Methods of Development: Strategic Alliances and Cooperation Between Firms

CEU Universidad San Pablo

Methods of Development: Strategic Alliances

Cooperation Between Firms

4. METHODS OF DEVELOPMENT. STRATEGIC ALLIANCES: COOPERATION BETWEEN FIRMS

4.1 COOPERATION OR ALLIANCES BETWEEN FIRMS.

4.2 BENEFITS AND DRAWBACKS.

4.3 TYPES OF AGREEMENTS.

4.3.1 Contractual Agreements.

4.3.2 Shareholder Agreements.

4.3.3 Inter-organizational networks.

4.4 MANAGING STRATEGIC ALLIANCES.

Cooperation or Alliances between Firms: Concept and Characteristics

E4.1 Cooperation or Alliances between firms. Concept and Characteristics of Cooperation Between Firms May be defined as an agreement between two or more separate firms that by joining or sharing their resources and/or capabilities, although not merging, introduce a certain degree of interrelation with a view to reinforcing their competitive advantages.

Concept

• There is a willingness to cooperate among companies that may even be rivals.
• It is an instrument for achieving individual objectives.
• There is a diversity of types from both a strategic and legal perspective.
• No Dominance: In cooperative agreements, no single firm dominates the other, as their voluntary involvement ensures equality, unlike in mergers and acquisitions.
• Coordination of Future Actions: Firms coordinate and jointly undertake certain activities, accepting specific commitments.
• Loss of Organizational Independence: Firms may lose some independence due to the agreement and commitments, while maintaining autonomy in other operations.
• Blurring of Boundaries: It can be challenging to clearly define which activities, personnel, or assets belong to each firm and which pertain to the partner.
• Interdependence: Partners rely on each other to fulfill the agreement, as they would have pursued their goals independently otherwise.
• Achieving Goals: The agreement helps achieve objectives that would have been difficult or less favorable to attain alone.

Characteristics of Cooperation

Justification for Business Cooperation

4.1 Cooperation or Alliances between firms. Justification for Business Cooperation. Why do companies opt for cooperation agreements instead of internal development or mergers/acquisitions? Why have alliances increased in recent years?

Economic Reasons for Cooperation

• efficient way to organize economic activity
• economies of scale (in activities or industries where the minimum critical mass to compete is very high)
• economies of scope or synergies (through joint performance of activities or complementarity of activities or resources between companies)
• learning economies (cost reductions benefiting from a faster accumulation of learning and experience)
• reduction of transaction costs (by establishing a lasting and trusting relationship with partners)

Strategic Reasons for Cooperation

• obtaining r&c (companies often lack all the necessary resources for optimal performance, so cooperation is suitable for acquiring complementary resources or those possessed by other partners, such as know-how or organizational routines)
• way to enter an industry and/or country
• reduce the level of industry competition or influence its future evolution
• acquire advantages of vertical integration (partners maintain a supplier-client relationship)
• achieve an adequate size to compete in a global market

Other Factors in Business Cooperation

• political factors: e.g., to access r&c aid in various countries > mandatory collaboration with a local partner
• defensive reasons (contagion effect): avoid being isolated in a context of multiple alliances or being acquired by another company
• trend reasons (bandwagon effect)

* Example of an alliance in the banking sector: Bizum > electronic payment services via mobile >> companies that do not join any of the existing alliances are in a very weak position to compete

Benefits and Drawbacks of Alliances

4.2 Benefits and Drawbacks.

Benefits (I)

Global Benefits of Alliances

• Combination of operational efficiency with the flexibility inherent in the agreement.
• Ease of dissolution.
• Possibility of accessing complementary r&d (difficult to obtain through other means).
• Reduces risk and uncertainty.

Autonomy in Alliances

• Advantages of concentration without imposing its limitations.
• Benefit from size, scale, or experience advantages without losing autonomy.
• Double the strategic maneuverability while preserving the culture and identity of allied companies.
• Exploit synergies by precisely defining the area of collaboration and proceeding "step by step".

Reversibility of Alliances

• Relationships are not irrevocable.
• They can be a transitional stage towards a total transfer, although the possibility of partial transfer is preserved before the process is completed.
• At the time of the final transfer, the remaining parts of the business can be sold at a better price.
• The date of the outcome is negotiable. The decision to transfer can be annulled if it is no longer the objective.
• Problematic if it is to solve current difficulties rather than to optimize a desired outcome.

Benefits (II)

Advantages of Alliances vs. Internal Development

• The organizational complexity of integrated companies is not assumed.
• Each partner can focus on managing the key activities they excel at.
• Exit barriers are reduced due to the reversibility of the agreements.

Advantages of Alliances vs. Market Transactions

• Greater stability for jointly performing activities, given the longer duration of relationships.
• Reduced risk for entering new industries, countries, etc.
• Reduction of transaction costs (eliminating information difficulties and conflicts among those conducting transactions).

* Transaction costs: additional expenses associated with the purchase or sale of goods and services, which go beyond the price of the product itself. They can be explicit, such as commissions and fees, or implicit, such as the time and effort spent searching for the best deal; examples include search costs, contracting costs, or coordination costs (e.g., transportation).

Advantages of Alliances vs. Mergers and Acquisitions

• Reduction of cultural and organizational integration issues.
• Greater ease in addressing legal competition defense issues.
• Represents a more reversible commitment.

Drawbacks of Alliances

• Harms competitive position if CA sources fade.
• Loss of autonomy in decision-making.
• Lack of delegation of power to those responsible for cooperation.
• Time and economic costs.
• Increased organizational complexity due to continuous coordination between partners.
• Possibility of divergent interests.
• Potential lack of trust and commitment between partners: "Trojan Horse" (Creating a new competitor or strengthening an existing one by sharing technology and knowledge with partners. In this sense, cooperation can become a "Trojan Horse" that allows one partner to take advantage of the other's skills or facilitate the entry of foreign competitors into local markets when alliances are international.)

Problems in Alliances

• Ambiguity rivalry/ cooperation
• Imbalances in the degree of mutual learning
• Difficult negotiations
• It may lead to mergers in the future

Types of Agreements

4.3 Types of Agreements. There are three main types of alliances according to their strategic implications

Complementary Alliances

Objectives Companies with capabilities and contributions from different nature

Effects on the competition The partner's product should not compete with that of the company that markets it.

Main Characteristics . Companies with unequal competitive positions. . They do not pursue new markets.

Example 1: A company specializing in the production of construction materials, such as bricks and cement, and another company focusing on housing construction. Example 2: Marketing wine and cheese

Joint Integration Alliances

Objectives Economies of scale on an isolated component or phase of the production process

Effects on the competition Competition remains direct. The products are substitutes

Main Characteristics . They do not pursue new markets. · Agreements on marketing, rarely on production

Example: A car manufacturing company and an electric battery company >> joint production of electric vehicles, shared R&D, shared distribution network for the new final product, joint warranties, and after-sales service ..

Addition Alliances

Objectives Develop and market a common product.

Effects on the competition There is no competition; the partners behave like merged companies

Main Characteristics · Pooling of resources in units created for this purpose. R&D and production • agreements · Distribution of tasks among associated companies. · Equivalent competitive positions. · Equivalent competitive positions. • To introduce products to new markets.

Example: An information technology (IT) company and a cybersecurity company: alliance to strengthen their capabilities and offer more comprehensive solutions to their clients: development of secure software, joint consulting, product or service packages.

SOURCE: STRATEGOR (1995)

Types of Agreements by Criterion

Activities Involved in Agreements

TYPOLOGY Focused on an activity Cooperation agreements (commercial, production, R+D ... )

CHARACTERISTIC Complex They involve various activities in the value chain. High interaction between partners

Number of Members in Agreements

TYPOLOGY Bilateral Two partners Multilateral More than 2 partners

Strategic Objectives of Agreements

TYPOLOGY Competitive Achieve or strengthen CA Corporate Expand partner activities

RELATIONSHIP BETWEEN PARTNERS Vertical Parner(A)-Supplier Supplier-customer agreement ➢ Partner(B)-Customer Competitive Horizontal Parner(A)-Industry X Partner(B)-Industry X > Between direct competitors Complementary Horizontal Parner(A)-Industry X ++ Partner(B)-Industry Y ➢ Between non-competitors

Legal Nature of the Agreement

TYPOLOGY 4.3.1. Contractual Agreements Contract-based 4.3.2. Shareholder Agreements Based on some form of shareholding 4.3.3. Inter-organizational Networks Multiplicity of agreements between multiple partners

Contractual Agreements

4.3.1. Contractual Agreements . There are various types of contracts between firms. . They do not involve the exchange of shares or investments in the capital of any firm, whether existing or new. · Not all agreements involve an alliance; a certain degree of continuity in cooperation is required to differentiate them from ordinary contracts or mere market relations. . The range of possible contractual agreements is broad and varied.

Range of Possible Contractual Agreements

A. Long-term contracts (through which the partners agree to undertake certain joint operations) B. Franchise C. Licence D. Subcontracting E. Spin-off F. Consortium