Strategic Alliances

• Some blatant facts

• Only 15% of the strategic alliances are
successful.
• Rules of SA”s
a) Both firms must remain independent entities
with their own objectives.
b) Each individual parties preserve their own
identity and come together for their own
objective
 Need for Strategic Alliances:

 Need to access superior ideas continously, with access to

knowhow and information to be sustainable in the marketplace
(Barley and Chakraborty1996)

 No firm can access all the information individually in

marketplace making collaborations essential in the form of
alliances with firms,government research laboratories and
universities(Arora and Gambardella 1990;Powel et al1996;Ahuja
2000)
 Primary purpose of an Alliance :
Co option – In this process potential competitors are
converted into allies and providers of complementary goals
and services that allow new businesses to develop.

Co specialization- Synergistic value creation in which partners

in an alliance contribute unique and differentiated sources like
skills, brands, relationships, and create value through
bundling of resources

Learning and Internalization : Alliances are learning sources

for skills which are tacit, embedded and collective which can
be internalized and exploited to yield more value.
 Synergies Generated in Alliance:
Modular Synergies: Companies manage resources independently
and pool results for greater profits e.g HP and Microsoft non
equity alliance that pools systems integration and enterprise
software skills to create technology solutions for small and big
customers e.g Airline companies.

Sequential Synergies: This happens when one company completes

its task and passes on the partner to do its bit. As for e.g the
Biotech firm that specializes in discovering new drugs like
Albgenix wishes to work with a pharmaceutical giant that is more
familiar with the FDA process like Astra Zeneca as both
companies are pursuing sequential synergies.
 Synergies Generated in Alliance:

Modular Synergies: Companies manage resources

independently and pool results for greater profits e.g HP and
Microsoft non equity alliance that pools systems integration and
enterprise software skills to create technology solutions for small
and big customers e.g Airline companies.

Sequential Synergies: This happens when one company completes

its task and passes on the partner to do its bit. As for eg the Biotech
firm that specializes in discovering new drugs like Albgenix
wishes to work with a pharmaceutical giant that is more familiar
with the FDA process like Astra Zeneca as both companies are
pursuing sequential synergies.
 Diversification
• Concentric

• Conglomerate
• Some examples:-
• Godrej and Procter Gamble Alliance.
• Birla AT &T and Tata
• Sony Ericsson Reckitt and Colman and Nicholas Piramal.
Some examples in SA’s:
a)Two firms in Related but non competing
Industries:-
(Telemetric Guidance Systems)Hitachi + GM =GPS
(Sat Navigation
Sys)

(O.E.M of electronic supplier to G.M.)

• Mercedes Aromatic Suspension + Johnson
Controls.
• SGL + Porsche = Carbon Brakes(life 3,00,000
miles)
B) Relation between two firms in same industry
but not in direct competition:
G.M + Isuzu = Trucks
($16000 mid sized trucks)
(Diesel Tech/$10000).
Porsche + BMW = SUV’s(XYZ series designed by
Porsche)
C)Relationship of a Firm to a Direct Competitor
G.M.+ Toyota= NUMMI(National United
Motor Mfg Incorp)

D) Alliance between totally unrelated folks:-

Du Pont + Sony = Optic Fibre.

Ericsson + Nokia + Motorola = Symbian System
Diversification –A Case Study of ITC
Ltd.
 Motives for Diversification
• Growth
– Manager’s interest

• Risk Reduction
– Threat from one product line

• Profitability
– Through forward & backward linkage
 MODEL OF DIVERSIFICATION
INDUSTRY

Existing New

C Mega
O Premier Plus
New Opportunitie
M 10
s
P
E
T
E
N
C Fill in the
White Spaces
E Existing Blanks

Source: Gary Hamel & C K Prahlad

 Ways to increase profitability in diversified
company
• By transferring competencies among existing
business.
• By leveraging competencies to create new
business.
• By sharing resources to realize “economics of
scope”
• By using diversification as a means of managing
risk/ rivalry
• By forward & backward linkage
 Transferring competencies…
• Philip Morris – distinct competency in Product
Development, Consumer Marketing & Brand Positioning.

• Acquired Miller Brewing.

• Both are mass market product & advertising, brand

positioning & product development skills are important

• If Brand Positioning improves–diversification successful

 Competitive Advantage for Diversification
• Market Power

• Economics of Scope (Cost Savings from using a resource in

multiple activities carried out in combination e.g. Boeing )

• Organizational Capabilities

• Economies from Internalizing Transactions

• Information Advantage of Diversified Corporation

 ITC Corporate

FMCG PSPD Agribusiness Hotels Subsidiaries

ITD Info tech

Packaged Foods BFIL Fin.

Lifestyle IBD ILTD
Surya Nepal
GGSB Land base
Leaf Tobacco
Safety Matches & Incense Sticks
Spices Russel
Inc. Credit
Soaps & Shampoos
Organic Input
 Core Competency & Diversification
• ITD – Distribution, Branding
 Synergy with FMCG

• ILTD – Procurement, Relation with farmers

 Synergy with ITC Foods, new product line

• IBD – Procurement, Trading, Relation with

farmers.

 Synergy with ITC Foods

 Limitations of Diversifications
• High bureaucratic cost

• Difficulty in coordination among business

• When the company’s core competency are applicable

to a wide variety of industrial & commercial situation

• The bureaucratic costs of implementation don’t exceed

the value that can be created through resource
sharing & transferring competency