Inter-Firm Relationships

Inter-Firm Relationships
 Inter-firm relationships are paths to

value enhancement along with internal
growth, M&As, etc.
 Analysis of relationships should be done
within the context of firm’s overall
strategic planning
 Alliances and other arrangements
between firms have become more
important since 1985 legislation eased
antitrust barriers
Chapter 14-1
Joint Ventures
 JV characteristics
• Combination of assets from 2 or more parent
firms place into a separate business entity
• Limited scope and duration
• May not affect competitive relationships
• Examples: R&D, joint production of single
product
 JV timing similar to M&As (correlation over
0.95) – driven by same factors affecting total
investment activity
Chapter 14-2
Joint Ventures
 JVs and restructuring – JVs can be used as
transitional mechanism in broad restructuring
(Nanda & Williamson, 1995)
• Buyer can better determine value of seller's brands,
personnel, etc.
• Risk of making mistakes is reduced through direct
involvement with business
• Customers moved to buyer over a period of time in
which both firms are involved in JV
• Buyer builds up expertise in JV
• Seller is able to realize higher value from sale
following JV due to increased buyer knowledge of
assets
Chapter 14-3
Joint Ventures
 Other benefits
• Knowledge acquisition is goal of at least 50%
of JVs – best for “learning by doing” with
complex processes
• Risk reduction – expansion of activities with
smaller required investment
• Tax aspects – contribution of patent or
technology may be more tax effective than
licensing (depreciation may offset revenues)
• International aspects – reduces risk of foreign
expansion (some nations require firms to take a
local partner)
Chapter 14-4
Joint Ventures
 Reasons for failure (70% disbanded early)
• Technology never developed
• Inadequate preplanning
• Disagreement over basic objectives
• Managers refuse to share expertise with
counterparts from other firm
 Requirements for success
• Participants have something of value to JV
• JV should be carefully preplanned
• Agreement should provide flexibility
• Should include provisions for termination
• Key executives involved in implementation
Chapter 14-5
Joint Ventures
 Empirical tests
• Business and economic patterns (Berg et al, 1982)
– Industry JV participation increases with: firm
size, capex, profitability
– Technologically oriented JVs: substitute for
long-term R&D more often than short-term
– JVs and R&D are complements at industry
level
• Event returns (McConnell & Nantell, 1985)
– Value of gains evenly divided between firms
– No change of mgmt. – gains must be from
synergy
Chapter 14-6
Strategic Alliances
 SA characteristics
• Informal or formal agreement between two or
more firms to cooperate in some way
• Created due to industry uncertainty and
ambiguity – value chains, new technology, etc.
• Need not create new entity
• Relative size of firms may be highly unequal
• Difficult to anticipate consequences –
relationships evolve, firm boundaries blur
• Firms pool resources and expertise hoping for
synergy from learning capabilities, etc.
• Allow firms much flexibility
Chapter 14-7
Strategic Alliances
 Requirements for success
• Well defined strategic themes
• Organization relationships should facilitate
communication to share decision making
• SAs viewed in real options framework – allows
portfolio of potential growth opportunities
• High level management should be involved
• Must be positive incentive to overcome tension
• SA governance must adapt to different types of
alliances
• SAs must seek out growth opportunities to
augment core capabilities
Chapter 14-8
Relative Roles
 Acquisitions
• Rapid augmentation of firm capabilities
• Consequences are long lasting
• Often costly due to takeover premium
• Challenges of combining organizations
 Joint ventures
• Reduce relative size of investments and risks
• Create new entities and relationships
• Can develop learning and new opportunities
 Strategic alliances
• Broaden range of potential opportunities
• Relationships are more ambiguous – greater need for
communication
Chapter 14-9
Minority Equity Investments
 Actively employed by successful high technology
firms with substantial cash balances
 Rationale for investor
• Investments in promising startups can yield high
returns and substantial long term benefits
• Information source about growth opportunities
• Method for learning about industries and firms
• Identification of new managerial talent
• May expand markets for investor’s products
 Rational for recipient
• May gain knowledge from investing firm
• Increases financing resources
• May bring visibility
Chapter 14-10
Technological and
Marketing Agreements
 Exclusive agreements
• Enable firms to combine complementary
strengths more quickly and at lower costs
• May develop into other forms of
interdependence between firms
 Licensing agreements – licensee may use the
knowledge or processes of licensor for a fee
• Method of expanding market for firm’s product,
or gaining acceptance for new product
• Licensee may gain by adding successful product
• High immediate returns for licensor in market,
but may create future competitor
Chapter 14-11
Franchising
 Contracts between franchisor (parent) and
franchisee that grant rights to use name, brand, etc.
within specific area
 Widely used in geographically dispersed industries
(Mail Boxes Etc., McDonald’s)
 Reduces monitoring costs – franchisees returns are
tied to performance
 Potential conflicts
• Franchisor has risk of franchisee not conforming to
standards
• Franchisee may prefer to use different vendors
• Disagreements with respect to size of franchisee’s
exclusive area exclusive
Chapter 14-12

Inter-Firm Relationships

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Inter-Firm Relationships

 Inter-firm relationships are paths to

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