Summary Class notes - International Strategic Alliance

- International Strategic Alliance
- Wilhelm
- 2016 - 2017
- Rijksuniversiteit Groningen (Rijksuniversiteit Groningen, Groningen)
- International Business and Management
202 Flashcards & Notes
1 Students
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Summary - Class notes - International Strategic Alliance

  • 1481238000 Introduction to the theme

  • Is there a third option beyond make (in a firm) or buy (at the market)?
    Yes, there is a third category, called the 'hybrids'. These consist of (1) strategic alliances, (2) networks, (3) outsourcing and (4) sub-contracting
  • What are the various motivations of firms to enter strategic alliances?
    (a) economies of scale, (b) entering new markets/faster entry in foreign markets, (C) acquisition of new skills, (d) circumvent foreign market barriers, (e) setting new standards for technology, (e) gaining competitive advantages, (f) dividing risks/sharing resources, (g) overcoming competition in a market and (h) setting new standard for technology.
  • What are the differences between Alliances, Mergers and Joint-Ventures.
    • Alliances are not defined by any particular legal status but by the nature of the relationship formed between the allied companies. However, most alliances are based on a contract or a series of contracts.
    • If the alliance is endowed with a legal status that is distinct from that of the partner companies, we talk of a joint venture.

    • A merger is useful when two businesses wish to become fully integrated -- that is, when two firms have enough overlap that they can perform most of their business together. A joint venture, on the other hand, typically has a much more limited scope. A joint venture normally focuses on a specific area where two firms overlap and can work together, but the bulk of their business remains separate.

  • What alliances and where do there mode of governance fit?
    Alliancesare a hybrid modeofgovernancebetweenmarketsandhierarchies
  • What is the definition of a strategic alliance?
    “Strategic alliances are links formed between two – or more – independent companies which choose to carry out a project or specific activity jointly by coordinating the necessary skills and resources rather than:

    •pursuing the project or activity on their own, taking on all the risks and confronting competition alone
    •merging their operations or acquiring and divesting entire business units.”
  • What are different types of ISA?
    (see photo)
  • Strategic alliances seem to fail a lot, why are they so hard to manage?
    - Multiple decision-making centers
    - No direct governance (outside firm's boundaries)
    - Constant bargaining
    - Clash of interests
    - Competition to gain a 'bigger share of the pie'
    - Races to learn
  • Explain the Market-based view to create a sustained competitive advantage
    Market-basedview (Porter): Structure–Conduct–Performance–Paradigm
    Proposition: resources in an industryarehomogenousand mobile
    Strategic management: selectingattractivesectorsandproducts

    ›  Competitiveadvantageslie in favorable marketstructures: Gainingmarket power becomeskey

    ›  Genericcompetitivestrategies: Costleadership vs. differentiation
  • Explain the Resource-based view (RBV) to gain a sustained competitive advantage
    Resource-basedview (Barney): Resources–Conduct–Performance–Paradigm
    Proposition: resources in an industryareheterogeneousand immobile
    Strategic management: creatinguniquecorecompetences

    •Firm-internal resources are the sources of competitive advantage.
    •Resource (bundles) need to be identified that are valuable, rare, inimitable, non-substitutable (VRIN).
    •Unique resources improve organizational performance.

    •Firms need to focus on their core competences and protect and develop these.
  • What are resources, according to Barney (1991)?
    In this article, firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness.
  • When are resources strategic?

    ›Strategic resourcesare a sourceofsustainedcompetitiveadvantageiftheyare:
    •valuable, i.e. create added value for customers
    •rare, i.e. cannot easily be developed
    •inimitable, i.e. controlled by only one firm because of unique history, social complexity, causal ambiguity
    •non-substitutable, i.e. not easily substituted by competitors

    All four criteria need to be fulfilled!
  • Explain the Relational view (RV) to gain a sustained competitive advantage

    Competitiveadvantagecanresultfromuniquerelationshipsbetweenorganizations. Sourcesof relational rentscanbe
    • Relation-specific assets
    • Knowledge sharing routines
    • Complementary resources and capabilities
    • Effective governance
  • Which barriers can help relational rents to be prevented from imitation?

    • Causal ambiguity
    • Time compression diseconomies*
    • Interorganizational asset stock interconnectedness
    • Partner scarcity
    • Resource indivisibility
    • Institutional environment
  • A RBV- perspective on strategic alliances (just read this part)

    ›…the crucial distinction between acquiring such skills in the sense of gaining access to them – by taking out a license, utilizing a subassembly supplied by a partner, or relying on a partner’s employees for some critical operation – and actually internalizing a partner’s skill has seldom been clearly drawn.” ›“As long as a partner’s skill are embodied only in the outputs of the venture, they have no value outside the narrow terms of the agreement. Once internalized, however, they can be applied to new geographic markets, new products, and new businesses.” 
  • What is Barney’s critique on the model of Porter to explain competitive advantages of firms?  Barney (1991)
    •  Porter’s model assumes that firms in one industry are identical in terms of the strategically relevant resources they control and the strategies they pursue.
    •  In case resource heterogeneity develops, this won’t be for long because the resources that firms use to implement their strategies are highly mobile.
    • Concerning the RBV, these two assumptions eliminate firm source heterogeneity and immobility as a possible source of CA.
  • What are the two central assumptions of the resource-based-view (RBV) that deviate from the model of Porter?  Barney (1991)
    • Firms within in industry may be heterogeneous with respect to the strategic resources the control.
    • These resources may not be perfectly mobile across firms, and thus heterogeneity can be long lasting.
  • How does Barney define sustained competitive advantages?  Barney (1991)
    When a firm implements are value creating strategy which is not simultaneously by any current or potential future competitors. AND Competitors are unable to duplicate the benefits of this strategy.
  • Explain the four criteria that a resource must fulfill in order for a firm to generate sustained competitive advantages.  Barney (1991)
    (1) Valuable resources: resources are valuable when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness.
    (2) Rare resources: As long as the number of firms that possess a particular valuable resource is less than the number needed to generate perfect competition dynamics in an industry, that resource has the potential of generating a competitive advantage.
    (3) Imperfectly imitable resources:
    •  unique historical conditions and imperfectly imitable resource: unique historical moments and circumstances matter. Firms without that particular path through history cannot obtain the resources necessary to implement the strategy.
    •  Causal ambiguity and imperfectly imitable resource: Causal ambiguity exists when the link between the resources controlled by a firm and a firm’s sustained competitive advantage is not understood
    • Social complexity: Existence of very complex social phenomena, beyond the ability of firms to systematically manage and influence (culture, reputation).

    (4) Substitutability: There must be no strategically equivalent valuable resources that are themselves either not rare or imitable. If enough firms have these valuable substitute resources, then none of these firms expect a sustained competitive advantage.
  • What is ‘causal ambiguity’ and why is it so important that “both the firms that possess resources that generate a competitive advantage and the firms that does not possess these resources but seek to imitate them must be faced with the same level of causal ambiguity” (p. 109).  Barney (1991)
    If firms that control these resources have a better understanding of their impact on competitive advantages than firms without these resources can engage in activities to reduce their knowledge disadvantages. If a firm with a competitive advantage understands the link between the resources it controls, then other firms can also learn about that link. Therefore, to be a source of sustained CA both firms must face the same level of causal ambiguity. Meaning that also the firm possessing the sustained CA does not fully understand it. Otherwise the imitating firms could just hire managers away from these firms or engage in studying the other firms systematically to close the gap.
  • Explain how Dyer & Singh’s paper both builds and extents the framework of Barney.  Dyer & Singh (1998)
    Barney argues that competitive advantages must be found within the resources of a firm. However Dyer & Singh argue that firms can also create competitive advantages by forming strategic alliances with partners. Therefore a relational view of competitive advantages is introduced.
  • What are typical characteristics of market transactions? What are the implications for the formation of relationships between firms?  Dyer & Singh (1998)
    • 1.Nonspecific asset investments,
      2.Minimal information exchange
      3.Separable technological and functional systems within each firm that are characterized by low levels of interdependence
      4.Low transaction costs and minimal investment
      ·Easiness of switching trade partners, but incapability of creating relational rents (supernormal profit) because there is nothing idiosyncratic about the exchange relationship that enables the two parties to generate profits above and beyond what other seller-buyer combinations can generate.
  • How do alliances that generate competitive advantages (i.e., create relational rents) depart from market transactions?  Dyer & Singh (1998)
    1. .Investments in relation-specific assets
      2.Substantial knowledge exchange, including
      3.Combining of complementary, but scarce, resources or capabilities
      4.Lower transaction costs than competitor alliances, owing to more effective governance mechanisms.

      ·Alliances generate a CA only as they move the relationship away from the attributes of market relationships.
  • What are the three types of asset specificity and what is their effect of the creation of relational rents?  Dyer & Singh (1998)
    1.Site specificity: successive production stages that are immobile in nature are located next to each other. This reduces inventory and transportation costs and lowers the coordination costs.
    2.Physical asset specificity: refers to transaction-specific capital investments that tailor processes to particular exchange partners. It allows for product variation and higher quality by increasing product integrity or fit.
    3.Human asset specificity: refers to transaction-specific know-how accumulated by trans actors through long-standing relationships. Communicate more efficiently and effectively, reducing communication errors and thereby enhancing quality and increasing speed to market.
  • What is tacit knowledge and why is it more likely to lead to the creation of relational rents than non-tacit knowledge?  Dyer & Singh (1998)
    Tacit knowledge:
    •  Know-how
    •  Sticky, complex and difficult to codify
    •  Difficult to imitate and transfer
    •  Source of sustained competitive advantage

    Relational rents:
    • Alliance partners that are particularly effective at transferring know-how are likely to outperform competitors who are not.
    •  Relational rents are possible when alliance partners combine, exchange, or invest in idiosyncratic assets, knowledge, and resources/capabilities, and/or they employ effective governance mechanisms that lower transaction costs or permit the realization of rents through the synergistic combination of assets, knowledge, or capabilities. 
    • A firm's alliance partners are, in many cases, the most important source of new ideas and information that result in performance-enhancing technology and innovations. -->  alliance partners can generate rents by developing superior interfirm knowledge- sharing routines
  • What is ‘partner specific absorptive capacity’ and why is it so important for the creation of relational rents?  Dyer & Singh (1998)
    • The ability to exploit outside sources of knowledge is largely a function of prior related knowledge or the “absorptive capacity” of the recipient of knowledge.

    •  Absorptive capacity: the ability of a firm to recognize the value of new external information, assimilates it, and apply it to commercial ends.  if a firm has absorptive capability, it is equally capable of learning from all other organizations.

    • Partner specific absorptive capacity: inter-organizational process that allows collaborating firms to systematically identify valuable know-how and then transfer it across organizational boundaries. (1) the extent to which partners have developed overlapping knowledge bases; (2) have developed interaction routines that maximize the frequency and intensity of sociotechnical interactions; (3) is enhances as individuals within the alliance partners get to know each other well enough to know who knows what and where critical expertise is located within each firm.
  • What are the two types of governance mechanisms that Dyer & Singh mention in their paper? Give an example for each type.  Dyer & Singh (1998)
    • 1.Third-party enforcement of agreement: TCE: Third party enforcer (state, contracts): Laws against monopolism (Kaisers-Edeka Fusion)
      2.Self-enforcing agreement: Safeguards that allow for self enforcement
      a.Formal safeguards: financial and investment hostages: to control for opportunism: stock purchases of the other company
      b.Informal safeguards: Goodwill trust or Embeddedness, Reputation: 
  • Give an example for inter-organizational asset interconnectedness.  Dyer & Singh (1998)
    A supplier builds a new plant close to the manufacturer (site-specific investment)  goods between the two plants are transported through a transportation/logistic system which both firms invested in.

  • How do the perspectives of the Resource-Based View and the Relational View differ a) in general and b) with respect to alliances?
    a.Both focus on resources:
    RBV: CA results from the resources and capabilities of the individual firm (internal perspective)
    Relational View: Competitive advantage can result from unique relationships between organizations (relational perspective); they share the resources
    b.RBV: Does not really say something about alliances – internal perspective
    Relational view: Relational rent is a supernormal profit jointly generated in an exchange relationship that cannot be generated by the either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners. Two firms put their complementary resources together that create relational rent. The relational rents are not resources that are found in the firm, but they are embedded in the context of the alliance and cannot be taken out of the context. Both parties need to open up and share their resources. If partners have a more RBV thinking, they hide important information and have a more competitive view. Once you have information form the other you should integrate it into your own firm; it is necessary to integrate it into my own firm.
  • If firms do not own strategic resources they could consider purchasing them on markets (e.g. through consultants, hiring a manager from a competitor). Do you agree or disagree with this statement?
    First impulse: You cannot buy it according to the fact that it is tacit or immobile. But we can acquire some valuable resources and recombine them with existing resources and develop a sustained CA. It is hard for instance for managers to implement their views (integration problems) in the new company, so the advantage will be diminished.
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Explain Tokatli’s statement that “instead of Zara changing the geography of jobs, the geography of jobs has changed Zara”. How would you characterize Zara’s production and sales network in the starting phase and today using the Global Value Chain framework?
1.Tokatli´s statements is about the fact that there was a shift in the culture of fashion. It changed from ready-to-wear to fast fashion. With as result that the firms in partially industrialized countries had to opportunity to profit from the demand for variety and fashion ability in the apparel industry. This was a major problem for Zara because, this two characteristics were part of their competitive advantage. The firms in partially industrialized countries such as Morocco, India and Turkey have gained the competence to manufacture high quality garments with the required flexibility and speed, due to this Zara started to outsource their activities. So we can conclude that Zara had to change their strategy due to the changing environment.

 By using the global value chain framework, I would characterize Zara’s production and sales network in the beginning as hierarchy. Because they produced everything in-house and the capabilities in the supply-base were low. Due to the upgrading in partially    industrialized countries the capabilities in the supply-base became high, which resulted   in the governance type relational.

Complexity of transactions is still high. Speed and difficult designs. Relational and modular modes for. Relational mode in Europe and relative closely to Europe.
Plus basic items outsourced.
What are indications that Zara is probably not an “exception to globalization” anymore today? Tokatli (2008)
Zara currently outsources the simple products (sweaters), an produces complicated products (with great fashion component) in-house
Since 2000s only half of the clothing sold was actually manufactured at home.
Or as they claim: 64% at home and neighboring countries (=also Turkey, Marocco?), 34% in Asia. 
What is “lead-time” and which specific advantages resulted for Zara from a shorter lead-time? Tokatli (2008)
Lead-time: The time between the start and finish of the production process (=producing 1 product)
Zara has very short lead-times (3-4 weeks). Advantages:
·Lower inventory costs by more accurate forecasts (lower inventory obsolescence)
·Postponement of fabric dying, ultimately leading to larger profit margins
In the text: “By greater flexibility and short lead times (offering fewer pieces more often): they collect larger percentages of the full price, thus achieve higher profit margins
·Quicker response to (changing) consumer demand, increased consumer satisfaction
+ Because of their short lead-time, Zara beats the high fashion stores to the market (weeks vs. months)
Which is the last value creation step Chinese and Turkish fashion brands need to master in order to fully outcompete the traditional European brands? Tokatli (2008)
Being able to master trend spotting and development of trends.
China and Turkey already have started setting up their own brands (parallel productions). Once they master the trend spotting/development, the ‘game will be over’
Which two developments tilted production of fashion towards, rather than away from, low-wage suppliers in partly industrialized countries? Tokatli (2008)
The increased variety and fashionability associated with the shift towards Fast Fashion; a new opportunity for firms
(1)Due to technological developments in the 1990s, Firms from countries such as China, Marocco, Turkey acquired the competence to manufacture the high quality clothing with required flexibility. + skilled tailors.
Transformation in consumer behavior: consumers are turning into their own stylists and are in charge of their own image, combining designer clothes, with cheap clothes from fast fashion, etc.
What is “fast fashion” and what are its prerequisites? Tokatli (2008)
Fast fashion: Retailers do not invest in design, but spot trends at fashion shows (and cues from mainstream consumers), transform into products and put them on the market almost immediately.
In general: they ship fewer pieces, greater variety of styles, more often.
Requires: shorter lead times, high-level flexibility à increased speed, flexibility and responsiveness of supply chain à requires greater integration of the supply chain

Track sales on real-time level. 
Describe the shift in the global apparel industry. What are the main differences between captive value chains and “full package production” in this industry?  Gereffi et al. (2005)
Due to upgrading of partially industrialized countries production moved to these countries. First the capabilities were low, so there was a captive relationship now it is more moving to a relational relationship. With a captive relationship suppliers are doing CMT (assembly only) with more capabilities they are moving towards a full package production which means volume production, scale economies, niche economies so more activities.

Captive: receives instructions to very high amount of detail. Supplier gets pre-cut fabric that needs to put together. Supplier only assembling
Full-package production: interpret designs,
Even higher forms of upgrading: Own design,
Own brand and logistics:

Not important for this course: modular and relational not very clear.
If you have full-package production; still have very complex transactions, but bundles activities as a package, reduce the need to interact with buyer
Modular: full-package supplier for very complex
Why were Zara and Benetton long considered “the exception to globalization”?  Tokatli (2008)
Globalization forces mainly influenced the ‘retailers without factories’, which outsource their manufacturing activities to partially industrialized countries (=emerging economies).
Reason: Cheap labor, lower production costs. 
Zara and Benetton, which are/were ‘retailers with factories’, were defying the force of globalization, as they kept manufacturing activities in industrialized countries (=Spain and Italy; home countries). Reason: market flexibility and lean inventories are more important
Explain the three factors that constitute the theory of global value chain governance. Gereffi et al. (2005)
These considerations lead us to construct a theory of value chain governance based on three factors:
A.The complexity of information and knowledge transfer required to sustain a particular transaction, particularly with respect to product and process specifications;

B.the extent to which this information and knowledge can be codified and, therefore, transmitted efficiently and without transaction-specific investment between the parties to the transaction; and
C.the capabilities of actual and potential suppliers in relation to the requirements of the transaction.

Complex: when it has a lot of specifications. Codifiable; to what extend can I codify the information
Is spatial proximity a prerequisite for building interorganizational trust? Gereffi et al. (2005)
Coordination costs dropped therefore, global buyers (retailers, marketers, and traders) can and do exert a high degree of control over spatially dispersed value chains even when they do not own production, transport or processing facilities, recent research on global production has highlighted other important forms of coordination.