larger firm/partner
Goal incongruence over time
Mismatch that emerged only later on
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Strategic investments and Cross-holdings
Strategic investment: acquiring or buying (and maintaining/owning)
shares of stock (part ownership) of another company
-the ‘holding’ company (i.e. the firm which buys shares of another
company which in turn becomes a subsidiary of the holding company)
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Strategic investments and Cross-holdings
Cross-holdings = refer to the
acquisition of shares of stock
(and becoming part owner) of
another company and vice
versa
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Strategic investments and Cross-holdings
Advantages:
– limited exposure to operational risks
– supports diversification of investment portfolio
– relatively easier strategy to enter markets
– risk avoidance (e.g. cultural risks, political risks)
– a good springboard for future real options (more engaged market entry strategies like joint venture)
Disadvantages:
– little say on operational activities
– limited opportunity to learn – business, markets, industry
– focused more on financial gains (ROI)
– highly volatile market exposes holding company to risks
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Joint venture
A joint venture is a business that’s newly created out of an agreement or partnership between
two or more firms
Each party/firm who enters into a joint venture agreement maintains their separate business as a
distinct legal entity – each firm is an owner of that new business – the joint venture
Each partner brings with it nor just capital but expertise and capabilities that are invested into the
joint venture
A party/firm can be a minority partner (owns less than 50%), majority partner (owns more than
50%) or a co-partner (50-50 or equal shares)
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Firm A Firm B
Firm “AB”
(Joint Venture)

Joint venture
Advantages
access to new markets and distribution networks
increased capacity
sharing of profits, risks and costs (ie liability) with a partner/s
access to new knowledge and expertise, including specialised staff
access to greater resources, for example technology and finance
politically acceptable – foreign governments prefer local firms to joint venture with foreign firms
Disadvantages
dealing with different working arrangements, workplace cultures and management styles between the
parties;
either of the parties making poor tactical decisions which may affect the desired outcome of the project; and
the joint venture parties may have a lack of commitment to the business
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Are Joint Ventures Always Effective?
Pros:
access to new markets and distribution networks
increased capacity
sharing of risks and costs (liability) with a partner
access to greater resources, including specialised staff, technology and finance
Cons:
Resource hungry – to initiate, build, maintain and dissolve
Problems are likely to arise if:
o the objectives of the venture are not clear and communicated to everyone involved
o the partners have different objectives for the joint venture
o the partners bring in different and divergent levels of expertise, investment or assets into the venture
o different cultures and management styles result in poor integration and co-operation
o the partners don’t provide sufficient leadership and support in the early stages
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Motivation for Alliances
Create economic value by:
accessing complementary resources and capabilities
leveraging existing resources and capabilities
An alliance is an organizational form of exchange that:
should produce a gain from trade due to some comparative or absolute
advantage
Access alliances partners provide needed capabilities (e.g. distribution
outlets or licenses to brands)
Complementary alliances – bringing together complementary strengths
to offset the other partner’s weaknesses.
Collusive alliances to increase market power. Usually kept secret to
evade competition regulations.
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How Strategic Alliances Create Value
Improve Current Operations
Shaping the Competitive Environment
Facilitating Entry and Exit
Value
Creation
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How Strategic Alliances Create Value
Improving Current Operations
Exploiting economies of scale
• a partner brings increased market share and/or manufacturing
capacity
Learning from partners
• a partner brings technology and/or market knowledge
Risk and cost sharing
• a partner bears a portion of the risk and/or cost of the alliance
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Creation of Synergy
1+1 is equal to or greater than 3
But what is synergy in strategic alliances?
Greek ‘Synergos’ or ‘working together’
Forms:
Shared know-how: sharing knowledge/capabilities/skills
Shared tangible resources: share physical assets
Pooled negotiating power: b.p. over strategic customers, suppliers,
governments, stakeholders, etc. (e.g. Fonterra – NZ Farmers)
Coordinated strategies: responses to competitors – entry barrier
Vertical integration – value chain efficiency
Combined business creation – from combined resources, segments in
separate value chains
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Apple’s acquisition of Beats (Dr.
Dre) for $3.2 Billion in 2014
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Motives:
Access to the premium headphone market ($1B/year)
Technical expertise of Beats – product design,
manufacturing expertise, network of suppliers and
endorsers! (Dr. Dre and Jimmy Iovine)
Music streaming service Beats Music —to fuel Apple
Music to counter Spotify
iTunes: download model
Beats Music – streaming model
Smart music devices – the way to the future
How Strategic Alliances Create Value
Shaping the Competitive Environment
Facilitating technology standards
Facilitating tacit collusion
• partners may agree on a standard and avoid a market battle for the
standard
• partners may communicate within an alliance in subtle, legal ways
whereas the same communication between competitors outside
an alliance would be illegal
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How Strategic Alliances Create Value
Facilitating Entry and Exit
Low-cost entry into new industries
Low-cost exit from industries
Managing uncertainty
Low-cost entry into new geographic markets
• a partner provides instant access and legitimacy
• a partner is an informed buyer
• alliances may serve as ‘real options’
• partners provide local market knowledge, access, and legitimacy with
governments and customers
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Performance
The performance of strategic alliances and networks
A combination of objective and subjective measures can be used to
determine performance
Four factors may influence the performance of alliances and networks: equity,
learning and experience, nationality, and relational capabilities
The performance of parent firms
Studies have shown that parent firms reap profitable returns and increased
market share
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Overcoming the Liability of Foreignness
The Liability of Foreignness – the inherent disadvantage foreign firms
experience in host countries because of their non-native status
Differences in formal and informal institutions govern the rules of the
game in different countries
Foreign firms are often discriminated against
Foreign firms deploy overwhelming resources and capabilities to offset
the liability of foreignness
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Liability of Foreignness
Costs of doing business abroad that result in a competitive disadvantage
Inherent disadvantage foreign firms experience in host countries because of their
non-native (foreigner) status
Additional costs a firm operating in a market overseas incurs that a local firm would
not incur
OZ MARMITE EXPORT INC.
People’s Republic
of Banjokistan
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Liability of Foreignness (LOF)
Forms or Types of LOF
Costs related to spatial distance: costs of travel, transportation and coordination
over distance and across time zones
Firm-specific costs – unfamiliarity with local business environment (e.g. research
costs, market studies, searching for information, access to resources through
relational channels etc.)
Costs due to lack of legitimacy and economic nationalism (e.g. costs to build one’s
corporate image, brand, navigate through unclear legal system, etc.; consumers
skeptical with foreign brand)
Costs from home country environment– a firm’s home country government sets
restrictions on high-technology sales to certain countries
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Liability of Foreignness (LOF)
Sources of LoF:
The CAGE Distance
People’s Republic
of Banjokistan
OZ MARMITE
EXPORT INC.
CAGE
Distance
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Overcoming LoF: Ghemawat’s 3As
Leverage home-grown
specific advantages
(resources and capabilities)
Mimic successful local firms
in host countries
6–42
Variation: making changes in products
and services, policies, positioning, and
expectations for success
Focus: market product/lines that require/s
less adaptation; focus on one target
market or segment or geographic area
Design: changes in order to reduce cost;
flexibility in manufacturing to
overcome supply differences
Innovation: to offer something new to
new overseas markets
Creating economies of scale or scope to deal with local market differences
Exploit similarities among geographies
(e.g. Southeast Asia, Latin America, South Asia, etc.)
and offer ‘standardized’ products for each geographic grouping
Consolidation of product lines
Examples include: use of global corporate brand,
centralized global production systems
(instead of having separate production systems in each country)
Exploiting the local market
differences to the firm’s advantage
Exploiting differences between
national or regional markets,
e.g. locating separate parts of the
supply chain in different places
Examples: locating production in
countries with cheaper labour
(e.g. outsourcing), less industry restrictions, etc.
Exploiting the legal, institutional, and
political differences between regions or
countries (e.g. lower taxes, government incentives
Exploiting local market imperfections
(e.g. lack of government regulation,
under developed local industry) to become
pioneers; first-mover advantage

Strategic Alliances and Networks and the Concept of Distance
Distance
not just the geographic separation between a firm’s home country and its international markets
(including host countries)
also includes cultural, administrative, geographic, and economic (CAGE) distance
An assessment of CAGE distance is of strategic importance in terms of knowing how to form and leverage
the firm’s strategic alliances and networks
Strategic alliances and networks are mechanisms to reduce some of the
transaction costs associated with
CAGE distance.
The CAGE Distance framework of Ghemawat (2001; see reading this week)
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The CAGE Distance Framework
Cultural
Distance
Administrative
Distance
Economic
Distance
Geographic
Distance
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THE CAGE DISTANCE FRAMEWORK

Attributes creating distance
Industries or products affected by distance
Cultural distance Administrative distance Geography distance Economic distance
Different languages
Different ethnicities; lack
of connective ethnic or
social networks
Different religions
Different social norms
Absence of colonial ties
Absence of shared monetary
or political association
Political hostility
Government policies
Institutional weakness
Physical remoteness
Lack of a common border
Lack of sea or river access
Size of country
Weak transportation
or communication links
Differences in climates
Differences in consumer incomes
Differences in costs and
quality of
Natural resources
Financial resources
Human resources
Infrastructure
Intermediate inputs
Information or knowledge
Products have high
linguistic content (TV)
Products affect cultural or
national identity of
consumers (foods)
Product features vary in
terms of size (cars),
standards (electrical
appliances), or packaging
Products carry country
specific quality
associations (wines)
Government involvement is high
in industries that are
Producers of staple goods
(electricity)
Producers of other
“entitlements” (drugs)
Large employers (framing)
Large suppliers to government
(mass transportation)
National champions (aerospace)
Vital to national security
(telecom)
Exploiters of natural resources
(oil, mining)
Subject to high sunk costs
(infrastructure)
Products have a low value-of
weight or bulk ratio (cement)
Products are fragile or
perishable (glass, fruit)
Communications and
connectivity are important
(financial services)
Local supervision and
operational requirements are
high (many services)
Nature of demand varies with
income level (cars)
Economies of standardization or
scale are important (mobile
phones)
Labor and other factor cost
differences are salient
(garments)
Distribution or business systems
are different (insurance)
Companies need to be
responsive and agile (home
appliances )

Source: Recreated from www.business-standard.com/general/pdf/113004_01.pdf.
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THE CAGE DISTANCE FRAMEWORK
CAGE analysis asks you to compare a possible target market to a company’s home market on the
dimensions of culture, administration, geography, and economy.
CAGE analysis yields insights in the key differences between home and target markets and allows
companies to assess the desirability of that market.
CAGE analysis can help you identify institutional voids, which might otherwise frustrate
internationalization efforts.
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LLL (3L) Framework of Entrepreneurial
Strategies to Overcome the CAGE Distance
Linking
Leveraging
Learning
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How do managers of entrepreneurial firms from emerging economies capture global
business opportunities and tap into global resources?
Successful managers of so-called ‘dragon multinationals’ follow three strategies:
LINKING: link up with firms, especially established Western multinational
enterprises (MNEs), through various forms of collaborative partnerships
LEVERAGING: leverage the linkages or relationships to overcome resource barriers
for business activities
LEARNING: building up the capability to learn through repeated linking and
leveraging
Mathews, J. 2006. Dragon multinationals: New players in 21st century globalization.
Asia Pacific Journal of Management, 23(1): 5–27.

LLL (3L) Framework of Entrepreneurial
Strategies to Overcome the CAGE Distance
Linking
Leveraging
Learning
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LINKING:
Building strategic alliances, business ties,
networks
Infosys: linked to its first client in New York in
1981: Data Basics Corporation
Haier – consumer electronics and home
appliances company in Shandong, China;
OEM contracts for US and Asian companies
Huawei – distributor of phone switches (pabx
switches) – linked with P.L.A. and the rest of
the government in China; then linked with
various foreign companies

LLL (3L) Framework of Entrepreneurial
Strategies to Overcome the CAGE Distance
Linking
Leveraging
Learning
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Leveraging or exploiting the linkages that have been built
over time – ganing access to VRIO resources or developing
capabilities
Haier: used the OEM contracts to improve products
continuously and introduced newer products (upgrading,
R&D, experimentation, etc.)
Haier: used its linkages to build cooperative research with
Toshiba, Philips, Lucent – improve quality and
competitiveness of products and services
Huawei – build R&D all over the world

LLL (3L) Framework of Entrepreneurial
Strategies to Overcome the CAGE Distance
Linking
Leveraging
Learning
50
Learning:
Repeated application of linking and leveraging to gain
competitive advantage
Haier: Learning from partnerships to improve technology
Huawei: learning by competing with foreign firms

LLL (3L) Framework of Entrepreneurial
Strategies to Overcome the CAGE Distance
Linking
Leveraging
Learning
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The 3L are effective mechanisms to address
the CAGE Distance
Linking to identify potential resources that
can be acquired from others
Leveraging partnerships and relationships to
access and utilise resources (VRIO)
Learning – to perform linking and leveraging
more effectively through repeated conduct

Summary
Strategic alliances and networks
Varieties of strategic alliances
Motivations to form strategic alliances
Model of strategic alliances
Formation of strategic alliances
Liability of Foreignness
The CAGE Distance Framework
3L Framework of Entrepreneurial Strategies
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