MT5: Alliances and Strategic Processes (Wk7 material)
*Recommended
~from Y1 notes
In essays, spend less time explaining literature. Spend more time critiquing it.
Own thoughts: think of it as a continuum...
o Standard market tx
o Outsource with non-equity alliance unilateral contract (tailored market tx)
o Bilateral contract non-equity alliance cross-license or tech sharing
o Equity alliance/ JV
o M&A/ build internally.
L13 Readings- Alliances and Transaction costs
Problems w/ market transactions
*~Coase 1937- <transaction costs> Firms internalise transactions when cost of arranging transactions <
cost of accessing market (e.g. search, bargaining, enforcement costs). Factors affecting organising costs
(spatial distribution/ dissimilarity of transactions). Sales taxes avoided within firms. Technology
advancements affect transaction and organising costs, and thus size of firms.
Ghoshal & Moran, 1996- <critique of TCE> organisations not arising merely to avoid tx costs, also
possess unique advantages for some economic activities. Market logic of autonomous adaptation (static
efficiency, coordination by price), organisational logic of purposive adaptation (better in cases of missing
markets, dynamic efficiency with innovation due to temporary hold-off of market forces, moral factor of
shared purpose creating efficacy in cooperation)
When to ally
**Dyer et al. 2004- <tendency not to compare ally/acquire, when to ally/ acquire> both are alternative
mechanisms for attaining goals and should be compared. Tendency to not compare due to initial
experience (stick with one) and organisation barriers (M&A team vs BizDev alliance team). Factors to
consider: type of synergy (modular use nonequity, sequential use equity since more tx cost from
resource customisation, reciprocal use acquisition), nature of resources (soft resources avoid acquisition
and use equity alliance, hard resources use nonequity alliance), extent of redundant resources (if high
use acquisitions, low use nonequity alliances), high market uncertainty (equity alliance first then acquire
once uncertainty lowers), high competition (acquire before competitors do)
Alliance types/ seller beware
*Bleek & Ernst, 1995- <Alliance types, seller beware> alliances often end in acquisition and median life
span on 7yrs. Types: Alliance between strong direct competitors (failure/ dissolution), Alliances of
complementary equals (long lasting), Alliances of the weak (usually stay weak, failure/ dissolution/ 3rd
party acquisition), Disguised sales (weak-strong alliance, ends in acquisition). Seller beware (alliance
reduce acquisition gain, buyer can estimate synergies with better confidence, deter other potential
buyers with difficulty of unwinding the alliance)
How to ally
*Oxley, 1997- <appropriability hazards and alliance governance, hostage exchange> 3 types of alliance
in ascending hierarchy: unilateral contract (license, supply), bilateral contract (cross license, tech
,sharing), equity-based alliance (JV). Empirically, more hierarchical alliance when contracting hazards are
high (tech transfer context): contractual specification of rights is hard (product/ process design alliance
beyond production/ marketing), monitoring is difficult due to large scope (broad range of tech/
products, wide geographic area, more firms involved). Less hierarchical when contractual hazard
lowered by multiple alliances together (hostage exchange)
Own thoughts: possible imitation, not providing things to an expected quality etc. If wrong
alliance structure used
monitoring is difficult: moral hazard
*Somaya et al. 2011- <license exclusivity and scope restrictions> exclusivity as a contractual hostage to
safeguard licensee complementary investment and for early-stage licensing (more licensor support
needed). Scope restrictions to balance tradeoffs for licensors working with exclusive licensee. Product
scope restrictions for early stage, geography restrictions for marketing-only resources. Other safeguards
like equity investment in licensee, reciprocal trading may reduce the need for exclusivity.
*Adegbesan & Higgins, 2011- <intra-alliance division of value created> Firms with relative scarcity,
superior complementarity (more valuable), and great relative bargaining ability get more pie-splitting
control rights and thus appropriate more value in strategic alliances. Empirical study of biotech R&D to
show this.
3 more readings (don't think they're very relevant)
Other related (not in reading list)
~Williamson 1981- <asset specificity, source of tx costs> Transaction costs higher with asset specificity
(site, human, physical), more likely internalised. Transaction costs arising from bounded rationality
(imperfect contracting) + opportunism (bad actors exploit imperfect contracting). Example: GM & Fisher
body merge in 1926
~Holcomb & Hitt, 2007- <Outsourcing TCT RBV> Strategic outsourcing decisions affected by transaction
cost theory and resource-based view. TCT (asset specificity don't outsource unless co-invest, small
number of suppliers bargain so don't outsource, tech uncertainty outsource risk but if very uncertain
don't outsource due to opportunism). RBV (outsource with complementarity of capabilities, strategic
relatedness/ goal congruence, prior cooperative experience). RBV: Firms see how internal capabilities
can integrate with capabilities available from intermediate markets (explain outsourcing of more key ops
like R&D).
Not important
*Coase, 1960- <problem with permit trading/ Pigouvian tax> Current economic solutions to negative
externalities are not necessarily/ usually desirable. Permit trading: transaction costs mean trading only
works if increase in production value > tx costs, so initial rights allocation matters. Alternatives to avoid
tx costs: firm internalisation, direct govt. regulation, do nothing if costs of solving is higher than gain.
Pigouvian tax: may not produce most efficient outcome. Fails to consider alternative social
arrangements (eg. victim can reduce damage more cheaply than polluter). Conclude: need to consider tx
costs and alternative arrangements (use double tax system).
~Walker & Weber, 1984- <make vs buy: production and tx costs> Factors affecting make-or-buy
decision. Comparative production costs between buyer and supplier (buy with supplier production cost
advantage, buy with competitive supplier market, make with buyer experience) Transaction costs (make
, with volume/tech uncertainty, buy with buyer production experience). Decision makers tend to focus on
relative production costs since it is direct, rather than transaction costs
Examples
Problems w/ market transactions: tx costs, adverse selection, moral hazard, hold up, matching
o Hold up example: GM & Fisher. Fisher invested in machines that specifically produced
metal closed body for GM car designs. To avoid hold up problems by GM after Fisher
invested in these machines, GM signed an exclusive contract to buy all its closed bodies
from Fisher at a cost-plus price, which gave Fisher leverage over GM as well. However,
GM is left vulnerable as Fisher used labour inefficiently and disagreed to shift closer to
GM, since costs are passed on to GM.
Example against asset specificity:
o Apple manufactures mainly by outsourcing, does not own large manufacturing facilities
Tx costs and firm size:
o Lower tx costs today with marketplace platforms (Upwork/ Fiver for services, Aliexpress
for goods) has led to increased outsourcing and the rise of one-person businesses
(Shopify and wooCommerce dropshipping stores)
Better decision making in ally vs acquire
o Cisco has one senior vice president in charge of corporate development, who is
responsible for M&A, strategic alliances, and technology incubation. Can view all of
them as alternatives to achieve goals.
o Modular synergy: American Airlines and Hilton Honors
Members of both programs can earn transferable miles/points and enjoy
reciprocal benefits when flying with American Airlines and staying at Hilton
properties
This clubs the consumer's choice of airline and hotel, so both benefit
o Sequential synergy:
AstraZeneca bought $100M stake in Abgenix, a biotech firm that specializes in
discovering new drugs. Abgenix will be responsible for conducting early clinical
trials, clinical manufacturing, and early commercial manufacturing. AstraZeneca
will be responsible for conducting late-stage clinical development as it is more
familiar with the FDA approvals process.
Chevron and Qatar Petroleum joint venture: Chevron specializes in exploration
and drilling, while Qatar Petroleum has expertise in production and refining
operations. The JV develops an oil field in Qatar.
o Reciprocal synergy:
Facebook's Acquisition of Instagram: synergy is derived from sharing Facebook
Business Manager, content moderation functions, advertising algorithms, data-
sharing etc. This form of highly customised collaboration works better with
acqisitions rather than alliances
Alliance of complementary equals are long lasting:
o American parent KFC and Mitsubishi's joint venture KFC Japan:
*Recommended
~from Y1 notes
In essays, spend less time explaining literature. Spend more time critiquing it.
Own thoughts: think of it as a continuum...
o Standard market tx
o Outsource with non-equity alliance unilateral contract (tailored market tx)
o Bilateral contract non-equity alliance cross-license or tech sharing
o Equity alliance/ JV
o M&A/ build internally.
L13 Readings- Alliances and Transaction costs
Problems w/ market transactions
*~Coase 1937- <transaction costs> Firms internalise transactions when cost of arranging transactions <
cost of accessing market (e.g. search, bargaining, enforcement costs). Factors affecting organising costs
(spatial distribution/ dissimilarity of transactions). Sales taxes avoided within firms. Technology
advancements affect transaction and organising costs, and thus size of firms.
Ghoshal & Moran, 1996- <critique of TCE> organisations not arising merely to avoid tx costs, also
possess unique advantages for some economic activities. Market logic of autonomous adaptation (static
efficiency, coordination by price), organisational logic of purposive adaptation (better in cases of missing
markets, dynamic efficiency with innovation due to temporary hold-off of market forces, moral factor of
shared purpose creating efficacy in cooperation)
When to ally
**Dyer et al. 2004- <tendency not to compare ally/acquire, when to ally/ acquire> both are alternative
mechanisms for attaining goals and should be compared. Tendency to not compare due to initial
experience (stick with one) and organisation barriers (M&A team vs BizDev alliance team). Factors to
consider: type of synergy (modular use nonequity, sequential use equity since more tx cost from
resource customisation, reciprocal use acquisition), nature of resources (soft resources avoid acquisition
and use equity alliance, hard resources use nonequity alliance), extent of redundant resources (if high
use acquisitions, low use nonequity alliances), high market uncertainty (equity alliance first then acquire
once uncertainty lowers), high competition (acquire before competitors do)
Alliance types/ seller beware
*Bleek & Ernst, 1995- <Alliance types, seller beware> alliances often end in acquisition and median life
span on 7yrs. Types: Alliance between strong direct competitors (failure/ dissolution), Alliances of
complementary equals (long lasting), Alliances of the weak (usually stay weak, failure/ dissolution/ 3rd
party acquisition), Disguised sales (weak-strong alliance, ends in acquisition). Seller beware (alliance
reduce acquisition gain, buyer can estimate synergies with better confidence, deter other potential
buyers with difficulty of unwinding the alliance)
How to ally
*Oxley, 1997- <appropriability hazards and alliance governance, hostage exchange> 3 types of alliance
in ascending hierarchy: unilateral contract (license, supply), bilateral contract (cross license, tech
,sharing), equity-based alliance (JV). Empirically, more hierarchical alliance when contracting hazards are
high (tech transfer context): contractual specification of rights is hard (product/ process design alliance
beyond production/ marketing), monitoring is difficult due to large scope (broad range of tech/
products, wide geographic area, more firms involved). Less hierarchical when contractual hazard
lowered by multiple alliances together (hostage exchange)
Own thoughts: possible imitation, not providing things to an expected quality etc. If wrong
alliance structure used
monitoring is difficult: moral hazard
*Somaya et al. 2011- <license exclusivity and scope restrictions> exclusivity as a contractual hostage to
safeguard licensee complementary investment and for early-stage licensing (more licensor support
needed). Scope restrictions to balance tradeoffs for licensors working with exclusive licensee. Product
scope restrictions for early stage, geography restrictions for marketing-only resources. Other safeguards
like equity investment in licensee, reciprocal trading may reduce the need for exclusivity.
*Adegbesan & Higgins, 2011- <intra-alliance division of value created> Firms with relative scarcity,
superior complementarity (more valuable), and great relative bargaining ability get more pie-splitting
control rights and thus appropriate more value in strategic alliances. Empirical study of biotech R&D to
show this.
3 more readings (don't think they're very relevant)
Other related (not in reading list)
~Williamson 1981- <asset specificity, source of tx costs> Transaction costs higher with asset specificity
(site, human, physical), more likely internalised. Transaction costs arising from bounded rationality
(imperfect contracting) + opportunism (bad actors exploit imperfect contracting). Example: GM & Fisher
body merge in 1926
~Holcomb & Hitt, 2007- <Outsourcing TCT RBV> Strategic outsourcing decisions affected by transaction
cost theory and resource-based view. TCT (asset specificity don't outsource unless co-invest, small
number of suppliers bargain so don't outsource, tech uncertainty outsource risk but if very uncertain
don't outsource due to opportunism). RBV (outsource with complementarity of capabilities, strategic
relatedness/ goal congruence, prior cooperative experience). RBV: Firms see how internal capabilities
can integrate with capabilities available from intermediate markets (explain outsourcing of more key ops
like R&D).
Not important
*Coase, 1960- <problem with permit trading/ Pigouvian tax> Current economic solutions to negative
externalities are not necessarily/ usually desirable. Permit trading: transaction costs mean trading only
works if increase in production value > tx costs, so initial rights allocation matters. Alternatives to avoid
tx costs: firm internalisation, direct govt. regulation, do nothing if costs of solving is higher than gain.
Pigouvian tax: may not produce most efficient outcome. Fails to consider alternative social
arrangements (eg. victim can reduce damage more cheaply than polluter). Conclude: need to consider tx
costs and alternative arrangements (use double tax system).
~Walker & Weber, 1984- <make vs buy: production and tx costs> Factors affecting make-or-buy
decision. Comparative production costs between buyer and supplier (buy with supplier production cost
advantage, buy with competitive supplier market, make with buyer experience) Transaction costs (make
, with volume/tech uncertainty, buy with buyer production experience). Decision makers tend to focus on
relative production costs since it is direct, rather than transaction costs
Examples
Problems w/ market transactions: tx costs, adverse selection, moral hazard, hold up, matching
o Hold up example: GM & Fisher. Fisher invested in machines that specifically produced
metal closed body for GM car designs. To avoid hold up problems by GM after Fisher
invested in these machines, GM signed an exclusive contract to buy all its closed bodies
from Fisher at a cost-plus price, which gave Fisher leverage over GM as well. However,
GM is left vulnerable as Fisher used labour inefficiently and disagreed to shift closer to
GM, since costs are passed on to GM.
Example against asset specificity:
o Apple manufactures mainly by outsourcing, does not own large manufacturing facilities
Tx costs and firm size:
o Lower tx costs today with marketplace platforms (Upwork/ Fiver for services, Aliexpress
for goods) has led to increased outsourcing and the rise of one-person businesses
(Shopify and wooCommerce dropshipping stores)
Better decision making in ally vs acquire
o Cisco has one senior vice president in charge of corporate development, who is
responsible for M&A, strategic alliances, and technology incubation. Can view all of
them as alternatives to achieve goals.
o Modular synergy: American Airlines and Hilton Honors
Members of both programs can earn transferable miles/points and enjoy
reciprocal benefits when flying with American Airlines and staying at Hilton
properties
This clubs the consumer's choice of airline and hotel, so both benefit
o Sequential synergy:
AstraZeneca bought $100M stake in Abgenix, a biotech firm that specializes in
discovering new drugs. Abgenix will be responsible for conducting early clinical
trials, clinical manufacturing, and early commercial manufacturing. AstraZeneca
will be responsible for conducting late-stage clinical development as it is more
familiar with the FDA approvals process.
Chevron and Qatar Petroleum joint venture: Chevron specializes in exploration
and drilling, while Qatar Petroleum has expertise in production and refining
operations. The JV develops an oil field in Qatar.
o Reciprocal synergy:
Facebook's Acquisition of Instagram: synergy is derived from sharing Facebook
Business Manager, content moderation functions, advertising algorithms, data-
sharing etc. This form of highly customised collaboration works better with
acqisitions rather than alliances
Alliance of complementary equals are long lasting:
o American parent KFC and Mitsubishi's joint venture KFC Japan:
