Learning from Partners

After a five-year study of 15 strategic alliances between major multinationals, Gary Hamel, Yves Doz, and C. K. Prahalad concluded that a major determinant of how much a company gains from an alliance is its ability to learn from its alliance partner.³⁰ They focused on a number of alliances between Japanese companies and Western (European or American) partners. In every case in which a Japanese company emerged from an alliance stronger than its Western partner, the Japanese company had made a greater effort to learn. Few Western companies studied seemed to want to learn from their Japanese partners. They tended to regard the alliance purely as a cost-sharing or risk-sharing device, rather than as an opportunity to learn how a potential competitor does business.

For example, consider the 10-year alliance between General Motors and Toyota constituted in 1985 to build the Chevrolet Nova. This alliance was structured as a formal joint venture, called New United Motor Manufacturing, Inc., and each party had a 50 percent equity stake. The venture owned an auto plant in Fremont, California. According to one Japanese manager, Toyota quickly achieved most of its objectives from the alliance: "We learned about US supply and transportation. And we got the confidence to manage US workers."³¹ All that knowledge was then transferred to Georgetown, Kentucky, where Toyota opened its own plant in 1988. On the other hand, possibly all GM got was a new product, the Chevrolet Nova. Some GM managers complained that the knowledge they gained through the alliance with Toyota has never been put to good use inside GM. They believe they should have been kept together as a team to educate GM's engineers and workers about the Japanese system. Instead, they were dispersed to various GM subsidiaries.

To maximize the learning benefits of an alliance, a firm must try to learn from its partner and then apply the knowledge within its own organization. It has been suggested that all operating employees should be well briefed on the partner's strengths and weaknesses and should understand how acquiring particular skills will bolster their firm's competitive position. Hamel, Doz, and Prahalad note that this is already standard practice among Japanese companies. For example, they made this observation:

We accompanied a Japanese development engineer on a tour through a partner's factory. This engineer dutifully took notes on plant layout, the number of production stages, the rate at which the line was running, and the number of employees. He recorded all this despite the fact that he had no manufacturing responsibility in his own company, and that the alliance did not encompass joint manufacturing. Such dedication greatly enhances learning.³²

For such learning to be of value, it must be diffused throughout the organization (as was seemingly not the case at GM after the GM - Toyota joint venture). To achieve this, the managers involved in the alliance should be used to educate their colleagues in the firm about the skills of the alliance partner.

Chapter Summary

This chapter addressed two related topics: the optimal choice of entry mode to serve a foreign market and strategic alliances. The two topics are related in that several entry modes (e.g., licensing and joint ventures) are strategic alliances. Most strategic alliances, however, involve more than just issues of market access. This chapter made the following points:

1. Basic entry decisions include identifying which markets to enter, when to enter those markets, and on what scale.

2. The most attractive foreign markets tend to be found in politically stable developed and developing nations that have free market systems and where there is not a dramatic upsurge in either inflation rates or private-sector debt.

3. There are several advantages associated with entering a national market early, before other international businesses have established themselves. These advantages must be balanced against the pioneering costs that early entrants often have to bear including the greater risk of business failure.

4. Large-scale entry into a national market constitutes a major strategic commitment that is likely to change the nature of competition in that market and limit the entrant's future strategic flexibility. The firm needs to think through the implications of such commitments before embarking on a large-scale entry. Although making major strategic commitments can yield many benefits, there are also risks associated with such a strategy.

5. There are six modes of entering a foreign market: exporting, turnkey projects, licensing, franchising, establishing joint ventures, and setting up a wholly owned subsidiary.

6. Exporting has the advantages of facilitating the realization of experience curve economies and of avoiding the costs of setting up manufacturing operations in another country. Disadvantages include high transport costs and trade barriers and problems with local marketing agents. The latter can be overcome if the firm sets up a wholly owned marketing subsidiary in the host country.

7. Turnkey projects allow firms to export their process know-how to countries where FDI might be prohibited, thereby enabling the firm to earn a greater return from this asset. The disadvantage is that the firm may inadvertently create efficient global competitors in the process.

8. The main advantage of licensing is that the licensee bears the costs and risks of opening a foreign market. Disadvantages include the risk of losing technological know-how to the licensee and a lack of tight control over licensees.

9. The main advantage of franchising is that the franchisee bears the costs and risks of opening a foreign market. Disadvantages center on problems of quality control of distant franchisees.

10. Joint ventures have the advantages of sharing the costs and risks of opening a foreign market and of gaining local knowledge and political influence. Disadvantages include the risk of losing control over technology and a lack of tight control.

11. The advantages of wholly owned subsidiaries include tight control over technological know-how. The main disadvantage is that the firm must bear all the costs and risks of opening a foreign market.

12. The optimal choice of entry mode depends on the strategy of the firm.

13. When technological know-how constitutes a firm's core competence, wholly owned subsidiaries are preferred, since they best control technology.

14. When management know-how constitutes a firm's core competence, foreign franchises controlled by joint ventures seem to be optimal. This gives the firm the cost and risk benefits associated with franchising, while enabling it to monitor and control franchisee quality effectively.

15. When the firm is pursuing a global or transnational strategy, the need for tight control over operations in order to realize location and experience curve economies suggests wholly owned subsidiaries are the best entry mode.

16. Strategic alliances are cooperative agreements between actual or potential competitors.

17. The advantage of alliances are that they facilitate entry into foreign markets, enable partners to share the fixed costs and risks associated with new products and processes, facilitate the transfer of complementary skills between companies, and can help firms establish technical standards.

18. The disadvantage of a strategic alliance is that the firm risks giving away technological know-how and market access to its alliance partner in return for very little.

19. The disadvantages associated with alliances can be reduced if the firm selects partners carefully, paying close attention to the issue of reputation and structure of the alliance so as to avoid unintended transfers of know-how.

20. Two of the keys to making alliances work seem to be building trust and informal communications networks between partners and taking proactive steps to learn from alliance partners.

Critical Discussion Questions

 

1. Review Merrill Lynch's 1997 reentry into the Japanese private client market (see the opening case for details). Pay close attention to the timing and scale of entry and the nature of the strategic commitments Merrill Lynch is making in Japan. What are the potential benefits associated with this strategy? What are the costs and risks? Do you think the trade-off between benefits and risks and costs makes sense? Why?

2. Licensing proprietary technology to foreign competitors is the best way to give up a firm's competitive advantage. Discuss.

3. What kinds of companies stand to gain the most from entering into strategic alliances with potential competitors? Why?

4. Discuss how the need for control over foreign operations varies with firms' strategies and core competencies. What are the implications for the choice of entry mode?

5. A small Canadian firm that has developed some valuable new medical products using its unique biotechnology know-how is trying to decide how best to serve the European Community market. Its choices are:

   • Manufacture the product at home and let foreign sales agents handle marketing.

   • Manufacture the products at home and set up a wholly owned subsidiary in Europe to handle marketing.

   • Enter into a strategic alliance with a large European pharmaceutical firm. The product would be manufactured in Europe by the 50/50 joint venture and marketed by the European firm.

The cost of investment in manufacturing facilities will be a major one for the Canadian firm, but it is not outside its reach. If these are the firm's only options, which one would you advise it to choose? Why?

Closing Case Anatomy of a Failed Alliance-General Motors and Daewoo

In June 1984, General Motors and the Daewoo Group of Korea signed an agreement that called for each to invest $100 million in a South Korean-based 50/50 joint venture, Daewoo Motor Company, that would manufacture a subcompact car, the Pontiac LeMans, based on GM's popular German-designed Opel Kadett (Opel is a wholly owned German subsidiary of GM). Much of the day-to-day management of the alliance was to be placed in the hands of Daewoo executives, with managerial and technical advice being provided by a limited number of GM executives. At the time, many hailed the alliance as

a smart move for both companies. GM doubted that a small car could be built profitably in the United States because of high labor costs, and it saw enormous advantages in this marriage of German technology and South Korean cheap labor. At the time, Roger Smith, GM's chairman, told Korean reporters that GM's North American operation would probably end up importing 80,000 to 100,000 cars a year from Daewoo Motors. As for the Daewoo Group, it was getting access to the superior engineering skills of GM and an entrée into the world's largest car market--the United States.

Eight years of financial losses later the joint venture collapsed in a blizzard of mutual recriminations between Daewoo and General Motors. From the perspective of GM, things started to go seriously wrong in 1987, just as the first LeMans was rolling off Daewoo's production line. South Korea had lurched toward democracy, and workers throughout the country demanded better wages. Daewoo Motor was hit by a series of bitter strikes that repeatedly halted LeMans production. To calm the labor troubles, Daewoo Motor more than doubled workers' wages. Suddenly it was cheaper to build Opels in Germany than in South Korea. (German wages were still higher, but German productivity was also much higher, which translated into lower labor costs.)

Equally problematic was the poor quality of the cars rolling off the Daewoo production line. Electrical systems often crashed on the LeMans and the braking system had a tendency to fail after just a few thousand miles. The LeMans soon gained a reputation for poor quality, and US sales plummeted to 37,000 vehicles in 1991, down 86 percent from their 1988 high point. Hurt by the LeMans's reputation as a lemon, Daewoo's share of the rapidly growing Korean car market also slumped from a high of 21.4 percent in 1987 to 12.3 percent in 1991.

However, if General Motors was disappointed in Daewoo, that was nothing compared to Daewoo's frustration with GM. Daewoo Group Chairman Kim Woo-Choong complained publicly that GM executives were arrogant and treated him shabbily. Mr. Kim was angry that GM tried to prohibit him from expanding the market for Daewoo's cars. In late 1988, Mr. Kim negotiated a deal to sell 7,000 of Daewoo Motor's cars in Eastern Europe. GM executives immediately tried to kill the deal, telling Mr. Kim that Europe was the territory of GM's German subsidiary, Opel. Daewoo ultimately agreed to limit the sale to 3,000 cars and never sell again in Eastern Europe. To make matters worse, when Daewoo developed a new sedan car and asked GM to sell it in the US, GM said no. By this point, Mr. Kim was very

frustrated at having his expansion plans in Eastern Europe and the United States held back by GM. Daewoo management also believed that the poor sales of the LeMans in the United States were not due to quality problems but to GM's poor marketing efforts.

Things came to a head in 1991 when Daewoo asked GM to agree to expand the manufacturing facilities of the joint venture. The plan called for each partner to put in another $100 million and for Daewoo Motor to double its output. GM management refused on the grounds that increasing output would not help Daewoo Motor unless the venture could first improve its product quality. The matter festered until late 1991 when GM management delivered a blunt proposal to Daewoo--either GM would buy out Daewoo's stake, or Daewoo would buy out GM's stake in the joint venture. Much to GM's surprise, Daewoo agreed to buy out GM's stake. The divorce was completed in November 1992 with an agreement by Daewoo to pay GM $170 million over three years for its 50 percent stake in Daewoo Motor Company.

http://www.gm.com

Source: D. Darlin, "Daewoo Will Pay GM $170 Million for Venture Stake," The Wall Street Journal, November 11, 1992, p. A6; and D. Darlin and J. B. White, "Failed Marriage," The Wall Street Journal,January 16, 1992, p. A1.