257 CHAPTER OUTLINE CASE 1 IBM’s Global Alliance Strategy CASE 2 The Global Airline Industry Introduction Factors Promoting the Rise of Strategic Alliances New Market Entry Shaping of Industry Evolution Learning and Applying New Technologies Rounding Out the Product Line Types and Benefits of Strategic Alliances Licensing Arrangements Joint Ventures Cross-Holdings, Equity Stakes, and Consortia Risks and Costs of Alliances Rising Incompatibility of Partners Risk of Knowledge/Skill Drain Risk of Dependence Cost of Alliance Control and Operations Balancing Cooperation and Competition Understand the Firm’s Knowledge and Skill Base Choose Complementary Partners Keep Alliance Personnel Long Term Ethical Dimension Collaboration and Competition in Alliances Alliance Personnel Issues Summary Exercises and Discussion Questions Strategic Alliances: Teaming and Allying for Advantage WHAT YOU WILL LEARN • The characteristics of a strategic alliance • Why companies around the world are forming strategic alliances • The different types of strategic alliances, including licensing, joint ventures, and multipartner consortia • The benefits and costs of entering into strategic alliances • How to balance the need for cooperation with competition 258 PART 2 Extending Competitive Advantage Throughout the 1990s, International Business Machines (IBM), the world’s largest computer company, entered into a wide array of strategic alliances with numerous partners in the United States, the Far East, and Europe. The very notion that IBM would enter into joint ventures with such global behemoths as Toshiba, Motorola, and Siemens revealed just how much IBM had changed. Even more compelling in recent years is IBM’s rapid deployment of alliances with a host of smaller players across an array of different industries such as telecommunica- tions, banking, software, entertainment, multimedia, and even consumer electronics and broadcasting. Through much of the 1980s, both admirers and critics of Big Blue had used various adjectives to describe IBM’s traditional “go-it-alone” attitude and desire for independence. These included “Fortress IBM,” “arrogant,” and “monopolistic.” During the past fifteen years, IBM has shifted from relying on mainframe computer products for its huge revenue base ($78.5 billion in 1997). IBM now offers a wider variety of products, which include, for example, semiconductors, personal computers, customized software, computer networks, Internet-based electronic commerce tools, and even software for factory automation. New products that connect and interact with corporate internal networks, the Inter- net, electronic commerce, telecommunications, and semicon- ductors are seen as key to helping transform the company’s oper- ations into a much more agile, flexible, and responsive firm. Early History of IBM’s Alliance Strategy IBM’s bold initiative in forming a broad array of strategic alliances with different firms did not materialize in a short time. Rather, IBM’s current alliance strategy in large measure is due to several key driving factors: (1) to enter new markets, (2) to fill gaps in its product line with other firms’ offerings, (3) to shorten product development time, (4) to learn new technolo- gies, (5) to restructure some existing operations, and (6) to block other key rivals from encroaching on the U.S. and Euro- pean markets too quickly. During the 1980s, many of IBM’s alliances were predicated on preventing large, well-funded Japanese firms from penetrat- ing too deeply in IBM’s core mainframe markets. Japanese rivals in the computer business, such as Fujitsu, NEC, Hitachi, and Toshiba, possess comparable technologies and skills in many key products and technologies. Unlike IBM, however, these firms were highly experienced in learning new technolo- gies and skills from their strategic alliance partners, which enabled them to reduce greatly the development time needed for successive product generations. NEC, Fujitsu, and Toshiba, in particular, had partnered with a host of U.S. and European firms in earlier days (e.g., General Electric, Honeywell, TRW, Control Data, Bull, Olivetti) to learn how to compete in the computer business during the 1970s and 1980s. More broadly, IBM has long been a global technological leader in many scientific areas. Still, it had difficulties translat- ing research into successful products quickly, especially with the advent of personal computers, computer networks, faster semi- conductors, and the Internet. IBM’s entry into strategic alliances took off when computer users demanded new levels of perform- ance. They also wanted a greater choice of vendors from which to select their equipment and servicing needs. Most important, customers called for an “open” computer architecture. This allows users to “cherry pick” and mix and match hardware, soft- ware, and networks from different firms. Under previous chair- man and CEO John Akers, and continued under current CEO Louis Gertsner, IBM has continued a series of corporate restruc- turings to enhance its ability to adapt to new technologies along a number of different computer architectures (open systems, client-server networks, Internet servers, and personal computer application software). These restructurings sought to give busi- nesses and foreign subsidiaries more autonomy to improve responsiveness and cut down product development time. IBM’s core skills in the areas of semiconductor technology, network development, miniaturization, multimedia, and client- server architecture will hasten its entry into new products and markets as well. Already, IBM envisions itself as a leading provider of many emerging products and services, such as hand-held communicators, broadcasting gear, design software development tools, Internet e-commerce tools, multimedia PCs, telecommunications equipment, and corporate and public net- works. This development is especially revealing as twenty-first- century technologies become more expensive and risky to develop. Many of these technologies require more than one firm to perfect. Strategic alliances will play a key role in helping IBM reshape these technologies. All together, IBM has formed more than 500 strategic alliances (of varying degrees of com- plexity) with partners around the world. These strategic alliances involve not only shared marketing and software development efforts, but also major commitments of investment funds to build ultra-modern facilities that are beyond the finan- cial means of any one company. Exhibit 8-1 portrays some of the most significant alliance relationships that IBM has entered as of December 1997. (Case 1) IBM’s Global Alliance Strategy 1 CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage 259 Motorola IBM has worked with Motorola on many key emerging tech- nologies. These include etching and lithography techniques for chip-making, mobile data networks, and new generations of microprocessors. Motorola has become a strong competitor to Intel in various classes of embedded microprocessors and to many Japanese and other U.S. firms in advanced logic chips. It has designed a broad array of new chips since the early 1980s using advanced manufacturing and fabrication techniques that are the envy of much of the world. Both IBM and Motorola are members of the U.S. semiconductor consortium, Sematech. In 1989, IBM and Motorola began to share X-ray lithography tech- nology used in currently produced memory chips. X-ray lithog- raphy uses a new technology to make ever-thinner circuit lines for 16-megabit and 64-megabit memory chips. Motorola is also the third “leg” of IBM’s joint venture with Apple Computer to develop multimedia operating systems and advanced chip tech- nologies. During the early 1990s all three firms attempted to develop a new operating system based on Motorola’s 88000 series microprocessor. This new microprocessor, known as the IBM’s Alliance Strategy IBM exhibit(8-1) Personal Computers • Matsushita (Low-end PCs) • Ricoh (Hand-held PCs) Computer Hardware/Screens • Toshiba (Display tech) • Mitsubishi (Mainframes) • Canon (Printers) • Hitachi (Large printers) Factory Automation • Texas Instruments • Sumitomo Metal • Nippon Kokan • Nissan Motor Telecommunications • NTT (Value-added networks) • Motorola (Mobile data nets) Semiconductor Technology • Micron Technology • Motorola (X-ray lithography) • Motorola (Micro- processor designs) • Sematech (U.S. Consortium) • Intel (Microprocessor designs) • Siemens (16 M and 64 Megabit chips) • Apple Computer (Operating systems and multimedia technology) • Etec (Electron beam technology) • Toshiba & Siemens (256 Megabit chips) • Toshiba (Flash memories) • Advanced Micro Devices (Microprocessors) • Silicon Valley Group (Photolithography) Software and Processing • Microsoft • Oracle • Sun Microsystems • Silicon Graphics • Metaphor • Hewlett-Packard • Netscape Communications Customer Linkages • Mitsubishi Bank • Eastman Kodak • Baxter Healthcare • Xerox • Integrion Consumer Electronics • Philips Electronics • Sega • Blockbuster Entertainment • Sony 260 PART 2 Extending Competitive Advantage Power PC, is expected to have many of the same capabilities as Intel’s latest Pentium series of chips, but require much less power consumption. The Power PC operates on a new RISC technology that is expected to be much faster than conventional microprocessors based on the Intel architecture. By June 1994, both Motorola and IBM factories were mass-producing the Power PC chip, with numerous commitments from other com- puter and electronics firms to use the chip in their products. For example, both Hitachi and Canon of Japan have already estab- lished plans to use the Power PC in their own versions of per- sonal computers and office equipment. Although IBM and Motorola continue to work jointly on cutting-edge semiconduc- tor technology, they have recently begun to take different paths in using the Power PC architecture for consumer electronics, telecommunications, and other applications. Apple Computer Apple Computer and IBM teamed up in July 1991 to form two separate ventures under a broad strategic alliance. One venture, named Kaleida, is designed around operating software and emerging multimedia technology and enables both firms to consolidate the industry’s operating standards. The second ven- ture, Taligent, works with Motorola to develop a new line of Power PC microprocessors. These Power PC chips are capable of competing with Intel’s Pentium chips and offer customers faster speed at lower cost. As these alliances were originally conceived, IBM would gain access to Apple’s proprietary Mac- intosh operating system, while Apple would receive develop- ment help and a steady supply of chips for its new computers. Both Kaleida and Taligent endeavors were highly welcomed in the computer marketplace, where numerous customers were increasingly wary of Microsoft and Intel’s growing dominance in Windows-driven software applications. Although the broad framework of cooperation was designed to counter some of Microsoft’s dominant market position in PC software, both pil- lars of the alliance, Kaleida and Taligent, eventually dissolved throughout 1995 and 1996. Neither IBM, Apple, nor to a lesser extent, Motorola, were able to resolve some key differences about how best to manage the organization and operations of the alliance. This access helps Big Blue secure more leverage against IBM’s software rival, Microsoft, in new types of oper- ating systems that form the brains and nerves for future com- puter and workstation systems. Perkin-Elmer, Silicon Valley Group, and Etec Systems In late 1989, Perkin-Elmer put its critical semiconductor manu- facturing equipment division on the sale block. Perkin-Elmer represented one of the last viable U.S. manufacturers of chip- making equipment. Its sale or transfer to foreign investors would hasten the erosion of U.S. manufacturing capability in this field. In early 1990, IBM joined forces with DuPont to transfer Perkin-Elmer’s photolithography division to the Silicon Valley Group, and the electron beam operation to Etec Systems, two smaller Silicon Valley firms that possessed cutting-edge technology vital to next-generation chip design and production. IBM, DuPont, and three other domestic strategic investors are dominant co-owners of both Silicon Valley Group and Etec Sys- tems. In June 1991, IBM announced it had successfully used this new technology to produce 16-megabit memory chips faster than its Japanese competitors. This technology is also vital to IBM’s efforts in even more advanced memory chips, such as the 64-megabit and 256-megabit chips now in develop- ment. In effect, IBM’s oversight of Perkin-Elmer’s transfer of key manufacturing assets into the hands of other friendly, strate- gically aligned investors insured that the United States retained a strong domestic manufacturing capability for semiconductor capital equipment. Etec Systems is now a leader in providing photomasks used in the photolithography process of making semiconductors. Toshiba IBM’s most important Japanese alliance partner, Toshiba, pos- sesses valuable manufacturing skills vital to flat-panel display screens. These screens are used in notebook and palm-sized, hand-held computers. Formed in September 1989, IBM and Toshiba jointly manufacture active matrix and liquid-crystal dis- play technologies in an ultra-modern plant and fabrication facil- ity in Japan. The development and manufacture of flat-panel dis- plays are extremely costly and difficult. Each screen uses over one million transistors to control the transmission of images back and forth between the screen and the computer. The failure of a single transistor would cause product failure. Consequently, the manufacturing skills required for successful screen production are intricate and not easily copied. IBM’s latest generation of Think Pad notebook computers employs advanced color screens developed and produced by this venture. In July 1992, IBM broadened the scope of its alliance with Toshiba to include Ger- man firm Siemens. This three-way venture will design and man- ufacture 256-megabit chips in the United States. The $1 billion cost of designing the first chip is so expensive that no one firm can afford to undertake the project alone. In October 1996, this three-way venture was expanded to include long-time IBM part- ner Motorola. Now, this complex alliance includes four different partners with complementary skills to forge ahead with extremely costly chip development. In another related venture signed in July 1992, IBM and Toshiba have agreed to cooperate on building flash memory chips. Flash memory chips operate dif- ferently than conventional memory devices, in that they retain memory after power shut-off. This new device is expected to CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage 261 replace many types of conventional memory chips and even hard disk drives for advanced computers by the end of the century. Flash memories are expected to be a $7 billion business by 2000 and already are used extensively for a number of consumer elec- tronic applications, such as digital cameras (to replace conven- tional films), laser printers, cellular phones, and home appliances. Siemens IBM’s relationship with Siemens forms the nexus of Big Blue’s position in Europe. Siemens is Germany’s largest manufacturer of electrical equipment, semiconductors, automation equipment, and industrial components. In 1989, IBM sold to Siemens its Rolm subsidiary, a manufacturer of PBX and telephone switch- ing equipment. In January 1990, the two companies signed a pact to codesign and manufacture 64-megabit chips. These chips are two generations beyond the current 4-megabit chips used in today’s personal computers. The 64-megabit venture spawned a separate deal in July 1991 to coproduce 16-megabit chips for both companies’ short-term needs. Siemens is the fourth mem- ber of a complex, evolving relationship with Motorola and Toshiba that was formed in July 1992 to produce even more dense 256-megabit chips. Philips In October 1994, IBM formed a joint venture with European consumer electronics giant Philips to codesign and coproduce new forms of microcontroller chips for use in television sets, CD players, stereos, and home appliances. By linking up with one of the world’s biggest and most advanced electronics firms, IBM gains access to Philips’ expertise in consumer products. The deal helps both companies learn how to develop new prod- ucts and technological applications that will be important for the emerging multimedia industry. Blockbuster Entertainment In 1993, IBM announced two separate joint ventures with Blockbuster Entertainment. The first joint venture, known as New Leaf Ventures, is designed to use IBM’s laser-based etch- ing technologies to custom make audio-based compact discs according to each customer’s preferences. IBM will provide the technological capabilities for imprinting the chosen music for each customer’s own personalized/customized CD at select Blockbuster Entertainment locations. In effect, customers can now select individual music and songs without having to pur- chase an entire CD for the actual selection they want. The sec- ond joint venture, known as Fairway Technologies, will design and develop computer-based hardware that will allow cus- tomers to order and buy different Sega video games on repro- grammable cartridges. After browsing through a list of hun- dreds of video game titles, customers can then select the ones they want and receive them in minutes. Blockbuster Entertain- ment stores would use small IBM computers and servers that could transfer and copy the game title onto the cartridge. By February 1995, however, it appeared that IBM and Blockbuster were dismantling their first joint venture (New Leaf Ventures) in the face of fierce opposition from leading record companies. Music entertainment companies, such as Time Warner, Poly- Gram, EMI, and Sony, are extremely worried that the technolo- gies used in the IBM–Blockbuster venture would seriously weaken their control over the music distribution business. Other Companies IBM has strategic alliances with numerous other companies. For example, with Baxter International and Eastman Kodak, IBM provides information systems networks expertise to run these firms’information systems and engineering development. IBM has also begun plans to work with semiconductor giant Texas Instruments on multimedia and video chips. In Novem- ber 1994, IBM signed a separate deal with ICTV Inc., a small company that specializes in designing and developing interac- tive television technology and video-on-demand. The company is also working with Scientific-Atlanta to design next-genera- tion interactive television, set-top boxes designed to provide Internet and other telecommunications access through cable tel- evision networks. IBM has also finalized several deals with emerging Silicon Valley chip-makers to design new and improved versions of microprocessors, in part to loosen Intel’s near monopoly over the “brains” used in personal computers and other electronic devices. For example, IBM entered a joint venture with Cirrus Logic in September 1994 to coproduce customized chips. In addition, IBM has worked with National Semiconductor’s Cyrix unit and NexGen to develop new microprocessor designs that will compete with Intel’s Pentium chip. Over the past few years, IBM has become a critical manufacturing partner for Advanced Micro Devices and National Semiconductor to pro- duce next-generation “system-on-a-chip” microprocessors, especially those designed for the sub-$1,000 PC market. IBM has also used joint ventures to enter other industries that are increasingly dependent on electronics, semiconductors, and software skills to compete in the future. With Nissan Motor, Nippon Kokan, and Sumitomo Metals, IBM jointly designs fac- tory automation software. These alliances with Japanese auto and steel makers help IBM learn how its software and advanced computing systems can be used in many types of industrial applications, such as automobile design and temperature con- trols. An ongoing relationship with optics giant Canon codevel- ops new bubble-jet printers and smaller, hand-held personal computers, while a separate venture with Hitachi markets IBM- made notebook computers in Japan. 262 PART 2 Extending Competitive Advantage During the 1990s, many airline companies have begun to form close strategic alliances with their counterparts from different parts of the world. As the demand for air transportation increases with global business growth, tourism, the rise of discretionary incomes, and the need for air freight services, many airlines are seeking to extend their reach and revenue streams from domes- tic markets into new regions of the world. In particular, alliances among different airline partners have taken on greater impetus during the mid-1990s as many governments (particularly those in Europe) have encouraged a wave of consolidation to improve efficiency and to promote competition within the industry. Alliances have begun to pervade the airline industry as they have in the telecommunications, semiconductor, financial services, and pharmaceutical industries. In all of these industries, firms have begun to realize that building a large, critically massed net- work is key to establishing competitive advantage and market position. As no one airline can afford to reach and serve every market in every region on a cost-competitive basis, alliances among once-fierce rivals have begun to mushroom, especially in the highly lucrative trans-Atlantic market. Some of the most noteworthy trans-Atlantic alliances involving two or more part- ners are listed in Exhibit 8-2. From Code-Sharing to Combined Operations Airline alliances once started as simpler “code-sharing” arrangements that enabled cooperating partners to sell each other’s seats using the same ticket for a passenger. When con- ceived in the early 1990s, code-sharing arrangements were an extremely important development in the industry, since they allow airlines to rationalize their passenger flights and airline capacity to maximize the number of revenue-miles per flight. In effect, airlines working together in code-sharing arrangements could streamline and improve the profitability of their opera- tions by coordinating different schedules and ticket pricing for various markets. Airlines would link up and share their flight codes through central computer reservation systems in such a way that the passenger’s ticket reflected a single itinerary that may include a flight that is on an airplane owned by an alliance partner. However, beyond that of selling seating capacity, code- sharing alliances are relatively simple mechanisms, since most code-sharing arrangements precluded the airline partners from more closely coordinating their schedules or pricing structures. In the mid-1990s, however, airline alliances evolved from simpler code-sharing arrangements to much closer, more intri- cate joint alliance planning between partners. In 1992, the U.S. Department of Transportation in a landmark decision granted antitrust immunity to Northwest Airlines and KLM Royal Dutch Airlines that enabled the two companies to coordinate their trans-Atlantic flights as if they were one single entity. This deci- sion set the pattern for more sophisticated alliances that allowed partners to unite their entire fare structures, flight schedules, marketing initiatives, frequent flier programs, baggage handling facilities, and time and gate slots at different airports. These part- nerships have worked to create significantly easier international connections for passengers traveling from one region to another, and it brought nonstop service to new, interior markets that were previously required to fly passengers to another “departing hub” or “gateway” location before they could actually catch their international flight. In recent years, governments have hereto- fore approved of such expanded partnership arrangements because there are more choices of international routings served through multiple hubs, thus preserving competition among com- peting airline alliances. The net effect of these alliance-driven, combined operations is to give partners an ability to leapfrog into new markets that they previously could not have served, either because of government regulations, pricing difficulties, overwhelming market dominance by a local carrier, or the high cost of establishing infrastructure at a newly served airport. These alliances provide the basis for a global network without the associated costs of high capital investment. Alliances receiv- ing antitrust immunity are the only way that airlines can become even more global in their reach, particularly when there are still numerous government restrictions imposed by many nations. Network vs. Network Airlines were forming alliances and combining their operations at a dizzying pace in the late 1990s. Northwest Airlines and KLM are working to extend their core Detroit-Amsterdam passenger routes to extend further into continental Europe and the U.S. Delta Air Lines has worked very closely with partners Swissair, Sabena, and Austrian Airlines to provide frequent nonstop serv- ice between New York, Atlanta, Cincinnati, and Salt Lake City to Zurich, Vienna, Brussels, and other parts of the continent. United Airlines coordinates its flight schedules and pricing closely with Lufthansa to gain access to Northern Europe and the rest of the continent. In May 1996, American Airlines sought governmental permission to enter into a broad-ranging alliance with British Air- ways to create a new global airline network. Far more vast than the Northwest-KLM or Delta-Swissair-Sabena-Austrian Airlines alliances, the proposed American-British alliance would over- shadow the existing trans-Atlantic division-of-labor among com- peting alliances in terms of sheer size of the parents, projected (Case 2) The Global Airline Industry 2 CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage 263 number of passengers carried, and the stranglehold that both American and British Airways would control at London’s key Heathrow Airport. In linking up with British Airways, American gains the ability to ticket its customers for travel beyond Heathrow and into the continent. American is currently second to Delta in serving the trans-Atlantic market and cannot extend its reach to such cities as Rome, Budapest, Vienna, Athens, or any other points beyond without a partner. British Airways, on the other hand, seeks American as a partner because it offers a strong passenger network into much of the United States and Latin America, where American has been steadily gaining strength against many of the nationally based local airlines. The vast scale of the proposed American-British Airways alliance has prompted numerous protests from other competing airline partners, such as United Airlines and Lufthansa, which demand greater access to Heathrow and other European hubs before they will approve of the deal. The proliferation of alliances in the profitable trans-Atlantic market is giving way to more complex, multipartner operations that are now linking up partners from different parts of the world into a series of interwoven code-sharing and joint marketing arrangements. These broader, multi-airline alliances have not yet received antitrust immunity for other markets, so their scope of coordination is somewhat more limited than that found in the core trans-Atlantic market. However, the trans-Atlantic alliance experiences for United Airlines, Delta Air Lines, and American Trans-Atlantic Linkages/Relationships Globe-Spanning Linkages/Relationships Airlines • Northwest Airlines • KLM Royal Dutch Airlines • United Airlines • Lufthansa • Delta Air Lines • Swissair • Sabena • Austrian Airlines • Continental Airlines • Alitalia • American Airlines • British Airways Type of Alliance Full partnership (antitrust immunity) Full partnership (antitrust immunity) Full partnership (antitrust immunity) Code-sharing, joint marketing (antitrust issues pending) Code-sharing, joint marketing (antitrust issues pending) Airlines • United Airlines • Lufthansa • Scandinavian Airline System (SAS) • Thai International • Varig Brazilian Airlines • American Airlines • British Airways • Cathay Pacific • Qantas Airways • Canadian Airlines Type of Alliance STAR Alliance: Code sharing, joint marketing Code sharing, joint marketing, arrangement for Trans-Pacific flights. New alliance now known as oneworld. Global Strategic Alliances in the Airline Industry exhibit(8-2) 264 PART 2 Extending Competitive Advantage INTRODUCTION This chapter shows how companies can use strategic alliances to learn and build new sources of competitive advantage. The role of strategic alliances in shaping corporate and business strategy has grown significantly over the past decade. In almost every industry, alliances are becoming more common as companies realize that they can no longer afford the costs of developing new products or entering new markets on their own. Alliances are especially prevalent in industries or technologies that change rapidly, such as semicon- ductors, airlines, automobiles, pharmaceuticals, telecommunications, consumer electron- ics, and financial services. 3 What is also interesting about strategic alliances is that we are now beginning to see intensely competitive rivals working together. For example, many U.S. and Japanese firms in the automobile and electronics industries have teamed up to develop new technologies, even as they compete fiercely to sell their existing products. Strategic alliances are linkages between companies designed to achieve an objective faster or more efficiently than if either firm attempted to do so on its own. The role of strate- gic alliances in shaping the future course of both industries and individual firms is likely to become even more profound in the next century. For both single-business and diversified enterprises, teaming and allying with other companies are becoming powerful vehicles for entering new markets, learning new technologies, and developing new products. Alliances serve a vital role in extending and renewing a firm’s sources of competitive advantage because they allow companies to limit certain kinds of risk when entering new terrain. Airlines have provided these carriers important experience and learning opportunities to broaden their relationships to other parts of the world where they have not intensively served before. From a competitive standpoint, these globe-spanning alliances will now pit entire global networks of airline alliances against other rival alliances to capture customers and market shares. Thus, the industry is moving to a new form of cooperation and competition between entire collections of firms. For example, in May 1997, the newly created Star Alliance enlarges the existing United Airlines-Lufthansa alliance to include a code-sharing arrangement with Thai International, SAS, and Varig Brazilian Airlines. The five-member Star Alliance enables Lufthansa and United to gain better access to Southeast Asia, Scandinavia, and Latin America respectively. By significantly broadening what is already a powerful alliance, Lufthansa could gain a much larger share of the profitable long- haul traffic from Europe to the Far East, especially from busi- ness travelers who contribute a disproportionate amount of air- line profits. Both United and Lufthansa have indicated that the Star Alliance could be expanded to include new partners in the future as well. During the last few years, Delta Air Lines has tried to extend its trans-Atlantic alliance network to include Singapore Airlines to serve Southeast Asia but was unable to persuade Singapore to join its alliance configuration. Delta is looking to enter the Pacific and Far Eastern markets to broaden its global reach and to balance its well-developed North American and European network. Although Delta’s relationship with Singapore Airlines appears to be unwinding, Delta still works with Singapore on a more limited code-sharing arrangement to sell each other’s seats. On the other hand, Delta has made some major inroads into the Latin American market with a newly signed code-shar- ing arrangement with TransBrasil and has moved to work more closely with longstanding partner AeroMexico. Meanwhile, American Airlines has been forming relation- ships with a number of important carriers to both Asia and Latin America throughout the past few years. Most recently, Ameri- can and British Airways announced that they would form a global partnership spanning Europe, North America, the Far East, and Australia by forming a series of alliances with Cathay Pacific of Hong Kong and Qantas Airways of Australia. Cathay Pacific and American Airlines both need each other in particu- lar because neither has the critical mass to serve North America or the Pacific respectively. In particular, Cathay Pacific has come under severe margin pressures recently with the economic recession now plaguing Southeast Asia. American, however, needs Cathay Pacific as a key partner to circumvent the need to fly to Tokyo before reaching other Asian destinations. In March 1999, American Airlines, British Airways, Canadian Airlines, Cathay Pacific, and Qantas Airways formally unveiled their globe-spanning oneworld alliance. Oneworld is designed to help all five carriers (and future participants) reach parts of the world they were unable to access before. New partners likely include Iberia and Finn Air to be included in late 1999. strategic alliances: linkages between companies designed to achieve an economic objective faster or more efficiently than either company could do so alone; take the basic forms of licensing arrangements, joint ventures, or multipartner consortia. CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage 265 We begin by examining the environmental changes that prompt companies to enter into strategic alliances. Second, we consider the different types and benefits of strategic alliances. Third, we analyze the costs and risks of cooperation that underscore all strategic alliances. Finally, we focus on alliance-based implementation issues, examining how com- panies can balance cooperation and competition to maximize the benefits and minimize the costs of collaboration. FACTORS PROMOTING THE RISE OF STRATEGIC ALLIANCES Alliances work to extend a firm’s competitive advantage in several important ways. In many situations, firms enter into strategic alliances because an alliance can potentially pro- vide benefits that are not possible through either internal development or external acquisi- tion. Thus, companies form alliances to acquire some of diversification’s benefits without assuming the full costs of going it alone. Alliances represent a viable alternative to full- blown diversification strategies to enter new industries. Unlike do-it-yourself internal development, a firm must work with a partner to develop new technologies and/or prod- ucts. Also, unlike full-scale acquisitions, an alliance does not give a firm total control over its partner; the firm does not completely merge with its partner. In this sense, alliances serve as an intermediate step to enter new industries and markets. Alliances can assist the firm’s learning and diversification into new areas of activity. Strategic alliances can help firms extend and renew their sources of competitive advan- tage when expanding globally. The successful pursuit of global or multidomestic strategies often requires firms to establish operations in distant markets. Yet, these commitments in many cases are high risk, especially when companies are not familiar with the local envi- ronment. Alliances thus act as potentially less risky vehicles for firms seeking to enter new markets that they do not know well. As such, firms may find that alliances provide useful platforms to test their products in new markets before they commit themselves to estab- lishing their own self-contained units and subsidiaries in global markets. By teaming up with a partner that has more experience and knowledge about a particular market’s condi- tions, a firm can better understand how to compete in a new region at lower cost and risk. Even companies that have already established their own operating subsidiaries in distant markets can benefit from strategic alliances. Working with a partner can help overcome or sidetrack other economic obstacles to further expansion. Firms engage in strategic alliances for a number of reasons, but they all involve some form of risk reduction. Strategic alliances can help reduce the risk of (1) entering new mar- kets, (2) shaping of industry evolution, (3) learning and applying new technologies, and (4) rounding out a product line. These categories are not mutually exclusive. Some strate- gic alliances may attempt to deal with several overlapping risks. New Market Entry Companies have formed strategic alliances to speed market entry. In the global pharma- ceutical industry, for example, Merck, Fujisawa, and Bayer aggressively cross-license their newest drugs to one another. These arrangements help all three firms reduce the high fixed costs of R&D and global distribution. Fujisawa distributes Merck’s and Bayer’s drugs in Japan, while Bayer does so for Merck and Fujisawa in Europe. In this way, all three firms avoid duplicating the high fixed costs of development, distribution, and marketing world- wide. In the global automobile industry, companies such as Ford and Mazda or General Motors and Isuzu assist each other in entering new markets with new products. General Motors helps Isuzu enter the small truck market in the United States and Asia, while Isuzu 266 PART 2 Extending Competitive Advantage helps General Motors better understand how to distribute cars in the Japanese and South- east Asian markets, where Isuzu has longer experience and a better distribution base. In the beverage industry, Nestle S.A. works with Coca-Cola to gain access to the other’s distribution channels. Coca-Cola distributes Nestle’s line of fruit juices and coffees, while Nestle works with Coke on other soft drink products distribution worldwide. Without teaming up, both companies would have to spend more time on their own “reinventing the wheel” to enter certain market segments. The rise of numerous alliances in the airline industry is directly related to partners’ seeking access to serve new markets they previously could not access. In particular, U.S. and European airlines have been teaming up with one another to serve the profitable trans- Atlantic market in such a way that they can reach into the European continent and the U.S. interior respectively. Trans-Atlantic airline alliances enable partners to extend their reach without incurring a disproportionate high cost of capital investment. Shaping of Industry Evolution Strategic alliances can help shape what an industry may look like in the future. In the semiconductor and biotechnology industries, many firms have formed alliances to define emerging standards or new products. (See Exhibits 8-3 and 8-4.) For example, Silicon Partners Technology Lucent Technologies Digital signal processors (DSPs) Motorola IBM 256 Megabit memory chips Motorola Advanced flash memories Toshiba Siemens Advanced Micro Devices Advanced flash memories Fujitsu Intel Advanced flash memories Sharp Corporation LSI Logic Hybrid, embedded DRAM chips Micron Technology Advanced Micro Devices Copper deposition technology in chip circuitry Motorola Intel Next-generation microprocessor (Merced project) Hewlett-Packard Lucent Technologies Custom-designed chips for communications NEC equipment Mitsubishi Electric Toshiba Advanced memory chips Samsung exhibit(8-3) Representative Alliances in the Semiconductor Industry [...]... development CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage efforts Thus, alliances have served as important vehicles for a number of upstart firms and incumbent high-technology firms to learn and apply emerging technologies to the telecommunications industries and other broadband network markets Moreover, alliances aid the internal development efforts of companies with strategic interests... budgets, plans, and product layouts must be carefully worked out and managed, CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage as managers at Arby’s and ZuZu came to realize belatedly Managers must also hammer out such key issues as accounting formats and human resource practices within the alliance, including such questions as whether a manager works for one partner or the other and whether... developments CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage RISKS AND COSTS OF ALLIANCES Through alliances, firms can acquire new products, skills, and knowledge that are otherwise not available to them Working with an alliance partner to learn and build new sources of competitive advantage, however, is not a cost-free proposition Without clearly understanding the risks and costs inherent... Philips will specialize in RISC chips for consumer and telecommunications products • Linkage with Texas Instruments gives domestic credibility to new product design • Linkage with Fujitsu gives access to low-cost production • LSI Logic and other smaller firms provide for cross-licensing and exchange of ideas CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage build a global presence in... Macintosh computer, CD-ROM, and a screen that also receives television signals This new Apple product merges technologies and skills required for competing in both the CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage computer and consumer electronics businesses However, Sony currently builds many of Apple’s latest generation of laptop computers in a long-standing alliance Sony has benefited... virus is so complex and daunting that many U.S firms are seriously considering joint research CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage ventures to pool their efforts Competing chemical firms often team up in formal joint ventures to commercialize costly development processes For example, DuPont teamed up with Japanese firm Toray to accelerate the learning and transfer of new... represent a useful intermediate step for firms seeking to gain the benefits of diversifying into new areas of activity • Alliances can serve as a lower-risk vehicle for firms seeking to enter new markets as part of a measured strategy of global expansion CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage • The need for some form of risk reduction promotes alliance formation These risks • • •... final products.17 CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage BALANCING COOPERATION AND COMPETITION Alliances involve both benefits and risks As such, alliances represent a trade-off Many of the risks associated with alliances—knowledge/skill leakage, deepening dependence, and coordination costs—result when managers rush into alliances The heaviest costs and highest risks of alliances...CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage 267 Graphics and Sun Microsystems have both enlisted a broad array of companies in the United States, Europe, and Japan to coproduce their RISC-based microprocessors Silicon Graphics and Sun are in a race to see whose standards dominate The more firms that Silicon Graphics can get to... (DVDs) for the consumer electronics industry Sony and Philips had their own alliance to codesign and produce their respective version of DVD technology that used a different set of design tools and layers to record and store video and other forms of data These DVDs are seen as potential replacements for conventional VCRs and even existing CD players in the next few years Both the SonyPhilips alliance and . Issues Summary Exercises and Discussion Questions Strategic Alliances: Teaming and Allying for Advantage WHAT YOU WILL LEARN • The characteristics of a strategic alliance • Why companies around the world are forming. development CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage 269 efforts. Thus, alliances have served as important vehicles for a number of upstart firms and incumbent high-technology. low-cost production. • LSI Logic and other smaller firms provide for cross-licensing and exchange of ideas. CHAPTER 8 Strategic Alliances: Teaming and Allying for Advantage 273 build a global presence