Selecting Strategic Alliance Partners: Fit and Purpose The Development of an Alliance Partner Selection Instrument

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Selecting Strategic Alliance Partners: Fit and Purpose

The Development of an Alliance Partner Selection Instrument

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Master Thesis

Master of Science in Technology Management

Selecting Strategic Alliance Partners: Fit and Purpose The development of an alliance partner selection instrument

Name : F.J. de Boer

Student no. : s1526049

Address : Van Starkenborghstraat 19 Telephone : +31 6 3191 7121

Email: : jdebee@gmail.com

Rijksuniversiteit Groningen Faculty of Economics and Business MSc Technology Management

Supervision

First supervisor : Drs. Ing. F.P. Bakker Second supervisor : dr. J.A.C. Bokhorst

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Selecting Strategic Alliance Partners: Fit and Purpose ₃

EXECUTIVE SUMMARY

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Selecting Strategic Alliance Partners: Fit and Purpose ₄

PREFACE

This thesis represents the final step of the Master study Technology Management at the Rijksuniversiteit Groningen, faculty Economics and Business.

The research was performed to gain insights into the criteria to select potential strategic alliance partners for contractual agreements, Joint Ventures and / or acquisitions in the region North America for Company A. The alliance partner selection process shows company specific heuristics, followed by task- and partner related criteria in order to rank different potential alliance partners. The final instrument has been used in a practical case for Company A. After use reflection on the outcomes took place. The second part describes how Company A currently practices the selection of strategic partners. In the analysis both processes will be compared and recommendations will be given for improvement of the current selection processes. For getting insights into the processes and procedures of the partnering practices at Company A a confidentiality agreement had to be signed. All confidential information has been deleted before publication of the thesis at the RUG.

I would like to thank several people for their support during the process of conducting this thesis. Firstly, I would like to thank my supervisors Drs. F.P. Bakker and dr. J.A.C. Bokhorst, for their support. Their expertise contributed largely to the quality of the thesis. Secondly, I would like to thank the MD of Company A for giving me the opportunity for doing my graduation research at Company A. Last but not least, I would like to thank my girlfriend Femke, parents Kor and Janneke, and all of my friends for their support in good and bad times in the process of graduating. Without their support it would have been hardly possible to complete this study Technology Management.

Thank you all!

Yours sincerely,

Joost de Boer

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Selecting Strategic Alliance Partners: Fit and Purpose ₅

1 INTRODUCTION

This section gives an introduction into the background of this study and the global Company A organization. It continues to zoom in to the level of this thesis at Company A.

1.1 Company A worldwide

The company A, established in 1927, is a global provider of high-level services to customers throughout the energy value chain, including business & technical consultancy, operational support, measurements & inspection, and testing & certification.

Company A provides impartial advice and support to the producers, suppliers and end- users of electricity, gas and heat, as well as to government bodies and manufacturers of energy-related equipment. Company A employs approximately 1,600 people and has offices and representatives in more than 20 countries around the globe. Company A Business Units’ operations are organized under the umbrella of several legal entities in various countries.

Confidential

At the time of writing, the Company A group is divided into six different business units (BU) that are supported by company-wide departments such as IT, HRM, International Development, Finance, Innovation, Legal and Marketing & Communication. The different BU's at Company A are 1,2,3,4,5 and 6. As per November 1, 2009, Company A sold part of its testing and certification activities to Company B. These activities are clustered in Company A-a. With this divestiture, Company A is increasingly focusing itself on the further

Figure 1 Energy Value Chain

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Selecting Strategic Alliance Partners: Fit and Purpose ₈ development of its energy-related activities. Company A turnover in 2009 is stated at €256,2 Mln. Figure 3 and 4 gives an overview of the net sales development throughout the years and the net sales in 2009 by country of destination.

The organizational structure of Company A can be found in Appendix 1.

1.2 Business Unit a of Company A

The business unit "a" has been acquired by Company A since the first of July 2009. Before this time "a" was a department of Company C called "x". Currently "a" has four functional departments. The department A is specialized on the advice of clients in political, regulatory, market and strategic questions, specific for the gas sector. Typical A services range from market analysis over strategy and business advice to also assistance in developing or evaluating market rules and regulations in the gas sector. More specific, A carries out in-depth studies in different gas market topics, including quantitative and qualitative market analyses, country comparisons and advice on investments for network expansion. The department B supports gas transport companies in transporting gas in a safe, efficient and reliable manner. The department provides support in the form of consultancy, research projects, inspections or technical services throughout the complete life cycle of pipelines and installations. The department C is largely focused on (natural) gas and gas infrastructural sustainability issues like the introduction of new gasses, CO2 transport, Smart Grids, Gas applications and footprint reductions. Finally, the department D focuses on gas quality issues that include pollutant measurements, calculations on calorific value of the gas and gas interchangeability of gases from different sources. Gas flow issues include consultancy for quantity measurements, the dynamic behavior of gas flows and calibration & testing of gas flow meters. A high level of all the service offerings are shown below.

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Selecting Strategic Alliance Partners: Fit and Purpose ₉

Figure 4 High Level Product Portfolio of Compamy A-a

1.3 Company A's Expansion Strategy Confidential 1.4 Initial motive Confidential 1.5 Problem analysis Confidential 1.6 Contextual factors Confidential

1.7 The problem owner

At Company A, managing directors (MD's) are responsible for the performance of their business units and as a collective for the performance of the whole company. Concerning this study the MD of Business unit "a" is defined as the problem owner.

1.8 Content of this thesis

The structure of this thesis is as follows. As elaborated above, chapter one has been written to introduce Company A, to elaborate on the initial motive and the analysis of the problem at hand. Chapter 2 provides a research framework that outlines the preferred approach to the idea or thought. In furthermore gives the research objective, the main research question and

Energy Management Asset Management Strategy Gas Business Development Unconventional Gas Production

New Gas Markets New Gas Infrastructure Energy Policy Development Regulatory Support

Design & Engineering Gas Infrastructure Condition Monitoring & Corrosion Control Safety & Reliability Materials & Installations Pipeline Integrity Management Flow Consultancy Noise, Vibrations and Pulsations

Carbon Capture & Storage (CCS) New Gases (Green gases (biogas and bio-SNG and Coal-bio-SNG and hydrogen)

Energy efficiency Footprint Reduction Gas applications (Smart Grids)

Gas Analysis/ Analytical Laboratory

Physical Properties Gas Gas Specifications New measurement Combustion Heat Transfer Odorant

Gas/ Liquid Separation Emissions

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Selecting Strategic Alliance Partners: Fit and Purpose ₁₁

2 RESEARCH FRAMEWORK

This section presents a research framework that outlines the preferred approach to the idea or thought. How should one look at the "partner selection activity" and what are the different approaches? Strategic alliances can be created between all kind of organizations and companies. The following framework shows an overview with different approaches to alliance partner selection whereas the orange circle shows the area of concern in this thesis. The arrows show from who's perspective the potential alliance activity is initiated. The framework will be elaborated below.

The framework distinguishes 6 different approaches in the selection of a partner. The arrows with the Capital "X" can be seen as a membership of a professional organization / committee and associations where no direct commercial transaction of products take place. These relationships are nonetheless very important for the visibility of a company in their industry, but are not the subject in this research. The arrow with the number 1 shows a supplier of goods that selects a service-partner to gain some sort of synergy in order to provide commercial competitive advantage on the market-place. The arrow with the number 2 shows a supplier of services that selects another supplier of services in order to provide commercial competitive advantage on the market-place. The arrowed line with the number 3 shows the perspective of a buying Enterprise on the market-place that selects a supplier of services in order to achieve some sort of business need or advantage. The arrowed line with the number 4 shows an identical process as line 3 but then a selection takes place for a supplier of goods. The grey colored arrows refer to potential cooperation between supplying companies or when a joint project (Consortium) is preferred by the buying Enterprise in the

Figure 5 Research Framework

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Selecting Strategic Alliance Partners: Fit and Purpose ₁₂ market-place. The arrowed line with the number 5 shows a supplier of goods that selects another supplier of goods to attain some sort of synergy in order to provide commercial competitive advantage on the market-place. Last but not least the arrowed line with the number 6 shows a service supplier that selects a supplier of goods in order to provide commercial competitive advantage on the market.

2.1 Research objective

The objective of this thesis is described as:

After a desk study, interviews and a literature review it came to the forth that the instrument should be able to rank potential strategic alliance candidates on the basis of objective criteria and managerial priorities. The objective criteria in this research are those criteria used or concluded in former research trajectories described in academic journals, the literature review. The managerial priorities refer to the fact that managers may give different weight to the different criteria. The instrument should be able to give different weights to criteria.

2.2 Research question

The main research question to deliver the goal of this study is described as;

To answer the research question, several sub questions have to be answered while ensuring all components and their relationships as shown in figure 8 on page 16.

2.3 Research sub-questions

The main research question contains several issues, like strategic alliance, partner selection in general, structure for partner selection, partner selection instrument, partner selection in daily practice at Company A. These different issues should be clarified to be able to achieve the objective of this study. Therefore six sub-questions are formulated for a better understanding of the different aspects of strategic alliances and partner selection. Underneath the sub-questions and why these questions are useful for achieving the objective of this study.

1. How do companies form strategic alliances given the research framework? In order to search for partner selection criteria this sub-question asks what kind of alliance-types exist. In a way it was the search for a taxonomy of alliance types in To develop a strategic alliance partner selection instrument that will support Company A in deciding for North American alliances and to give recommendations for improvement of Company A's alliance partner selection process

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Selecting Strategic Alliance Partners: Fit and Purpose ₁₃ order to have a scope for the search of literature. The focus was not in terms of performance, but to the final formal alliance structures.

2. Within the research constraints, what are motives for strategic alliances?

This question tries to find answers on motivations of companies behind strategic alliances in order to understand the criteria for partner selection . Such an analysis gives insights into the motivational context. From the beginning, the initiation, there are "tasks / purposes" that are written towards alliance activities. Not all of them are measurable and used in the prescriptive model, but it gives insights to the motivating criteria upon which these business activities are based. Following literature on alliance formation processes adapted from interviews, literature and scientific articles, the main motivations have been elaborated.

3. Within the research constraints, what are partner selection criteria for strategic alliances?

Being aware of the potential motivation of a company, the purpose of this sub-question is to find selection criteria that can be used for the selection instrument. It is the search for objective criteria used by other companies and reported in scientific articles. By comparing the different contexts (around the different alliance types) in which the selection process took place similarities and differences can be shown and analyzed to a final set of criteria used in the instrument.

4. Which methods or techniques are used by companies to select strategic alliance partners?

This question tries to find a technique/method for the specific situation of Company A and that can be used for the instrument. In order to avoid doing things twice or reinventing the wheel, a search for methods and techniques already in use regarding the subject partner selection is performed. An analysis of the different techniques was performed for the decision which one to use in this instrument.

5. What are existing alliance creating processes?

The purpose of this sub-question is to get insights into the existing theories and processes in order to analyze these with the way Company A creates alliances. Potential differences may show improvement opportunities for future alliance selection practices.

6. How does Company A select partners for strategic alliances?

The purpose of this question is to give us insights into the current method of Company A in partner selection for strategic alliances. This information can be mirrored to the analysis and conclusions of previous sub-questions in order to show potential discrepancies and provide recommendations for improvement. History shows the extensive experience of Company A in the formation of alliances. The processes and procedures developed during time have been studied and several interviews have been taken place to really understand the processes, procedures and outcomes.

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Selecting Strategic Alliance Partners: Fit and Purpose ₁₄

3 RESEARCH DESIGN

The purpose of this research design is to determine a selection instrument which creates accurate and unbiased data for drawing valid conclusions. It elaborates on the scientific systematic method used for gaining the knowledge for developing the alliance partner selection instrument and for the improvement of the acquisition process at Company A. This research is based on a policy supporting research methodology as defined by de Leeuw 2003 in his book, Management Methodology – Management of research. Policy supporting research supports decision making by the creation of useful knowledge. This usefulness includes relevance and virtue which refers to, if the produced-knowledge really fits into the context of the research question, and that the produced-knowledge is scientifically created and can therefore be trusted (De Leeuw, 2002). The dynamics of policy and policy research makes a linear guideline a fiction and needs to be strongly put into perspective. It nevertheless does help to structure the study and is applied with an iterative component (De Leeuw, 2003 p.217).

The following steps have been made:

Step 1: Problem statement – preliminary survey

Step 2: Development of a research framework research question and sub-questions Step 3: Translation of the detailed sub-questions into methodological questions Step 4: Data collection

Step 5: Analysis Step 6: Writing thesis

3.1 Methodology

Thinking about a methodology forces the researcher to look critical to the approach and results of the research performed. The methodology is very close to our common sense and raises questions like; how did you collect the data, how did you analyzed the information and how did you draw the conclusions? It helps to gain insights into how to investigate the problem under consideration. It includes a: “philosophically coherent collection of theories, concepts or ideas as they relate to a particular discipline or field of inquiry”.

Because of the complexity of the problem area (strategical issues are in principle insoluble1), a fundamental and challenging aspect is to find a structured and theoretically supported problem approach and methodology. Managing, evaluating and motivating research will only be possible after rigidly delimiting the subject and the introduction of both research questions and goals / objectives. A framework including these concepts is based on methodologies developed by De Leeuw (2003). All components in this method relate to each other forcing decisions about its elements to be made with respect to impact on the others. The project goals and phases in this section are developed through filling in the boxes in De Leeuw’s

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Selecting Strategic Alliance Partners: Fit and Purpose ₁₅ model based on the defined problem approach assure the delivery of a structured research framework.

Problem statement: "What is to be produced, and for who?"

o A strategic alliance partner selection instrument for Company A

o Recommendations for improvement of partner selection practices at Company A

Concepts to be used: "What theories are to be applied?"

Sub-question 1 - How do companies form strategic alliances given the research framework?

Literature, scientific articles and internal documents were the main sources to gain this knowledge. In a way it was the search for a taxonomy of alliance types. Concepts used:

•_{market entry mode concepts} •_{Governance structures.}

Sub-question 2 - Within the research constraints, what are motives for strategic alliances?

The main motivations have been elaborated from literature on alliance formation processes adapted from interviews, literature and scientific articles.

Sub-question 3 - Within the research constraints, what are partner selection criteria for strategic alliances?

Literature study to methods and techniques in use regarding the subject partner selection criteria. An analysis of the different techniques was performed for the decision which one to use in this instrument.

Sub-question 4 - Which methods or techniques are used by companies to select strategic alliance partners?

An analysis of the different techniques was performed for the decision which one to use in this instrument. The techniques that were analyzed include Goal Programming Techniques (GPT), Fuzzy Multy-objective Dummy Programming (FMDP) and Analytical Hierarchy Process (AHP).

Sub-question 5 - What are existing alliance creating processes?

An analysis of the existing theories and processes in order to analyze these in compare with the way Company A creates alliances. Potential differences may show

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Selecting Strategic Alliance Partners: Fit and Purpose ₁₆ improvement opportunities for future alliance selection practices. Information was gathered at academic journals and study books.

Sub-question 6 - How does Company A select partners for strategic alliances? The processes and procedures developed during time have been studied and several interviews have been taken place to really understand the processes, procedures and outcomes.

Observation methods: "How will data be extracted from sources?"

o Every research requires gathering information in academic journals and other literature which shows awareness of the current state of knowledge on the subject. All senses are used; See, hear, taste, smell, touch, pain etc.2

o The ‘snowball’ method is used for documents, books and articles. This entails using relevant literature and tracing of references.

o Reading and analyzing relevant scientific articles from electronic journals o Reading and analyzing relevant internal documents of Company A o Open interviews with decision makers and other stakeholders Data sources: "From which sources will data be adapted?"

o Electronic Journals o Internet

o Intranet Company A

o Key persons and other employees at the Dutch and US Company A organization

Methods for analysis: "How will data be analyzed and be further turned into knowledge?"

o Reveal similarities and differences in partner selection practices between Company A and other relevant companies described in scientific articles o Translating motivations or drivers of strategic alliances into selection criteria o Searching for a reliable technique or method to combine objective selection

criteria and managerial priorities

3.2 Boundary conditions

This section elaborates on the constraints liable to the research results and methods. It concerns limitations regarding the research itself and the final knowledge product.

Every attempt was made to identify and review as many published articles as possible to make the review about partner selection as complete as possible, yet resource (time) restrictions influenced the ability to identify and evaluate every article. My apologies to those authors who are not used but who have made important contributions in this field of knowledge. Because of the confidentiality it was less easy to find information and discuss results. The graduation time available for this type of theoretical research is determined normally at three months by the program commission at Technology Management.

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Selecting Strategic Alliance Partners: Fit and Purpose ₁₈

4 THEORETICAL ANALYSIS

A company’s selection of an appropriate alliance partner is a critical decision (Hitt, Tyler, Hardee, & Park, 1995). Partner selection determines a strategic alliance’s mix of skills, knowledge, and resources, its operating policies and procedures, and its vulnerability to indigenous conditions, structures, and institutional changes (Child & Faulkner, 1998). Selection of the right alliance partner should lead to planned/superior performance whereas selecting a non-suitable partner may lead to great problems in management and decision-making and may even lead to leakage of tacit knowledge and/or to other problems. According to Dyer & Singh (1998) alliances may ‘‘shift the very basis of competition to a new level – from company vs. company to (...) rival groupings of collaborators”, which means that the performance of a company is intimately tied to the performance of its collaborative engagements (Dyer & Nobeoka, 2000).

4.1 Strategic Alliances - Types

This paragraph elaborates on the first sub-question; "how do companies form strategic alliances within the given research framework?" It will start with elaborating the different ways companies form alliances in order to gain capabilities and resources. Companies need certain capabilities and resources in order to compete in the market-place and these capabilities and resources can be developed internally or gained via a cooperative relationship with another company (Bierly III et. al. 2007). These cooperative relationships here are called alliances. This thesis focuses on gaining capabilities and resources through the formation of strategic alliances. The internal development of capabilities and resources are not in the scope of this study.

4.1.1 Gaining capabilities and resources through strategic alliances

Companies can decide to gain capabilities and resources by close collaboration or even acquisition of another company. There are several types of alliances that are distinguished by varying contractual mechanisms that dictate their governance structure (i.e., control and coordination features). The various types may be categorized as equity agreements (e.g., Joint Venture, minority equity positions, and equity swaps) and non-equity agreements (e.g., joint R&D, long-term sourcing agreements, reciprocal distribution, and less than arm’s length franchising and licensing relationships). Existing typologies of strategic alliances do not typically include mergers and acquisitions (acquired wholly-owned subsidiaries), but can be seen as the extreme end of alliances. Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

4.1.2 Market entry modes and governance

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Selecting Strategic Alliance Partners: Fit and Purpose ₁₉ mode research is important because setting the correct boundaries of the company has significant performance implications (K. D. Brouthers, 2002). In literature there is no consensus to the precise relationship of the main modes of market entry, namely contracts, Joint Ventures (JV), and Wholly Owned Subsidiaries (WOS), on the one hand, and the entry through the establishment of greenfield ventures versus acquisitions on the other, which are both WOS. The following figure shows the alliance structures that are used in the search for literature on partner selection derived from the hierarchical model of market entry modes (Pan & Tse, 2000);

Non-equity modes are defined as modes that do not entail equity investment, and are essentially contractual modes, licensing, franchising, such as leasing and management service contracts (Dunning, 1988).

Equity modes are defined as modes that entail equity investment by the companies under consideration. Equity Joint ventures can involve partners creating a new entity in which they share equity and most closely replicate the hierarchical control features of organizations (Gulati and Singh, 1998). When at least one of the two (or more) legally distinct organizations (the parents) is headquartered outside the country where the new company is located it is typoligized as an International Joint Venture (IJV). Parent organizations hold ownership interests and actively participate in the decision making activities of the jointly owned business entity (Geringer, 1991).

It is important to understand that foreign entry is a multilevel phenomenon (Brouthers and Hennart, 2007). It involves a company based in a given country setting up an operation in an industry of a particular host country. Hence, the form taken by a given foreign market entry (contract vs. equity and, if equity, full or partial control) hinges on the characteristics of the

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₀ parent company, on the characteristics of the operation (e.g., its size), on the relationship between the two (the nature of the transaction), on the situation in the industry entered (e.g., the degree of competition and the existence of present or future excess capacity), and on the characteristics of both the country where the Multi National Enterprise (MNE) is based (its home country) and the country that it is entering (the host country).

Brouthers and Hennart, 2007 further elaborate on two main views in the literature of entry mode choice. The first view arranges contracts, JV's, and WOS's along a continuum of increasing control, commitment, and risk, with WOS chosen when companies want maximum control and are willing to make maximum commitment and take maximum risk. A second view classifies modes of entry into two categories, contracts and equity, with JV's and WOS's in the equity category. The fundamental characteristic of equity, whether shared in a JV or full in a WOS, is that input suppliers are paid ex post from the profits of the venture, in contrast to contracts, where payments are specified ex ante.

Equity alliances tend to provide partners with more administrative control than non-equity alliances by virtue of the establishment of an administrative hierarchy that allows partners to exercise a residual right of control. Equity ownership is equated to greater control under the assumption that more equity ownership gives a partner more voting power. As well, equity participation generates a governance structure in which the sponsoring companies can monitor the activities of the alliance as they are represented on the board of directors. Shared equity ownership might also be expected to align the incentives of alliance parties, thereby creating mutual interests that reduce the need for control. Non-equity alliances, on the contrary, are contractual agreements that lack shared ownership or dedicated administrative structures, and they are, therefore, seen as more akin to arm’s-length transactions (Globerman & Nielsen, 2006).

4.1.3 Analysis and Conclusions

This section answers the first sub-question about how companies form strategic alliances within the given research framework. Companies can gain capabilities and resources to compete on the market place by developing these themselves or by creating alliances with other companies. The main categories of alliance types are contractual agreements (e.g. licensing, R&D contracts etc.), Joint Ventures (e.g. Minority JV, 50% share JV and Majority JV) and wholly owned subsidiaries (e.g. Greenfield's, acquisitions). Research indicates that alliance structures, also called governance modes, once established, are difficult to change or correct, suggesting long-term consequences for the company. Therefore companies should think carefully and strategically in deciding which structure they will use and of course with who. Furthermore, companies sometimes have to adopt a market entry mode that is dictated by the host country government.

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₁ 4.2 Strategic Alliances – Motivations

This paragraph elaborates on the second sub-question about motivations for strategic alliance activities. Company leaders tend to be driven by social justification to give a plausible and meaningful account of their actions. Several stakeholders (e.g., shareholders, customers, governments, public interest groups etc.) judge organizational activities (such as alliances), and assess the appropriateness or legitimacy of these activities from their own perspective. Strategic and economic activity is embedded in a social and normative context and this context motivates company leaders to seek approval particularly from those stakeholders on whom they depend for physical, human, financial, or reputational capital (Dacin et al. 2007). Following this reasoning it is of great importance to argument the choice of a selected partner by looking at the criteria upon which these choices have been based.

4.2.1 Motivations for Strategic Alliances

A question that only some studies address is; "what are the motivations behind the formation of alliances?" Is it a search for a market, the search for resources, forces of globalization, multi domestic purposes or are there also other motivations behind these alliances? These issues may help explain the selection criteria in the process of selecting potential partners. A study performed by Al-Khalifa et al. (1999) argues that the motivating factors for establishing an alliance should be clearly differentiated from the motivating factors involved in partner selection; they are two separate decision processes.

Hajidimitriou and Georgiou (2002) argue that the ultimate driver / motivation for companies, which participate in alliances, is their aspiration to create value that neither company would have been able to create alone for itself (Synergy effects of combining companies). It sounds logically that company leaders search for possible combinations of companies in order to achieve synergy effects.

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₂ (e.g. Hagedoorn, 1993), and the acquisition of institutional legitimacy (e.g. Dacin et al., 2007).

Some other theorists argue a very delicate issue, that mergers and acquisitions are frequently driven by a CEO’s self-serving motives rather than by strategic or economic considerations. For example the expectation of an increased compensation for management because of the larger size of the company (Wright, et al., 2002; Grinstein & Hribar, 2004; Datta et al, 2001). The board of directors are also part of these practices in alliance processes (Deutsch, Y. et al. 2007).

One motivation that hasn't been mentioned explicitly is the general term growth. Dr. Tony Grundy, a Senior lecturer in Strategic Management at Cranfield Business School reasons that this search for growth is especially the search for shareholder value. It is therefore remarkable that research suggests that acquisitions tend to destroy rather than add to shareholder value, at least on the short term. Any company that is strong and / or has lots of potential will typically be very expensive. Furthermore a buyer is likely to have far more imperfect information than the seller. This seems to make it much easier to create shareholder value via divestment (except in a forced sale), rather than by acquisition (Grundy, 2009).

In Strategy (2005) several motives for acquisitions (the extreme end of alliances) are cited. It elaborates on the main strategic motives of companies that decide to acquire or merge with another company. The following tables show the different motives and gives a description.

Motives Description

Industry Restructuring Removing competitors in an over-saturated industry Increased Market

Power

The enlarged company may be able to achieve monopolistic or oligiopolistic power over its customers and better control its competitors.

Access to new markets This can be an effective way of entering new countries without the difficulties of establishing new distribution systems.

Economies of scale and scope

Cost advantages obtained due to expansion.

Acquisition of new skills Acquire skills and capabilities they don't have themselves.

Diversification This may allow the company to find opportunities for generating superior returns to those available within the sector

Tabel 1 Different motives for acquisitions, adapted from Strategy (2005)

All of these strategic motives are designed to achieve improved performance. In addition, there are also motives that might be classified as purely financial;

Buying a bargain A company that is perceived to be cheap. This would also include asset stripping. Tax advantages Where companies have a significant tax liability in one country and earnings elsewhere Financing

advantages

More attractive financing means easier access to finance and / or lower cost of capital; A company may acquire a business in another country to gain advantages from

different tax laws

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₃ So far, we have reviewed the "managerial" reasons for making acquisitions that would be found in any acquisition offer document. This is not the whole picture. Other motives can be;

Chief Executive Characteristics

Ego, the need for a challenge, addiction to doing deals, prestige and empire building etc.

Process issues The decision in a larger company may be the result of many disconnected impulses, rather than a single rational decision. A top management team is likely to rationalize the process post-hoc.

Environmental pressures

External pressures may force the company into action, rather than the company being proactive. A top management team is unlikely to admit to not being in charge.

Tabel 2 Summarized from Strategy (2005)

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₄ 4.3 Strategic Alliances - Partner Selection Criteria

This section continues our research to and elaborates on the third sub-question about which partner selection criteria that are used in practice. Many scholars tried to synthesize what kind of criteria can be used in strategic alliance partner selection, such as Geringer (1991) with 15 key questions for international joint ventures. Geringer suggested that despite the almost unlimited range of alternative criteria that might exist, it is possible to provide a simple two-fold typology of categories of selection criteria, thus dividing the selection criteria into task- and partner-related selection criteria. He describes that task related criteria are associated with the operational skills and resources which a company has for its competitive success. Partner related criteria are associated with the efficiency and effectiveness of partners' cooperation and organization.

A study of Brouthers et. al., (1995) has focused on four wide criteria categories of factors called ‘‘complementary skills”, ‘‘cooperative cultures”, ‘‘compatible goals” and ‘‘commensurate levels of risk”. The so-called Four C's of Strategic Alliances are further analyzed and the authors conclude that if the Four C's are seriously taken into consideration, that could result in a more efficient and effective alliance partner selection process. Their study even suggests that one should not enter into alliances unless there is a real resources shortage, be it skills, technology or finance.

The study of Dacin et al. (1997) elaborates on partner selection criteria employed by managers from U.S. and Korean companies. They used the following selection criteria;

Partner Characteristic Definitions and Examples

Financial Assets Resources that reflect liquidity/financial health (e.g., lines of credit, costs of capital, and debt/equity positions).

Complementarity of Capabilities

The degree to which a partner’s resources can be used in conjunction with those of your company. (For example, the distribution channels of a partner are

complementary if those channels can be used to market your company’s products.) Unique Competencies Abilities or skills possessed by a partner but not by other companies. (If a partner

produces a product that cannot be imitated by other companies, it possesses unique competencies.)

Industry Attractiveness The degree to which an industry presents a favorable environment in which to achieve a company’s goals. (An industry composed of a small number of

competitors and/or potentially large number of buyers may be viewed as attractive.) Cost of Alternatives The cost to your company of alternatives to the joint venture. (For example, an

alternative to a joint venture may be the development of a wholly owned subsidiary.) Market Knowledge / Access The expertise or ability of a partner to effectively operate in a market or industry

(e.g., understanding competitors and customers, experience with government regulations, knowledge of culture).

Intangible Assets Assets which are not reflected in financial statements (e.g., company reputation, brand name, human resources).

Managerial Capabilities The ability of managers to guide their company efficiently and effectively (e.g., the ability to build consensus among groups or an ability to recognize demographic changes in customers).

Capabilities to Provide Quality Product / Service

The ability of a partner to provide buyers with the quality of products they desire (e.g., low defect rates, strong manufacturing facilities).

Willingness to Share Expertise

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₅ Partner’s Ability to Acquire

Your Company’s Special Skills

The ability of a partner to learn/acquire skills which your company possesses (i.e., experience acquiring skills of partners in joint ventures).

Previous Alliance Experience The number of alliances in which a partner has engaged (e.g., prior participation in joint ventures resulting from formal agreements).

Special Skills That You Can Learn From Your Partner

The ability of your company to learn/acquire skills which a partner possesses (e.g., partner has technology or marketing know-how that your company does not possess but wishes to learn).

Technical Capabilities The ability of a partner to develop new process or product technologies (e.g., significant R&D operations; develops and commercializes new products).

Tabel 3 Summarized Partner Selection Criteria from Dacin et al. (1997)

Their study argues that companies that are potentially going to ally should know each others' selection criteria to have the highest change to be successful. This can favor the understanding of your partners and the criteria they seek in selecting partners for alliances. For example U.S. executives used by order of importance 1) Financial Assets; 2) Managerial Capabilities; 3) Capabilities to provide Quality Products / Services; 4) Complementary of Capabilities and 5) Unique Competencies as their most important selection criteria. The Korean counterparts found 1) Technical Capabilities, 2) Industry Attractiveness, 3) Special Skills You can Learn from Partner, 4) Willingness to Share Expertise and 5) Capabilities to provide Quality as their most important criteria.

A study of Yadong Luo (1998) illuminates various partner selection criteria to the survival and growth of foreign companies active in China. They conclude that it is essential to the ventures' success in China that the potential partner possess complementary skills and resources, and share compatible goals and a cooperative culture. Using reliable sources of information, foreign companies should examine the following attributes of a local partner candidate:

1. Strategic traits, including marketing competence, relationship building, market position, industrial experience, strategic orientation, and corporate image

2. Organizational traits, including organizational leadership, organizational rank, ownership type, learning ability, foreign experience, and human resource skills; and 3. Financial traits, including profitability, liquidity, leverage, and asset efficiency

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₆ a sample of 60 IJVs established by Finnish companies in various foreign countries during the 1990s. The results indicated that IJV location-specific and investment-specific variables had influenced the relative importance of the partner selection criteria used by the Finnish companies, while foreign partner-specific variables had a much more limited influence. The influence of contextual variables in general was seen to be stronger on task-related criteria. Bierly and Gallagher (2007) argue that Strategic fit is one of the most common and rational explanations for the way in which the strategic and resource needs of alliance partners are met. Following them strategic fit is a source of inducements to collaborate through alliances. These inducements may take two general forms. 1); an alliance may provide a company with access to resources that are not available within the company. Resources may take the form of capital, technology, capabilities or company-specific assets, and are frequently key or critical success factors in an industry. Alliances may also have strategic considerations, as they can help companies manage their resource dependence on other companies or maintain competitive positioning in their industry, and 2); companies may elect to form alliances to gain quick access to new geographic or product markets. Roy and Oliver (2009) used Geringer's (1991) typology of partner selection criteria. These criteria require that the choice of the ‘‘right’’ partner be based on a consideration of how the chosen partner will best fit with the focal company. For details see the following table;

Partner related

Partner Selection Criteria (PSC) Description if necessary

Partner related Trustworthiness

Partner related Transparency of the company and/or ethical values/ beliefs

Partner related Reputation local, industry, and/or international Partner related Company size

Partner related Market share or industry position

Partner related Financial capabilities Assets, ability to raise financing Partner related Goals, objectives, aspirations, or synergy potential

Partner related Commitment, seriousness, and/or enthusiasm for the partnership

Partner related Favorable past association with your company or mutual acquaintances

Partner related Successful partnering record with other companies

Task related Partner Selection Criteria (PSC) Description if necessary

Task related Facilities Location and quality of production, R&D, or office facilities

Task related Managerial and / or labor skills HR, leadership, technical, service Task related Raw materials / natural resources, products,

services, and/or technology

e.g., quality, cost, diversity

Task related Ability to satisfy host government requirements e.g., for investment, subsidy, credit, or tax avoidance

Task related Connections to government or non-government organizations

e.g., other companies, trade organizations, etc.

Task related Regulatory permits, licenses, or patents

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₇ One of the most recent studies found on the subject partner selection presents an overview about criteria and sub-criteria in selecting strategic alliance partners. The following framework has been extracted from the study of Wann Yih Wu et. al. (2009).

Criteria Sub criteria

Characteristics of the partner Unique competencies, Compatible management styles, Compatible strategic objectives, Higher or equal level of technical capabilities between manufacturers and distributors

Marketing knowledge capability Increase market share, better export opportunities, and knowledge of local business practices

Intangible assets Trademarks, patents, licenses, or other proprietary knowledge, reputation, previous alliance experiences, technically skilled employees among partners

Complimentary capabilities Partners owned managerial capabilities, wider market coverage, diverse customer, the quality of distribution system to those of the strategic partners

Degree of fitness The compatible organization cultures, willingness to share expertise, equivalent of control, willingness to be flexible of partners compatible with that of strategic partners

Tabel 5 Framework extracted from Wann Yih Wo et. al. (2009)

4.3.1 7s Model of McKinsey

To judge the potential partner on their organizational aspects we will now further elaborate how organizations are build up. In doing this, the 7-S model of McKinsey will be used because several selection criteria have strong overlap with the elements of an organization as shown in the 7-S model. The McKinsey 7S model was named after a consulting company, McKinsey and Company, which has conducted applied research in business and industry (Pascale & Athos, 1981).The model shows seven variables (levers) that are all connected to each other. The following section will elaborate on the different "levers" within the 7 s model of McKinsey;

Structure is defined as a skeleton of an organization or the organizational chart. Organizations are structured in a variety of ways, dependent on their objectives and culture. The structure of a company often dictates the way it operates and performs (Waterman et al.,

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₈ 1980). Strategy is described as the plan or course of action in allocating resources to achieve identified goals over time. Strategy is differentiated by tactics or operational actions by its nature of being premeditated, well thought through and often practically rehearsed. Strategy is designed to transform the company from the present position to the new position described by objectives, subject to constraints of the capabilities or the potential (Ansoff, 1965). Systems are the routine processes and procedures followed within the organization. It supports and implements the strategy and runs day-to-day affairs. Staff/Skills are described in terms of personnel categories within the organization (e.g. engineers), whereas the skills variable refers to the capabilities of the staff within the organization as a whole. Organizations are made up of humans and it's the people who make the real difference to the success of the organization in the increasingly knowledge-based society. Organizations have their own distinct culture and management style. The way in which key managers behave in achieving organizational goals is considered to be the style variable. It includes the dominant values, beliefs and norms which develop over time and become relatively enduring features of the organizational life. Shared Values / super ordinate goals refers to the significant meanings or guiding concepts that organizational members share (Peters and Waterman, 1982). All members of the organization share some common fundamental ideas or guiding concepts around which the business is built. These values and common goals keep the employees working towards a common destination as a coherent team and are important to keep the team spirit alive.3

This section answers the third research sub-question. Despite that there are almost unlimited alternative criteria, it is possible to provide two categories of selection criteria, known as task- and partner-related selection criteria. The task related criteria can be seen as criteria translated from the motivations of entering into alliances and gives an answer on the question ''what is this alliances going to deliver us?", the task. These criteria have been mentioned in the former paragraph. The partner related criteria show a great overlap with the theory of the 7 S model of McKinsey. The following partner related criteria have been derived from literature and will be used in the instrument for partner selection; compatible strategies, compatible structures, compatible systems, compatible styles / cultures, compatible staff / skills, compatible values / super ordinate goals, liquidity / financial health, previous alliance experience and finally the willingness / commitment / trustworthiness.

3

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Selecting Strategic Alliance Partners: Fit and Purpose ₂₉ 4.4 Strategic Alliances - Selection Methods and Techniques

This section elaborates on sub-question four about methods and techniques for selecting partners in the formation of strategic alliances. In theory on partner selection several methods and techniques are used. In the study of Hajidimitriou and Georgiou, (2002) the goal programming technique (GPT) was used to evaluate the potential candidates in International Joint Ventures (IJV) that leads to the selection of the optimal partner. The GPT is a linear programming technique for determining a way to achieve the best outcome (such as maximum profit or lowest cost) in a given mathematical model for some list of requirements represented as linear equations.

In a study of Huang et al. (2006) the Fuzzy Multi-Objective Dummy Programming Model was used. They argue that previous studies on partner selection ignore the issue of resource allocation. Following their analysis the only way to achieve the synergies is by effectively use these alliance resources. Their method should provide the best alliance cluster and the optimal resource allocation combinations.

The Analytical Hierarchy Process (AHP) was used by Wann Yih Wu, et al. (2009) in their study on supplier selection in the high-tech industries. Although the context of their study is not the same as this study, this method can be used in developing the partner selection instrument for Company A.

The following section elaborates on Multi Criteria Decision Making whereas AHP is one of the different techniques.

4.4.1 Multi Criteria Decision Making

Decision making methods are used to make decisions in many aspects of human activity. This is especially true with decisions that involve large amounts of money or decisions that may have huge impact on large numbers of people. Multi-criteria decision making (MCDM) is aimed at supporting decision makers faced with numerous and sometimes conflicting evaluations. It aims at highlighting these conflicts and deriving a way to come to a compromise in a transparent process. Unlike methods that assume the availability of measurements, measurements in MCDM are derived or interpreted subjectively as indicators of the strength of various preferences. Preferences differ from decision maker to decision maker, so the outcome depends on who is making the decision and what their goals and preferences are (Saaty, 2005). Since MCDM involves a certain level of subjectivity, the morals and ethics of the persons implementing MCDM play a significant part in the accuracy and fairness of MCDM's conclusions. Choosing the best MCDM method is itself a multi-criteria decision making problem, in which the alternatives are the methods themselves and the decision criteria are the various evaluative ways for comparing them. The choice of a model depends on the problem at hand and may be to some extent dependent on the most appropriate model for the decision maker.

4.4.2 The Analytical Hierarchy Process

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Selecting Strategic Alliance Partners: Fit and Purpose ₃₀ decision making where there are a limited number of choices but each has a number of attributes and it is difficult to formalize some of those attributes. Rather than prescribing a "correct" decision, the AHP helps the decision makers find the one that best suits their needs and their understanding of the problem.

The AHP analysis is based on the following steps (Saaty, 2005): Step 1: Decompose problem

Step 2: Define criteria Step 3: Design the hierarchy

Step 4: Perform pair wise comparison and prioritization Step 5: Calculate the weights of the criteria

Step 6: Rate the alternative candidates

Step 7: Compute the overall score of each prospective candidate Step 8: Make overall decision

The fourth sub-question can be answered as follows. The review shows that decision makers often lack the ability and resources to arrive at the optimal solution, and that they instead apply their rationality only after having greatly simplified the choices available. One could say that the decision maker is a satisfier, one who is seeking a satisfactory solution rather than the optimal one. This refers to bounded rationality. Bounded rationality is the notion that in decision making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions. This thesis therefore uses the AHP as a tool to link the subjective capabilities of the brain to set priorities and the calculating capacity of the computer to find the partner that suits best. The AHP method is chosen because it is most understandable for practitioners and it helps decision makers with their understanding of the problem.

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Selecting Strategic Alliance Partners: Fit and Purpose ₃₁ 4.5 Strategic Alliances - Creating Processes

This section will elaborate on alliance creating processes and provides an answer to sub-question five. Looking at the time line, literature shows different areas of interest related to the process of alliance formation. Several processes are called differently but tend to look a lot like each other; Alliance formation, The acquisition process and Foreign direct investment. The following sections gives an overview about these processes and analyzes potential data that can be used for the partner selection in the first phase(s).

4.5.1 Alliance Formation

The study of Mitsuhashi (2002) examines amongst other subjects the process of companies that form alliances. His study is based on fieldwork at 20 biopharmaceutical organizations in the USA. He distinguishes passive and proactive approaches in forming alliances. The passive approach refers to correspondence like phone calls, emails, meetings and other ways where expressions of collaboration mentioned. The proactive approach refers to a systematic approach that uses alliances and collaboration in order to achieve the companies' strategic goals. Nearly all of the alliance formation processes that he encountered at the fieldwork consisted of five phases: (1) defining opportunities, (2) identifying sets of prospective partners, (3) making contact, (4) proceeding with due diligence processes, and (5) making deals. The following scheme shows the alliance formation process and the major activities per phase.

The study further identifies three mechanisms for reducing selection uncertainty, including the relational, internal and contextual mechanisms. The relational mechanism operates on the principle that companies form alliances networks based on pre-existing social ties and personal rapport as a way to reduce uncertainty. The internal mechanism means that companies use internal capabilities and structures of organizations to reduce uncertainty.

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Selecting Strategic Alliance Partners: Fit and Purpose ₃₂ The contextual mechanism refers to the organizational use of reputations of prospective partners to reduce selection uncertainty.

4.5.2 Strategic Management of Acquisitions

One of the favorite forms of alliances, also the most extreme one, are Mergers & Acquisitions (M&A). M&A is one of the pathways for growth. Grundy (2009) proposes the acquisition process as follows;

In the strategy and objectives phase the acquirer must first of all have a clear understanding of its own strategic position and competencies and abilities to generate economic value. It should then perform an analysis of how it expects to add value to any prospective acquisition. For example: Product/market innovation, Absorbsion of operations, Taking their products to new geographical markets/distribution channels, gaining economies of scale, Injecting better management or commercial input (keener pricing, lower capital, lower costs). In other words; "What are you really good at?". In the search phase it’s a save route to perform a market / competitive analysis of potential targets. The valuation and evaluation phase refers to the due diligence process to value the target prospect. The deal phase reflects how you optimize the competitive forces in the deal in your favor. This is a comprise of; the acquirer pressure to do the deal, the vendor's pressure to do the deal, how many other options the acquirer has, how many other options the vendor has and the competitive rivalry to buy the company. At the Integration phase it is crucial to identify who is project managing the implementation. Prior to the completion of the deal, there must be a detailed implementation plan.

4.5.3 Foreign Direct Investment

This section elaborates on the Foreign Direct Investment process whereas the targeted project is the formation of alliances abroad. Unlike normative models of decision-making that present the process as linear and structured, Mintzberg et al.’s (1976) empirical work shows the iterative nature of the FDI process. The FDI Process shows the stages; 1) Recognition, 2) Diagnosis, 3) Screening, 4) Development and design and 5) Negotiations (Aharoni, 1966). The recognition stage of a decision process is usually considered to be the identification of the investment project.

As Larimo (1995) noted, the stimulus in FDI's is usually an opportunity arising in a foreign country, rather than a problem that necessitates change. For FDI's, the first step in diagnosis

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Selecting Strategic Alliance Partners: Fit and Purpose ₃₃ is usually the choice of country, followed by the choice of product range. The choice of country does not necessarily rely on a full search and analysis of various options, but rather it depends on the stimulus received, which expresses the context within which any decision will take place (Boddewyn, 1983). The role of diagnosis is to clarify and specify the received stimulus in order to proceed (or not) to the decision process (Mintzberg et al., 1976), and so initial ideas and proposals shape the way in which projects are defined.

The screening phase of investigation and data collection is perhaps the most important stage of the FDI decision process. Information about the economic, political and market environment, as well as prospective partnerships, is important in order to examine whether a project fits the corporate strategy for expansion and to estimate future demand for the company’s products. These actions take place during the project screening stage. Previous research has shown that the screening process usually concludes with project authorization being given by a senior executive (Mintzberg et al., 1976).

The development phase of an FDI project usually concerns the design of a single option. Formal information available during development is often inadequate, not up-to-date and difficult to process (Pinches, 1982). Therefore, decision makers have to rely on informal channels, strategic and non-financial considerations and of course on their own judgment. During the on-the-spot investigation, managers visit the targeted country seeking more detailed economic data and information on factors such as the market, the applied regulations, various facilities and they make local contacts (Aharoni, 1966). The final outcome of the detailed investigation will be an investment plan or business plan. Negotiations with prospective partners usually occur just after diagnosis, mainly during the design phase. In theory, if negotiations lead to an agreement, then follows the implementation stage (Aharoni, 1966).

The iterative nature of the FDI decision-making process, where information is continuously recycled, was discussed by Mintzberg et al. (1976). An important point, especially for FDI's, is that the external environment (e.g. negotiations with partners, authorities, etc.) affects any decision outcome. Strategy is not explicit planned according to the desires of managers, but is realized as the outcome of a series of mini decisions in response to external motivations and environmental changes (Huy and Mintzberg, 2003).

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Selecting Strategic Alliance Partners: Fit and Purpose ₃₄ does not explicitly elaborate on selection criteria, but it does mention these certain "tasks" that a potential alliance could produce for the (new) organization as a whole.

The alliance formation process elaborates on prerequisites of prospective partners based upon business strategies. These prerequisites also tend to have a strategic character that can be called "a task of the prospective partner". Also in here the companies own strategic direction plays an important role in selecting partners. The FDI process is not typically used for the creation of strategic alliances but for "investment projects" abroad. The selection of a project can be seen as quite the same when selecting alliance partners. The first phase shows a decision which country to focus on and a choice of product range. Strategic considerations are not specifically mentioned. It does elaborate on the information available in the first stages of investment projects, and specifically that this information is often inadequate, not up-to-date and difficult to process. Decision makers must therefore rely on informal channels, strategic and non-financial consideration and make their own judgment.

Selecting Strategic Alliance Partners: Fit and Purpose The Development of an Alliance Partner Selection Instrument