How to Navigate Strategic

Alliances and Joint Ventures

How to Navigate Strategic
Alliances and Joint Ventures
A Concise Guide For Managers

Meeta Dasgupta
How to Navigate Strategic Alliances and Joint Ventures: A Concise Guide
For Managers

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To my family
 Abstract
It is not only the smaller organizations, but also the larger organizations
like IBM, GE, and Microsoft that are realizing the importance of collabo-
rations and partnerships to achieve their business objectives. In contrast to
a decision to go for an acquisition, a decision to go for a strategic alliance
demands a collaborative mindset. Organizations in order to create inde-
pendent and joint values are entering into strategic alliances with their
suppliers, customers, and even their competitors. Every alliance, whether
a contractual or an equity alliance or a joint venture, follows a lifecycle.
A strategic alliance starts with having a clarity on the business case of the
alliance, followed by selection of a partner, negotiating the terms and
conditions of the alliance, managing an alliance, and finally, assessing the
performance of an alliance. Decisions have to be taken by executives at
each stage of the alliance lifecycle. Anticipated revenues and other sources
of financial value remain unrealized if inadequate decisions are taken
and alliances fail or underperform. This book takes a reader through the
different stages of an alliance lifecycle and discusses and debates on the
decisions to be taken. The book also demonstrates the various challenges
faced by executives in an alliance. The author by sharing various practical
incidents tries to connect the readers to the various decisions involved and
taken by organizations during an alliance. This book is perfect for mana-
gerial executives who are contemplating proposing a strategic alliance for
their organizations or are part of an organization juggling various ongoing
alliances, alliance managers, and business development professionals. In
short, the content of the book should be of interest to anyone for whom
alliances are a topic of interest.

Keywords
strategic alliance; joint venture; business case for an alliance; partner
selection; risk assessment; value creation; negotiating an alliance; alliance
management; assessment of the alliance
 Contents
Acknowledgments�����������������������������������������������������������������������������������xi

Chapter 1 What Are Strategic Alliances?�������������������������������������������1

Chapter 2 Business Case for an Alliance������������������������������������������19
Chapter 3 Selecting a Partner for an Alliance�����������������������������������29
Chapter 4 Assessing Individual and Joint Values������������������������������41
Chapter 5 Assessing and Managing Risks����������������������������������������49
Chapter 6 Negotiating the Deal������������������������������������������������������65
Chapter 7 Managing the Alliance����������������������������������������������������83
Chapter 8 Assessing the Alliance���������������������������������������������������105
Chapter 9 Alliance or Acquisition�������������������������������������������������123
Chapter 10 Conclusion�������������������������������������������������������������������129

Bibliography���������������������������������������������������������������������������������������133
About the Author��������������������������������������������������������������������������������141
Index�������������������������������������������������������������������������������������������������143
 Acknowledgments
First and foremost, I would like to thank the management executives and
participants of various programs at the Management Development Insti-
tute, Gurgaon, who have interacted with me in classroom sessions and in
various forums. These interactions have given me interesting insights on
various decisions their organizations have taken when they decided to go
for a strategic alliance. Effort has been made to share these insights and
interesting anecdotes with the readers.
I would like to thank my family—my parents, my husband, and my
children, who have been a constant source of inputs, support, and inspi-
ration to me, and my brother who has patiently responded to a number of
my queries on the subject. It is their support that gave me the motivation
to initiate writing this book.
I would also like to thank my colleagues at the institute, who had
written books with BEP and other publishing houses, for encouraging
me to attempt writing this book. Their experience with writing books and
account of their journey motivated me to endeavor the same.
I am grateful to the reviewers of the book for painstakingly providing
comments and feedback to improve the content of the book.
Most important of all, I thank God for making me accomplish what
I had started with.
 CHAPTER 1

What Are Strategic

Alliances?
Do You Expect to Conquer the World Independently?
Over the past number of years, both domestic and international strategic
alliances have grown exponentially in number and are now a very pop-
ular instrument in the current competitive global environment. Many
multinational organizations that had previously shunned alliances are
becoming increasingly involved in partnerships. Organizations have real-
ized the importance of strategic alliances as a means of complementing
their generic competitive strategies. Organizations have realized that it is
challenging to take on the world by oneself. They have realized that they
can no longer develop all the resources, technologies, and products to
compete in the current dynamic marketplace. Strategic alliances, becom-
ing a critical part of the overall strategy of the organization, are being used
to develop critical skills, knowledge, and capabilities that it lacks and to
grow product and service offerings. The make versus buy1 decision, which
once confronted decision makers, has expanded and has become more
complex—make versus buy versus partner decision. This argument is sup-
ported by a study conducted by Accenture, which reported that about 25
percent of the executives said alliances accounted for at least 15 percent of
their market value.2 A study conducted by KPMG professionals in 2017,
wherein they surveyed around 50 alliance experts from around the world,
supports the importance organizations give to strategic alliances in their

1
  Gardiner, S.C., and Jr. J.H. Blackstone. 1991. “The ‘Theory of Constraints’ and
the Make-Or-Buy Decision.” International Journal of Purchasing and Materials
Management 27, no. 3, pp. 38–43.
2
 Palmer, D., and P. Mullaney. 2001. “Building Better Alliances.” Outlook,
pp. 53–57.
2 How to Navigate Strategic Alliances and Joint Ventures

Importance of strategic alliances

Extremely important- are a fundamental
60% 56% part of the strategy

Important- are one of the building blocks of

50% strategy

Somewhat important- not at the forefront of

40% 36% strategy

30% Not very important- take an opportunistic

approach to strategic alliances

20% Unimportant- do not intend to pursue

10% 6%
2%
0%
0%
Extremely Important Somewhat Not ver Unimportant
important important important

Figure 1.1  Importance of strategic alliances in overall corporate

strategy

overall corporate strategy.3 Figure 1.1 graphically exhibits the opinion

voiced by the experts in the study.
IBM’s entry into the personal computer industry was greatly facil-
itated by its willingness to rely on outsiders for development and pro-
duction: Intel for chips, Microsoft for operating systems software, Epson
for peripherals, and a number of Asian vendors for other components.
General Motors partners include Isuzo, Suzuki, and Toyota. While taking
the example of Tata Motors, some 100 component makers worked with
the organization for over three years to create Nano. Ratan Tata was able
to keep his promise and deliver a car for INR 100,000, the Nano with
help from them, most of them homespun Indian outfits. This exemplifies
the fact that organizations, big and small, are accepting the importance
of alliances to compete and win at the global level. It is clear that strate-
gic alliances as an organizational structure for global organizations have
become very popular.
A very big contributor toward this partnership drive has been the emer-
gence of global integration. Global integration can be looked through the
lens of globalization of demand, globalization of supply, globalization of
competition, and globalization of strategy. Demand from customers is
not restricted to a particular geography. Their tastes have become global,

3
 Global Strategy Group. “Strategic Alliances: A Real Alternative to M&A?”
https://assets.kpmg/content/dam/kpmg/ie/pdf/2018/01/ie-strategic-alliances-
a-real-alternative-to-ma.pdf
 What Are Strategic Alliances? 3

their preferences becoming standardized, thereby leading to the evolution

of a global marketplace. The concept of supply globalization works in
tandem to the House of Innovation proposed by C.K. Prahalad in his
book New Age of Innovation, wherein an organization, in order to satisfy
one customer, needs to have access to unlimited resources. Companies
also, in their drive toward cost efficiency, have diversified their supply
chain management activities across the globe. This makes it imperative
for them to tie up with the local players of different geographies. Apple’s
iPhone has its various parts manufactured by suppliers in China, Japan,
and Taiwan.4 Competition has become global. Gone are the days when
organizations would compete with local players. It is a global battlefield
with global corporate stalwarts pitted against each other. Tata Motors is
not only competing against the likes of Maruti Suzuki and Mahindra and
Mahindra, but due to acquisition of Jaguar Land Rover also with luxury
carmakers. The strategic choices that organizations have to make or the
decisions they have to take also have taken a global perspective. A change
in the business scenario anywhere in the world might impact an organi-
zation’s decisions.

Changing Dynamics of the World

Not only has the importance of strategic alliances picked up, but the
dynamics have also changed. Triadization or strategic alliances among the
triad regions of North America, Western Europe, and Japan has given
way to alliances with the big emerging market countries of India, China,
Brazil, Indonesia, and others. Examples are as follows:

• Walmart making an inroad into the Indian retail industry by

entering into a joint venture with Bharti Enterprises.
• Fiat entering into a strategic alliance with Tata Motors for
joint production of cars and distribution of Fiat cars.

4
  Gould, S. and A. Antonio Villas-Boas. 2016. “Here’s Where All the Components
of Your iPhone Come From.” April 13, 2016, https://businessinsider.in/Heres-
where-all-the-components-of-your-iPhone-come-from/articleshow/51802648.
cms
4 How to Navigate Strategic Alliances and Joint Ventures

• Cafe Coffee Day tying up with Swiggy, an online food

delivery startup, to deliver coffee and snacking items at the
doorstep.
• Spotify getting into an alliance with Uber to provide stereo
control and personalized experience to Uber riders.

Multinationals, realizing the importance of the emerging markets, have

changed their focus to entering into collaborations with Indian companies.

Need for an Organization to Enter

Into a Strategic Alliance
Executives of every organization planning to grow and achieve certain
strategic outcomes are posed with this question sooner or later during
their lifespan.
The decisions can be shown across a continuum, as illustrated in
­Figure 1.2.
An organization has a choice; to achieve its objectives independently,
also referred to as organic growth, to go and acquire another organiza-
tion, or enter into collaboration with another; the latter two choices
also referred to as inorganic growth. In the first case, the organization
should have the resources and capabilities that would help it to achieve
its objectives independently. In case the organization lacks the resources
and capabilities to develop those resources independently, it can go and
acquire another organization that has all the resources and capabilities the
organization lacks. But, the organization should be prepared to own the

How does my organization achieve its objectives?

Collaborative
Competitive

Independently Acquisition
(Greenfield ventures) Strategic alliances (Brownfield ventures)

Figure 1.2  Choices for an organization

 What Are Strategic Alliances? 5

complete risks and liabilities of the acquired organization. In case that is

not something that the organization is prepared for, it can consider enter-
ing into a collaboration. Decision of a strategic alliance lies somewhere in
between on the continuum.
For successful implementation of a global strategy, it becomes essen-
tial that a multinational enterprise should carefully implement its entry
strategy for each international market because the success or failure of
investment in one market will critically influence the activities in the
complete network.
According to the real options theory, strategic alliances confer valu-
able options to expand or grow under conditions of uncertainty. By
entering into strategic alliances, organizations are able to limit their
downside losses to an initial, limited commitment, as well as position
itself to expand. Organizations can spur their growth or market entry
strategies either through greenfield investments or through mergers and
acquisitions. In capital and research-intensive industries, organizations
can spread risk over multiple capital providers by engaging in interna-
tional joint ventures, rather than outright acquisitions. By entering into
international strategic alliances, multinational corporations (MNCs) can
also rely upon local partners’ resources to manage risk, including their
local knowledge, relationships with local government, and so forth. Inter-
national strategic alliances lead to higher value creation, particularly in
the presence of asymmetric information between the partners.
Strategic alliances help to increase efficiency. Cooperation leads to
increased output, lower prices, and creation of new or better products.
Two underlying sources of efficiencies are reduced costs and increased
investment incentives. Production and distribution costs are reduced by
realizing potential scope and scale economies and by eliminating dupli-
cative activities. Increased technological rivalry stimulates innovation.
Research and development (R&D) activities when done in coordination
would not only speed up the development of new products at lower cost,
but also help to achieve scale economies through joint ownership of a
single large production facility.
Many international strategic alliances in developing countries are
driven with the aim to grow, with research showing that the growth
potential in case of emerging economies’ alliances was more than that
6 How to Navigate Strategic Alliances and Joint Ventures

of developed economies’ alliances. Organizations in industries with

high technology components such as electronics, computers, and
chemicals tend to have greater growth option values than those in
food processing or tire manufacturing industries. International strate-
gic alliances provide access to foreign markets, which otherwise would
have been difficult to access due to insufficient capital, technology, and
personnel.
Although mergers and acquisitions provide more control on the oper-
ations of the combined entity, interestingly, mergers and acquisitions,
rather than being a secret to financial success, can destroy shareholder
value more than they can create it. Their approximate failure rate ranges
anywhere from 50 to 90 percent, with more than 60 percent destroying
shareholder value. When there is uncertainty and stakes are high, part-
nerships can be an attractive alternative to going alone or indulging in
mergers and acquisitions.
The organization belongs to a slow cycle industry; does a strategic alliance
add value to the organization?
The answer to this question leaves no doubt in one’s mind when one
talks of a fast cycle industry, like information technology, that is mov-
ing at a very fast pace. Technologies become redundant at a very fast
pace. In such industries, a strategic alliance not only helps organizations
to shorten the product development cycle time and speed up entry to
market, but also helps to share the R&D expenditure and the associated
risks. An organization in a slow cycle market can use a strategic alliance
to gain access to restricted markets and to maintain market stability by
establishing standards.
The market power theory says that an organization, in order to com-
pete successfully, should strengthen its market position. Strategic alliances
are also formed to alter the basis of competition. To remain competitive
or eliminate competition, organizations may enter into strategic alliances,
thereby strengthening their market position.

Understanding the Term Strategic Alliances

According to Webster’s Dictionary, an alliance is an association of interests.
In a broad context, the term alliance refers to “relationships that provide
 What Are Strategic Alliances? 7

opportunities for mutual benefit and results beyond what any single orga-
nization or sector could realise alone” (Austin 2000; p. 47). In the context
of business and management, alliance can be defined as any voluntarily
initiated cooperative agreement between organizations that involves
exchange, sharing, or codevelopment, and it can include contributions by
partners of capital, technology, or organization-specific assets. “Compat-
ibility of goals, synergy among partners, an appropriate value chain and
partners who make approximately equal contributions in relevant areas
are some of the key success factors for strategic alliances” (Dwyer et al.
2011). Complementarities of market and compatibility of resources drive
the formation of alliances in firms and the rate of their performance and
survival.
What makes alliances unique is that independent companies coor-
dinate their actions and resources and also share risks and rewards. Alli-
ances generally involve some degree of exclusivity. Though not always,
but often, strategic alliances are perceived to be temporary vehicles for
growth and attaining objectives.
For a strategic alliance, it is essential that:

• Two or more organizations unite to pursue a set of agreed-

upon goals and remain independent subsequent to the forma-
tion of the alliance.
• Partner organizations share the benefits of the alliance and
control over the performance of the assigned tasks.
• Partner organizations contribute on a continuing basis in one
or more key strategic areas.

History is replete with examples of companies entering into strate-

gic alliances. Timex getting into a strategic alliance with Titan for the
distribution of its watches through the latter’s vast distribution network.
IBM got into an alliance with Wipro, wherein Wipro would market and
integrate IBM’s wide range of server and storage products to address
customer needs in India and Asia Pacific region. Walmart got into an
alliance with Bharti Enterprises to set up Best Price Modern Wholesale
stores that offered best fixed and fair prices for a wide assortment and
variety of high-quality merchandise. Hero Motors got into an alliance
8 How to Navigate Strategic Alliances and Joint Ventures

with Honda, Japan, to manufacture fuel-efficient low-cost motorcycles.

At the global level, Starbucks got into an alliance with Barnes and Noble
to provide coffee breaks to customers while they browse through the latest
bestsellers shelf. Interestingly, the business model of international giants
like McDonalds, Kentucky Fried Chicken, Hilton, Hyatt, and Pepsi is
surviving on the basis of franchisee agreements entered into with players
in various countries.
Is there a limit to the number of partners in an alliance?
Alliances are not restricted to two partners. Companies can enter into
an alliance with a single partner organization or with multiple organiza-
tions to form an alliance network. For example, General Motors entered
into an alliance with Toyota, Isuzo, Suzuki, and SAAB so that it could
compete effectively with Ford Motors that was part of another alliance
network with Nissan, Mazda, Kia, and Jaguar. For example, Star alliance
had 28 member airlines, whereas Sky Team alliance is a network of 19
airlines.
The concept of one-to-one partnering has shifted toward managing
a network of alliances. Companies feel that operating in networks helps
them to hedge against future technological challenges. They always have
the option, when working with multiple partners, to reposition them-
selves in adjacent knowledge networks.
Are strategic alliances restricted to corporates?
Alliances are not restricted to corporates or organizations. Nations
also see the benefit of alliances. The concept of regional economic inte-
gration and formation of agreements between nations like the North
American Free Trade Agreement (NAFTA), European Union (EU),
Association of South East Asian Nations (ASEAN), and so on are steps
in the direction. Member countries, through regional economic inte-
gration, make efforts to promote free and fair trade on a regional basis.
Member countries continue to be in the alliance till they feel it is creat-
ing value for them more than they would be able to create when work-
ing independently. The formation of International Solar Alliance, an
inter-government treaty-based organization, marks the coming together
of like-minded countries and businesses that share United Kingdom’s
commitment to deliver clean, affordable energy, and thereby help to end
poverty. These sources of energy are considered to be the lifeline for
 What Are Strategic Alliances? 9

Mutual service Joint venture Value chain

consortium Licensing/Franchising arrangement partnerships

Weak and distant Strong and close

relationship among relationship among
partners partners

Figure 1.3  Continuum of strategic alliances

the rural community.5 But, the focus of this book is alliances between
corporates.

Types of Strategic Alliances

For the purpose of our understanding, and for the purpose of the book,
the term strategic alliance has been taken in an inclusive manner. It relates
with any alliance entered between two or more players for a mutually
decided objective, to achieve mutually beneficial strategic outcomes, and
ultimately to achieve competitive advantage.
Based on the proximity between the alliance partners and the strength
of the relationship, strategic alliances can be represented along a contin-
uum, as illustrated in Figure 1.3. Alliance partners might enter into a
consortium wherein alliance partners have come together for a purpose,
with no sharing of assets and revenues. A good example would be DIAL
(Delhi International Airport Authority Limited), which is a consortium
set up as a joint venture between GMR Group (54 percent), Airport
Authority of India (26 percent), and Fraport AG and Emran Malaysia
(10 percent each). The concession to manage, operate, and develop the
Indira Gandhi International Airport was awarded to the consortium in
2006 for 30 years, extendable by another 30 years.6
What is the need to form a consortium?

5
 Aditi, K. April 17, 2018. “UK Joins International Solar Alliance to Mark
­arendra Modi.” https://livemint.com/Industry/J6uQDEC9pqS7ZqQzfm-
N
mzuJ/UK-joins-International-Solar-Alliance-to-mark-Narendra-Modi.html
(accessed October 08, 2018).
6
  Delhi International Airport (P) Ltd., http://gmrgroup.in/dial.aspx
10 How to Navigate Strategic Alliances and Joint Ventures

In case of large complex projects, especially nuclear projects or other

projects of the government, wherein varied specialized skills are required,
which are rarely possessed by a single organization, organizations form a
consortium. Organizations having the requisite skills join hands to bid
for such projects. The structure of a consortium not only gives them the
independence that is required to operate independently, but also helps
them share the risk involved in such complex projects.
On the other end of the continuum are value chain partnerships
where alliance partners need to coordinate closely and synchronize their
working so as to create value. Value chain partnerships are long-term
arrangements entered into by organizations either with their suppliers
or with their distributors for mutual advantage. Any gap in the relation-
ship or in the working of the partners will lead to lags in the value chain
output. For example, Toyota’s alliance with its various suppliers or Nike’s
alliance with its retail partners.
Other forms of strategic alliances are licensing agreements and joint
ventures. In case of the former, the licensor licenses its technology to
the licensee for production. In return, the licensee is entitled to pay roy-
alty or license fee on the number of units produced using the licensed
technology. A transaction very similar to licensing is franchising relation-
ships in the services industry: McDonalds, KFC, Pizza Hut, Dominos,
Bikanervala, and so on. Some of the most common nonequity alliances
include cobranding, comarketing, strategic outsourcing, cooperative bid-
ding, and joint purchasing. A joint venture leads to the creation of an
independent legal entity by the alliance partners; allocating ownership,
operational responsibilities, financial risks, and rewards to each member
while maintaining their separate identity and autonomy. An important
aspect that differentiates a joint venture from any other strategic alliance
is the formation of a separate legal entity.
Is a cartel a form of strategic alliance?
Absolutely, a cartel survives on a mindset of cooperation among the
participating organizations or countries. A very good example is the
Organization for the Petroleum Exporting Countries (OPEC), an inter-
governmental organization of 14 nations. The cartel’s mission to “coordi-
nate and unify the petroleum policies of its member countries and ensure
the stabilization of oil markets, in order to secure an efficient, economic
 What Are Strategic Alliances? 11

and regular supply of petroleum to consumers, a steady income to pro-

ducers, and a fair return on capital for those investing in the petroleum
industry”7 has an influence on global oil prices. Although a cartel is a
formal agreement among the participating organizations, in countries like
India, a cartel is considered to be an illegal arrangement by the Competi-
tion Commission of India (CCI), the regulatory body that promotes free
competition and free play of market forces in the country. Organizations
following collusive practices that hamper the market forces come under
the scanner of the CCI.

Thin Balance Between Cooperation and Competition

Alliances draw balance between cooperation and competition, thus pos-
ing a dilemma for management executives, as illustrated in Figure 1.4.
Alliances formed between manufacturers and their suppliers or their
distributors present low potential of conflict between the partners. Alli-
ances formed that are intra-industry and among noncompeting organi-
zations require high level of interaction among partners. For example, an
alliance between Renault and Nissan requires the partners to share their
platforms to jointly develop model of cars that they independently sell.
The partners at the time of the alliance do not regard each other as rivals,
although, later on they have the potential to be competitors. Alliances
formed between competitors require a high level of interaction among

Maintaining Flexibility
Protecting Core Competencies
Enhancing Learning
Maximizing Value

Cooperation Competition

Figure 1.4  Balance between cooperation and competition

 OPEC, from https://en.wikipedia.org/wiki/OPEC#cite_note-4 (accessed

7

December 22, 2017)

12 How to Navigate Strategic Alliances and Joint Ventures

partners to create value, with the partners competing directly in the final
market. An apt example is the joint venture formed between Airtel, Voda-
fone, and Idea to share towers and bring in more efficiency of operations
in the telecommunication industry. Each of these players, however, com-
petes in the market for customers. Organizations from unrelated indus-
tries also come together to form alliances. For example, DuPont and Sony
came together to form an alliance to develop optical memory storage
products. Neither of the organizations possesses the technological or mar-
ket know-how that is required to succeed alone. Through this alliance,
they expect to develop a product that they will subsequently manufacture
and market independently. The joint activity requires limited interaction
between partners. However, being potential rivals in the memory storage
market adds a dimension of conflict between the two partners.
Horizontal joint ventures that link competing organizations from
the same industry are anti-competitive in nature because of the increased
market power derived from horizontal linkages between the parent orga-
nizations. Nonhorizontal joint ventures that link together competing
organizations from the same industry are more likely to increase compe-
tition as they provide entry into new markets.

Role of Foreign Direct Investment Regulations of a

Country
Do the foreign direct investment regulations of a country influence the forma-
tion of a joint venture?
The foreign direct investment regulations of a country guide the for-
mation of strategic alliances. Industries protected by the foreign direct
investment (FDI) regulations of the country block the entry of foreign
players. FDI rules allowing investment by foreign players up to a cer-
tain limit, say 26, 49, or 74 percent, restrict the maximum stake of the
foreign player up to the specified limit. For example, in the aviation
industry, when Jet entered into an equity alliance with Etihad, the gov-
ernment allowed foreign airlines to hold maximum of 49 percent in
Indian carriers. Etihad took a 24 percent stake in Jet Airways. Simi-
larly, in the insurance industry, when Sun Life Financials entered into
an alliance with the Aditya Birla group, the maximum stake allowed to a
 What Are Strategic Alliances? 13

foreign player was 26 percent. It is advisable that when designing a joint

venture, one should look at the investment climate in the international
market. A more favorable investment climate renders joint ventures less
vulnerable to the downside effects of unanticipated government-induced
uncertainties.

Benefits of an Alliance
There are various ways in which strategic alliances benefit organizations.
The most common reasons being:

• Enter new markets: An organization that invests in a foreign

country usually suffers from the liability of foreignness, a
competitive disadvantage that arises from the inability of the
organization to understand the foreign market and operate
in them. An alliance might help organizations to enter new
markets, either in terms of new products and services or new
geographies. In emerging markets, where regulatory bodies
have restrictions with respect to the FDI in particular indus-
tries, a strategic alliance with a local player enables entry into
those markets. Entry into new products and services is fraught
with various risks. An alliance helps to share those risks. For
example, in the Jet–Etihad alliance, wherein the government
had put a restriction of 49 percent of the FDI, an alliance
with Jet gave an opportunity to Etihad to enter into India.
• Safeguard against uncertainties: In dynamic market conditions,
an alliance helps organizations to hedge and safeguard against
various uncertainties. Alliances, in effect, give organizations
an option to explore future growth and development. The
organization invests in an alliance and has the option either
to exit from the alliance or to get more deeply involved if the
business holds promise. Drawing parallel with the financial
world, an option is the right to buy or sell a security within
a given period at a predetermined price. The option if not
exercised within the given period expires. The key value of
the option rests on the flexibility it offers to act in the future
14 How to Navigate Strategic Alliances and Joint Ventures

as new events unfold. The greater the uncertainty of future

events, the higher the value of the flexibility.
• Get access to critical complementary assets: For successful
commercialization of a product or service, organizations need
complementary assets, varying from downstream activities
like marketing and distribution, after-sales service to upstream
activities like procurement of raw materials and manufactur-
ing. Strategic alliances enable organizations to get access to
the complementary resources they lack. For example, in the
Jet Etihad alliance Jet’s domestic tie-ups and routes comple-
mented Etihad’s international routes.
• Learn new capabilities and acquire new skillsets: Strategic
alliances enable organizations to learn new capabilities and
acquire new skill sets, which otherwise would not have been
possible if operating independently. Or, acquisition of those
capabilities would have been a time-consuming and an
expensive process. In fact, organizations in an alliance are in
a race, and the organization that learns faster and attains its
objectives would like to exit the alliance. These learning races
tilt the bargaining power in favor of organizations that have
managed to learn more than the other.
• For example, in the joint venture between General Motors
and Toyota, the latter managed to learn the tricks of operating
in the U.S. market faster than the former learning the art of
executing lean manufacturing system in its various plants.
• Reduce political risk: The decision to enter into new markets
is loaded with political risk, especially because of the high
level of information asymmetry. Risk is also high because of
the uncertainty in various government rules and regulations
with respect to the operations of multinational enterprises in
various industries. Strategic alliances help multinational enter-
prises, especially to ward off this risk. Their local counterpart
is in a better position to understand and manage the political
nuances.
• Attain economies of scale: Two organizations operating in the
same industry by getting into an alliance can enjoy benefits of
 What Are Strategic Alliances? 15

economies of scale and reduced average cost per unit. This can
produce a potential barrier for entry of would-be competitors
into the industry. It can also help organizations to compete
more effectively with the existing set of competitors.
• Strengthen competitive position: Organizations can use strategic
alliances to change the dynamics of the industry, establish new
industry standards, and thereby strengthen their competitive
position. For example, IBM by collaborating with a number
of organizations like Samsung, ST Microelectronics, Frees-
cale Semiconductor, and so on for R&D and manufacturing
of semiconductors changed the dynamics of operating and
competing in the semiconductor industry. Similarly, Tesla’s
portfolio of strategic alliances with leading companies in the
automotive and other industries has spelt success for the orga-
nization. Tesla’s alliance with Daimler Chrysler gave access
to superior engineering expertise and funds, which saved the
organization from potential bankruptcy. The alliance with
Toyota enabled Tesla to buy NUMMI joint venture plants in
United States and also learn large-scale high-quality manu-
facturing. The alliance with Panasonic, Japan, the consumer
electronics organization and a world leader in battery tech-
nology provided a route to the two organizations to do joint
manufacturing of the lithium-ion battery. The alliance with
Starbucks helped Barnes and Noble to stay ahead of the curve.

Alliances, therefore, help companies to manage risk. They help them

to share the costs of risky projects, hedge risks, reduce the cost of respond-
ing to unpredictable trends, and most important of all, explore future
opportunities.

Emerging Market Alliances

Global companies are eying emerging markets for growth. On the other
hand, companies in the emerging markets are looking for ways to be part
of the expanding global economy. Alliances, therefore, serve as an obvious
solution for both sides. Global companies usually contribute intangible
16 How to Navigate Strategic Alliances and Joint Ventures

Sustained / Stable Balance of Power

(Successful for both Partners-May continue for decades)

Power Shifts towards Local Partner

(Local partner may acquire - may succeed or fail)

Initial
Alliance
Power Shifts towards Global Partner

(Global partner may acquire - may succeed or fail)

Collision of Power

(Alliance likely to be short - lived-neither partner gains)

Figure 1.5  Possible outcomes of alliances in emerging markets

assets like technology, brand name, skills, and expertise. Local companies
provide an insight into local customer behavior, knowledge about the
market, a manufacturing base, and possibly a network with regulatory
bodies.
Do all the alliances in emerging markets follow the same trajectory?
Possibly, no. As illustrated in Figure 1.5, history sees four different
outcomes of strategic alliances in India.
We have examples of joint ventures like that of between Honda and
Hero Motors that survived for 26 long years. On the other extreme, we
have an example of the alliance between Bajaj and Renault–Nissan that
failed miserably at the onset without creating any value for the organiza-
tions. The foreign partner might decide to acquire the Indian organiza-
tion’s stake in the joint venture, as in the case of the alliance between IBM
and Tata Consulting Services. It may be the other way round, with the
Indian organization buying the foreign partner’s stake, as it happened in
the joint venture formed between TVS Motors and Suzuki, Japan.
Although the evolution of alliances will be driven by the strengths
and weaknesses of the partners, there are two factors that influence the
sustainability and likely direction of an alliance: the aspirations and the
will to control the venture and relative contributions. If the global part-
ner aspires full control of the venture and has learned the tricks of the
 What Are Strategic Alliances? 17

trade in the local market, it would ultimately lead to an acquisition or

dissolution of the alliance. On the other hand, if the local player harbors
global ambitions and has the confidence to compete on its own against
the multinational, it would lead to a conflict.

The Road Ahead: Lifecycle of a Typical Strategic

Alliance
As illustrated in Figure 1.6, a typical strategic alliance starts with hav-
ing clarity with respect to the business case, going ahead with selecting a
partner, negotiating the terms and conditions of the alliance, managing
the alliance, and lastly, assessing the performance of the alliance. The sub-
sequent chapters in the book take us through each stage of the alliance
lifecycle, wherein we deliberate on some important characteristics of each
stage. The spotlight will be trained on the foremost question: What deci-
sions should executives take to create value from the alliance?
The mission of the book is to provide a solid overview of what every
business student or a management executive needs to know with respect
to the formation and management of a strategic alliance. The content will
be taken forward by connecting to examples of strategic alliances between
organizations.

Value Risk

Business Partner Managing

Negotiation Assessment
Case Selection Alliances

Figure 1.6  A representation of a typical alliance lifecycle

 Index
Alphabet “f” and “t” in italics after page number indicate figure and table,
respectively.

alliance, 6 audit committee choices, 106–107

factors governing acquisition audit committee structure, 105
asset or resource indivisibility, effect of environmental factors, 107
124 exit costs, 108–109
barriers and regulations, 125 exit provision objectives, 109
collaborating or acquisition exit reasons, 109–110
competence, 127 exiting alliance, 108
costs of, 124 factors driving termination
lack of cultural integration, 125 alternative objective, failure of,
marketplace uncertainties and 111–112
competition, 126–127 asymmetric contribution, 114
need for resources and synergy, breach of trust, 113
125–126 changes in competitive strategy,
synergy types, 125–126 114–115
target valuation, 124–125 control issues, 112–113
vs. acquisition, 123 inadequate preplanning, 111,
alliance assessment, 89–90. See also 121
risk assessment; strategic lack of cultural integration,
alliance; value creation 113–114
alliance fixing, 107 non sharing of expertise and
alliance termination outcomes knowledge, 112
complete liquidation, 118–119 resource sharing issues, 112
effect on stock markets, 121 technology development failure,
third party acquisition, 120–121 110–111
venture acquisition by local performance metrics, 106
partner, 119 value, 42
wholly owned subsidiary by alliance management, 25, 26. See also
foreign partner, 119–120 coopetition; risk assessment;
alliance termination terms and risk management
conditions challenges in
business valuation methodology, alliance coordination, 87
117 alliance relation ambiguities,
clarity on human resource 84–85
policies, 116 competition vs. cooperation, 85
events triggering termination, manager mindset, 86
identification of, 115–116 synergizing issues, 86–87
ownership rights, 116–117 external dimension of top
post-termination demands, management in
117–118 alliance termination, 90
144 Index

new opportunities, 89 decision making, 78–79

partner relationship, 88–89 dispute resolution, 79–80
performance measurement, intellectual property rights,
89–90 80–81
internal dimension of top termination and share disposal,
management in 80
common vision, 91–92 alliance risks. See also coopetition
incentive and reward systems, and competition, 58
92–93 performance, 51–52
internal communication, 92 relational, 50–51
manager selection, 90–91 resource management, 52–53
organizational culture and resource types, 53–54
mindset, 93–94 risk management strategies, 54–58
resource allocation, 91 alliance structure
issues in, 84 contractual alliance, 70–71
management group, 84, 88f equity vs. non equity alliance, 70,
manager role in, 94–95, 102f 71, 72
alliance viability assessment, joint venture, 71
101–102 limited liability partnership, 72
decision making, 100–101 Association of South East Asian
information regulation, 97–99 Nations (ASEAN), 8
internal relationships, 99–100
monitoring contributions, 96–97 business case
right working atmosphere, alliances, 20
95–96 deliberation, 20f
steering committee, 84 and alliance failure, 26
strategies for, 45–47, 83–84, 103 alliance timing, 25
alliance negotiation. See also alliance commitment to alliance, 25–26
assessment organization preparedness,
areas in 23–25
conduct of talks, 68–70 understanding importance of,
negotiation team selection, 20–23
67–68 motivations, 20–21
preparations for, 66–67, 115 understanding in alliance, 19
establishment issues
alliance scope, 75 capitalization, 77
alliance structure, 70–72 cartel, 10–11
equity stake issues, 72 Competition Commission of India
governance issues, 74, 100 (CCI), 1
governance structure, 74–75, consortium, 9
107 need for, 9–10
partner liabilities, 78 coopetition, 58
partner restrictions, 77–78 definition, 58
performance clause, 77 drivers of
resource sharing, 75–76 cost reduction, 60
resource valuation, 77 entry into emerging markets, 59
post establishment issues industry standards, 58
contract changes, 79 market share, 60
 Index 145

new business ventures, 60 reasons for failure, 30–31, 108,

product line expansion, 59 110–115
risk sharing, 59 role of FDI regulations on, 12–13,
risks involved 72
critical technology leakage, 61 values in, 30
customer defection, 62 vs. limited liability partnership, 72
decision-making delays, 62–63
fire sale, 63 licensing agreements, 10
strategic plan and future plan limited liability partnership (LLP), 72
leakage, 61–62 advantages of, 72
cost approach, 77 disadvantages of, 72

Delhi International Airport Authority market power theory, 6

Limited (DIAL), 9
discounted cash flow, 77, 117 North American Free Trade
Agreement (NAFTA), 8
emerging markets, 15–17, 59, 107
alliance outcome in, 15–17 organic growth, 4, 19
European Union (EU), 8 Organization for the Petroleum
exclusivity clause, 78 Exporting Countries (OPEC),
10
foreign direct investment (FDI), 12, organization preparedness, alliance
59, 102, 107, 125 communication and trust, 24
Foreign Investment Promotion Board influence of past alliance
(FIPB), 107 experiences, 23
personnel skills in, 25
global integration, and globalization, role of established practices on,
2 23–24
globalization, 2 team-work in, 24
and global integration, 2–3
of competition, 2 partner selection
of demand, 2 assessment importance, 29–30
of strategy, 2,5 criteria for, 31–37, 33t
of supply, 2, 3 finalizing partner, 39–40
methods, 31, 32
industry benchmarking, 77 nature of partner, 32
inorganic growth, 4 reasons for failure, 30–31, 35
International Solar Alliance, 8 relationship fit, 33–34, 84–85
role of industry life cycle on,
joint venture, 10, 12, 24, 30, 45, 46, 36–37
50, 70, 71, 73, 105, 108, 110, soliciting partners, 37–38
114, 116, 131 Prahalad, C.K., 3
benefits of, 58–60
equity stake issues in, 72–73 real options theory, 5
governance structure and control, relational risk, 50–51
74–75, 107 resource valuation
horizontal vs. non-horizontal, 12 capitalization, 77
issues with, 71 cost approach, 77
146 Index

discounted cash flow, 77, 117 and emerging markets, 15–17, 59,
industry benchmarking, 77 107
risk assessment. See also alliance and global integration, 2
assessment; coopetition importance of, 1–2, 5, 20–21
resource types, 53–54 life cycle of, 17, 21, 65, 129
and risk diversification, 49, 59 management strategies, 45–47
risk management motivations for, 21–22, 58–60
alliance flexibility, 55–56 need for, 4–6
control, 54–55 and opportunisim in, 51, 55, 73
data and knowledge security in, partner restrictions, 8–9
56–57 readiness for, 23–25
productivity assessment for, reasons for failure, 30–31
57–58 role of FDI regulations on, 12–13
risks in international alliances scale vs. scope alliance, 20
performance risk, 51–52 selection methods, 31–37, 33t
relational risk, 50–51 success, criteria for
resource management, 52–53 clarity of strategic purpose, 129
risk management. See also coopetition complimentarity and
control types and strategies, 54–55 compatibility, 130
coopetition risks, 60–63 dedicated alliance function, 131
division of duty, 130
and coopetition, 58–60
incentive and reward system, 131
data and knowledge security in,
performance expectations, 131
56–57
risk identification, 130
flexibility in alliance, 55–56
trust building, 132
orientation for, 54f
value identification, 130
productivity assessment for, 57–58
types of, 9–11
and value addition, 6
strategic alliance. See also alliance; value, 42f, 42–45
alliance negotiation; partner
selection; risk assessment; risk triadization, 3
management; value creation
alliance timing, 25 value chain partnership, 10. See also
for achieving objectives, 4, 129 value creation
benefits of, 13–15, 58–60 value, 42
business case clarity for, 19 value creation, 6, 10, 23, 41, 45,
collusive alliance, 20 101, 130. See also value-chain
commitment to, 25–26, 73 partnership
complementary alliance, 21 alliance value, 42–45, 42f
conditions for, 7 factors affecting profitability, 41
continuum of, 9f performance measurement, 44,
cooperation vs. Competition, 89–90, 105
11–12, 58, 85 shareholder, 45, 46–47
and coopetition, 58 through strategic alliance, 6, 130
definition, 6–7 value chain partnership, 10
dynamics of, 3–4, 127, 129 value, 42
and efficiency, 5 venture capitalist, 73