Strike while the iron is hot!

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Strike while the iron is hot!

A search for the ideal strategic alliance partner in the supply chain

The author is fully responsible for the contents of this paper; the copyright rests with the author.

Author: Pieter Petrus Liefting

University of Groningen

Faculty of Management and Organization First supervisor: drs. O.C.J. Lappöhn

Second supervisor: dr. J.A. Neuijen

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“Joint undertakings stand a better chance when they benefit both sides” Euripides

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Preface

This paper marks the closing chapter of my study Business Administration at the University of Groningen. This thesis was written by me in order to graduate in two concentrations, namely International Business and Small Business & Entrepreneurship. Furthermore, this research was conducted on behalf of the company ‘Cross-Line International’ which is part of ‘Holding het Zuiden. B.V.’ and headquartered in the city of Kerkrade, the Netherlands. This paper was about the formation of strategic alliances in an international context and to be more specific, a vertically alliance with suppliers. In my view this thesis offers a unique insight in the possibilities of strategic alliance formation for medium-sized automotive product component suppliers. In addition, this is a practical case of the resource-based theory in alliances. The findings of this research have been put directly into practice by the management. Dialogues were already started by Cross-Line with some foundries about the formation of an alliance as a result of this research. A secondary goal of this research was to explore other options of alliance formation, which can also be put into practice by the management of Cross-Line in the future.

Without a number of people, I would not have been able to deliver the report as it lays before you today. First of all, I would like to thank my supervisor from the faculty, Otto Lappöhn. His advice has lead to a better written paper and he was always patient with me. I would also like to thank my second supervisor, Bram Neuijen. He supervised this research during the absence of Mr. Lappöhn and was responsible for the International Business perspective. Furthermore, I would like to thank the directors of Cross-Line, Casper van Leusden and Lodewijk Overman, for providing me the opportunity to do my internship at their company and to be gripped by their entrepreneurship. Especially Casper was always enthusiastic about the company and allowed me to be involved in various company projects.

I am also thankful of the contributions from other managers within the company. Above all, Mr. Eeg Robben provided a lot of input for the list of potential partners and he has a great deal of knowledge about the foundry market.

My gratitude goes out as well to my dear friends Martijn Schoonvelde and Sible Andela; they provided a lot of general and grammatical corrections. In particular, Sible Andela contributed to a better readability and consistency of this paper. Even when he was in Paris for a French language course, he was willing to give his advice. C’est fantastique!

I hope that this little book will, to quote the Roman author Catullus, whatever it may be, last for more than one generation!

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Management Summary

The Dutch based and privately owned company Cross-Line International (CLI) has become one of the largest suppliers of machined metal product components in Europe. The company has four production facilities in four European countries, including the Czech Republic, where over 320 employees are located. Since the management buy-in of two ambitious entrepreneurs a few years ago, the company’s turnover grew substantially. Revenues grew with 40% compared to 2004, totalling approximately 40 million for the year 2005. However, a large share of the company’s turnover is still generated in the truck industry and by one main customer. One solution that is proposed by the management for this diversification problem, is to form an alliance with a supplier. These foundries supply castings to be machined by Cross-Line to customer specification. On the other hand, these foundries also need machining services for their own customers. Moreover, a foundry as an alliance partner will provide Cross-Line a better strategic position against the buying power of the manufacturers. Such an alliance will also provide more value to the customer since it ensures a stable supply of high quality components. Together with a partner, Cross-Line can supply fully finished product components to its current and other customers. At the same time, both partners can share the cost of specific investments in production activities and the transportation costs of the product components to the clients.

The following research question has therefore been formulated for the search of an alliance partner:

Research design and method

This design of this research is based on the concepts used in the resource-based theory. This theory assumes that differences in performance between firms across time are primarily caused by their unique resources and capabilities. Resources are the inputs of a firm’s production process while capabilities represent the company’s ability to integrate them in order to achieve a certain goal. One must assess the strengths and weaknesses of a company in order to determine which resources or capabilities need to be strengthened or complemented by an alliance partner. However, these resources can only become long term strategic advantages when they comply to one or more of the following criteria (Barney 1996): they have to be rare, valuable for the company, and can not be imitated by competitors or substituted by other resources.

A strategy is needed to exploit these resources on the basis of the success factors in the industry. After that, a gap analysis is performed in order to determine which gaps exist between the company’s strategy and its resources. An alliance partner can possibly strengthen the strategic advantages of Cross-Line and complement its weaknesses. Subsequently, the profile of the alliance partner is determined on the basis of these analyses. Besides the proposition for a foundry as partner by the management, possibly other alliance possibilities exist that can strengthen Cross-Line’s resources or complement its weaknesses. Some recommendations are therefore given for other types of possible partners. However, the search

Central question:

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for a partner is focused on an alliance with a foundry. A selection is made of the countries that provide the most potential for finding this partner. Secondly, a partner must be active in certain markets that are attractive and must supply to major manufacturers. After that, the criteria for the alliance partner are set. Finally, the names of potential alliance partners are provided. There are also some recommendations given for the alliance structure and for ensuring the success of the alliance.

This research is unique since it uses the resource-based theory for alliances in a real case. Furthermore, this research is exceptional since it combines the resource theory with strategy, partner selection criteria and the choice of alliance structure.

Results

One of Cross-Line’s main weaknesses is, that it does not have enough engineering capacity in order to stay in line with its high growth rates and it lacks certain engineering capabilities. The company’s engineers are currently more occupied with production related activities instead of on production process improvements projects, due to the current large workload for the engineers. As a result, engineers cannot be assigned easily to new projects causing amongst others increased delivery times for new customers. Furthermore, this obstructs the company to expand in other markets and to diversify within its customer base.

Although other machining companies are more often co-designing product components at the request of the automotive manufacturers, there are none of these capabilities available within Cross-Line.

The external analysis has shown that the machining industry is very competitive. Machining is in effect a service and a commodity. Competitors from low-wage countries in Eastern Europe and Asia have also entered the European market. The manufacturers (OEMs) are able to demand a lot from their suppliers in terms of price since these suppliers are very dependent on them. The total cost of a component is for a large part determined by the price of the casting. However, in order to escape from this intensive competition also a more focused strategy is needed. This can be done by providing more services to the customer such as co-design, being a one-stop-shop by vertical integration in the value chain and by being able to provide more complex (knowledge intensive) services. Wages in the Czech Republic are relatively low in comparison to that in the Netherlands or Belgium. As a result, Cross-Line should differentiate between larger series/medium labour intensive/medium complex product components in the Czech facility and smaller series/labour intensive/complex product components in the Dutch and Belgium facility, in order to produce more cost efficiently. The very simple labour intensive activities, such as surface treatments, are already performed in the Czech Republic. Another option for reducing labour cost is to further automate the production line of the Dutch and Belgian production sites.

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An alliance with a company that is active in certain markets, can possibly provide Cross-Line access to certain important manufacturers. Other types of alliance partners can provide the needed knowledge and experience in supplying to unrelated industries.

Conclusions

One way of dealing with the intense competition and the buying power of the OEMs, is to form partnerships. These partnerships can be formed vertically with suppliers or customers, and horizontally with competitors or engineering companies. Since the engineering department can be a source of competitive advantage for Cross-Line, it is recommended to develop a partnership with the goal of strengthening the company’s engineering capacity and capabilities. In order upgrade its engineering capacity and capabilities, the company can form an alliance with an engineering company.

Cross-Line can also diversify geographically by forming an alliance with a competitor in the rapidly growing markets of India and China. An alliance with a foundry offers even more advantages for the company. Both partners can share the cost of logistics for example. They can also combine their marketing activities. Moreover, they can start to invest in certain types of machines that are requested by a customer or industry. In addition, they can share the cost of their engineering activities. The castings process can also be tuned in line with the machining activities in order to increase the efficiency. Additionally, the company can start to co-design product components with the customers. It is recommended that Cross-Line forms an alliance with a foundry that is able to supply ‘strategic’ or ‘complex’ product components for the automotive industry. The manufacturers do not want to run risks in the supply chain for these types of components. Such an alliance will provide for higher profit margins because customers are willing to share more of their profit with a dependable supplier.

As a consequence of the production relocation strategy between larger series/medium labour intensive/medium complex product components in the Czech facility and smaller series/labour intensive/complex product components in, the company needs to form different alliances for each different machining activity. Most often, complex product components are needed in markets such as wind turbines, the military and aero(space) industry. Other alliances can be formed for the automotive and related markets such as the truck, construction equipment, forklift and agricultural equipment industry. Truck manufacturers sometimes also require more complex machining activities for their critical product components such as engines and gearboxes. In addition, the company can form an alliance with a foundry for castings of light weight or very strong alloys such as magnesium.

It is even more profitable to form an alliance with a group of foundries. These foundry groups supply to various markets and in high quantities. Furthermore, these groups have extensive capabilities in areas such as marketing and engineering. All of these alliance partners must be willing to source out (parts of) their own machining activities.

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Chapter 1. Introduction

This chapter will serve as an introduction to the company and the research. First, the research will be briefly introduced. Also the motive for this research will be outlined. This is followed by a short description of the company and its primary process. The setup of this research is described in the second chapter.

1.1 Brief introduction

Cross-Line International must “strike while the iron is hot”. This saying is formed by the image of a blacksmith working by hand to heat the iron in a fire to make it malleable. The smith shapes the iron with blows from a hammer. The smith needs to do this very quickly before the iron cools and it becomes brittle.

This research is unique since it uses the resource-based theory for alliances in a real case. Furthermore, this research is exceptional since it combines the resource theory with strategy, partner selection criteria and the choice of alliance structure.

The company Cross-Line International has many opportunities to take advantage of. After a change in management a few years ago, the company has opened up its windows towards the outside world. Cross-Line has many possibilities to gain additional turnover by expanding into its current markets and by entering other markets. The management wants to form new relationships with their suppliers. These foundries deliver casted metal components to CLI, which the company needs to consequently machine. Cross-Line has already formed several long-term strategic cooperation agreements with foundries. As a result of this research, several conversations with foundries have been started by the management about the formation of an alliance. The management needs to shape these relationships “while the iron is hot” so these opportunities will not pass. There are also many other opportunities for the company to grasp.

1.2 Motive for this research

Cross-Line International1 has been a supplier of machined metal components for many years now. Since its founding in 1959, it was always very oriented towards a few customers. The company’s most important client was always DAF, a large truck manufacturer in the Netherlands. This dependability on one customer and the truck industry poses a serious threat to the future of the company. The truck market remains highly cyclical because it is very dependent on the economic conditions. This can lead to a volatile turnover of CLI and excess production capacity for the company during the lower economic cycles. Therefore, the two ambitious entrepreneurs that took over the company in 2002 have set top priority to look for new market opportunities.

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In 2003 Mr. Raven2, a business student from the Faculty of Management at the University of Groningen, conducted a study about CLI’s possibilities for supplying to other customers and markets. This research is a follow-up study from his recommendations and a steppingstone for the management to make the much needed decisions about further expansion of CLI’s activities.

One of the main findings of Mr. Raven’s thesis is that Cross-Line has to engage a vertical partnership with a foundry or forger. A foundry or forger supplies the raw material in the form of castings or forgings. An alliance with a foundry that is already supplying to complementary customers or industries provides CLI rapid access to new customers. This also enables CLI to become a full service supplier by providing new services for the customer in cooperation with the potential partner. Together they can offer a fully finished product to the customer. Also some synergy and efficiency benefits can be gained by for example sharing the cost of logistics. Moreover, this will make CLI less dependent on the OEMs because will be able to independently purchase its castings. Since a few years, CLI has committed itself to an alliance with a group of foundries under the name of ‘Globe Foundries’. The foundries of ‘Globe’ are all located in the area around Kerkrade and are currently owned by the Finnish company Componenta. ‘Globe Foundries’ was one of CLI’s most important suppliers of castings for many years. Currently, CLI has taken over all machining operations from the Globe’s foundries in the Netherlands. This proved to be a very profitable relationship and this has cleared the way for the search of new partnerships.

1.3 Background of the company

History

Cross–Line International (CLI)3 was founded by Mr. J. Vreuls in the year 1959. The company was at that time still known as “Het Zuiden” BV. Since then, it has become one of the largest independent machining companies in Western-Europe. The main activity of the company is the machining and assembly of various ferrous and non-ferrous product components. It started its operations in the village Simpelveld, but it has later been relocated to the city of Kerkrade (the Netherlands). The son of the founder, Mr. H. Vreuls, took over daily operations in 1989. Due to his efforts the company expanded rapidly. Cross-Line also has a long history of supplying to the Dutch truck manufacturer DAF, which is now owned by the American truck company Paccar. A production facility of DAF in the city of Olen was taken over by Cross-Line in 1996. This site originally supplied to DAF’s production line in Westerloo (Belgium). Due to the rapid expansion of the company, a new production site was opened three years later in the Czech city of Dubnany. The Czech Republic has the benefit of having lower wages and the availability of a highly qualified labour force. In 2000, a service and maintenance facility was opened in Germany in order to keep these services internally at lower cost.

Since the management buy-in of two ambitious entrepreneurs a few years ago, the company’s turnover grew substantially. The company generated a turnover of 40 million Euro in 2005 with a workforce of 320 employees. Revenues in 2005 grew with 40% compared to 2004.

2_{Raven, G. A., 2003, Onbekend maakt onbemind, De marktmogelijkheden voor Machinefabriek en}

staalconstructiebedrijf “Het Zuiden B.V.”, Thesis, Faculty of Management and Organisation, University of

Groningen

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Company structure

Cross-Line International has three production locations and a maintenance/engineering facility. Its main office is located in the city of Kerkrade, the Netherlands. The production facilities can be found in cities of Kerkrade, Olen (Belgium) and Dubnany (Czech Republic). The engineering department is located in the German city of Viersen. This engineering department refurbishes machines bought from the second-hand market. It also takes care of the setup and maintenance of the machines.

The subsidiary in the Czech Republic operates under the name ‘Orfus s.r.o’. Purchasing and sales activities are for the most part performed in Kerkrade. Around 140 employees are located in Kerkrade, 140 in Dubnany, 30 in Olen and 10 in Viersen. Cross-Line International is registered under the name of ‘Holding het Zuiden’ and is fully owned by “ALF Holding B.V.” Each of the two directors owns half of the stock. The Belgium location is however still in the hands of Mr. H. Vreuls.

The organization

The management team includes the two new directors, the former director and the heads of the departments. The departments within Cross-Line are: purchasing, production, quality, logistics and engineering. These are supported by the staff of the secretary, personnel affairs and financial controlling department.

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1.4 Primary process

The primary process for Cross-Line is the machining of iron or aluminium components. Raw material is supplied in the form of castings or forgings by foundries or forgers. The customer specifies the dimensions of the product component by drawing. CLI’s production series are medium to large: from 3000 to 60000 pieces a year. Most machining processes are performed by automated machines: CNC (Computer Numerical Control) machines. The main machining services that Cross-Line delivers to its customers are: turning, milling, and grinding of casted or forged metal product components. CLI is also able to offer labour-intensive activities such as surface treatments and the assembly of product components into modules. Surface treatments such as heat treatments are for the most part performed in the Czech Republic due the lower labour cost. CLI delivers the part directly to OEMs (Original Equipment Manufacturers) or indirectly to suppliers of the OEMs: ‘first tier’ or ‘second tier’. When CLI is a first tier supplier to the OEM, the product components need to be delivered Just-In-Time (JIT). These components are ‘critical’ and are used immediately in the assembly line of the OEM. Critical product components are product components that are at the basis of a product and therefore need to be off high quality e.g. truck axles. These product components are purchased from foundries or forgers that are often predetermined by the OEM. It is also possible that the OEM has purchased the components already and these are directly delivered to CLI. CLI in fact performs only a service for the client. Sometimes CLI is able to offer the OEM fully finished product components by purchasing the castings independently.

The materials that are machined by CLI are grey iron, nodular iron, and aluminium. Nodular iron or ‘Spharoguss’ is the most common used material in truck product components. This material is stronger than grey iron and reduces the amount of wear and tear.

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Chapter 2. Research set-up

In this chapter the setup of this research will be described. The first section describes the main stakeholders of this search. After that, a definition of a strategic alliance is given and a general description will be made of the literature that is used in this paper to analyse the management problems. This will lead to the problem statement and sub questions which are outlined in section three and four. The research model and the scope of the research will be given in the next two sections. Other sections of the research setup include the research model, the selection process for finding the partner, a conceptual model, the research methods and the data collection strategy.

2.1 Who are involved in the problem?

Management problem

The management of Cross-Line has set out several goals for the coming years. First of all, they want to increase the company’s turnover substantially. In 2005 it already reached a turnover of around 40 million Euro. This is an increase in turnover of more than 10 million Euros since 2004. Furthermore, the company still does not generate enough profit. Although the company’s profit margin already has improved substantially since 2003. Before that, the company was making losses. It now generates a profit of around 5% of its turnover. However, the most important goal is to diversify its customer base. In 2007 the turnover generated by DAF must be less than 50 percent of the total turnover, which is now around 80%. During the last few years the company has increased its turnover to non-DAF customers substantially in absolute terms. However, the amount of sales to DAF has also risen in recent years. As a result of this, DAF still takes up a large portion of CLI’s turnover. The management also wants to have a better distribution between the amount of turnover that is generated in the truck market and the turnover produced in other (related) markets: for example the construction equipment and agricultural machinery industry. One solution for this diversification problem is to refuse some product components of its sales to DAF. However, this does not seem a very attractive option since this will stall the company’s growth strategy and can even set the relationship with DAF at risk. Therefore, the most obvious solution seems to be to increase the company’s turnover in its current and other markets. The management has therefore set the goal to form at least three alliances with foundries or forging companies in Western-Europe by the year 2007, besides its alliance with ‘Globe foundries’. By forming these alliances the company does not only get access to new customers, it can also set a better competitive position in the market.

Other stakeholders

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There are also stakeholders in this matter; The company’s lenders and investors (e.g. the bank) for example would like to see that CLI meets its turnover goals and off course do not want it to become bankrupt.

In summary the problem is:

Dependency on one customer and market: The turnover of Cross-Line is very

dependent on the truck market and one customer. This can lead to uncertain future cash flows and poses a potential risk for the future of the company. The truck market is highly dependent on the economic cycle. This can lead to a volatile amount of turnover. In addition, a highly flexible production capacity is needed in order to keep up with the rapid changes in demand by the manufacturers. CLI will have an overcapacity in production during a declining market and a capacity constraint during the higher economic cycles. Besides that, it is not difficult to imagine what will happen when CLI suddenly loses its biggest client.

Achieving ambitious profitability and growth goals set by the management of CLI for

the coming years.

2.2 Literature review

In order to structure the conduct of this research, an initial literature review will take place. First, the perspective that is used in this research will be described. After that, a definition of a strategic alliance is given. Furthermore, the theory of the resource-based theory is outlined. 2.2.1 Inside out versus outside-in Perspective

One can look from two different perspectives at a strategic problem: outside-in or inside-out. Strategists that adopt an outside-in perspective take the environment as the starting point when determining a strategy (De Wit & Meyer, 1998:330). Companies scan the environment for opportunities in order to take an advantageous position in the market. In the inside-out perspective, strategies are not built around external opportunities but around the company’s strengths (De Wit & Meyer, 1998:331). Strategists believe that a company should acquire exclusive resources and/or the need to develop resources that are difficult to imitate.

Although both perspectives are used in this paper, this research will primarily focus on the inside-out perspective. Determining the core competencies of Cross-Line International and how these can be strengthened, will be at the basis of this research.

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2.2.2 Definition of a strategic alliance

Strategic alliances can be defined according to Jorde en Teece (1989) as:

“A bilateral relationship characterized by the commitment of two or more partner firms to reach a common goal and which entails the pooling of specialized assets and capabilities” This definition puts forward that both alliance partners have to show commitment in the form of a shared assed or capability. This can entail an equity investment by both parties although this is not necessary. However, they do not include mergers. Since this will involve a controlling interest of one company in the other (M. Supphelen et al., 2002). These relationships are different from exchange transactions where one party sells goods to the other for cash. A strategic alliance is much deeper and longer lasting than a traditional transactional alliance. As shown in table 2-1, the scope and duration of a strategic alliance compared to a transactional alliance is very dissimilar.

Transactional alliance Strategic alliances

- Partners do not share their critical

capabilities - The cooperation is based on shared capabilities or on equity - Relationship does not involve

control and is usually contract driven.

- The partners share a common strategy

by a reciprocal relationship - The partners remain at arm’s length.

They do not share a common strategy or act as one.

- Such an alliance potentially increases

the value of both companies in the market, and places more pressure on the competitors.

- Both partners must be willing to share

and leverage core capabilities.

Table 2-1: Transaction versus Strategic Alliances (Source: Harbison and Pekar (1998) in: Sari Wahyuni (2003)

Focus on Strategic Alliance

In this research the focus will be on such a strategic alliance. A longer and deeper relationship with a partner will provide the management of CLI more leverage to carry out their long term strategic objectives. Because the scope and duration of such a relationship is much deeper, a considerable amount of attention and commitment by the management of CLI is needed for the strategic alliance. Huyzer (1990:31) states that collaborations need to be formed for those activities that are weaknesses for the company in comparison to its competitors. An ideal partner is complementary to the strengths and weaknesses of an organisation. The partner can also have similar strengths.

2.2.3 Resource-based theory

As mentioned before, the outline of this thesis is based on the Resource-Based theory. This theory assumes that differences in performance between firms across time are primarily caused by their unique resources and capabilities (Hitt, 1999:21-22). A firm is also expected to acquire new resources and to develop unique capabilities over time. Therefore companies will possess different strategically relevant resources.

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resources in order to carry out the strategy which is shaped by the conditions and constraints in the environment. While in the resource-based view a firm’s unique resources and capabilities provide the basis for a strategy. This strategy should allow a company to exploit its core competencies at a maximum relative to opportunities in the external environment (Hitt, 1999:21). One must also ensure that a firm’s resources are fully employed and its profit potential is exploited to the limit (Grant, 1998:111). Furthermore, a company needs to build its resource base. A resource analysis does not only focus itself on the deployment of existing resources. It is also about filling the resource gaps and building the company’s base of resources and capabilities for the future.

The concepts of resources, capabilities and strategic competitive advantages are further explained below. Hitt et al. (1999:91) define resources as “inputs into a firm’s production process such as capital equipment, the skills of individual employees, patents, finance and talented managers”. The combination and integration of sets of resources form the basis of a strategic advantage. A capability therefore represents the company’s ability to deploy resources that have been integrated to achieve a certain goal (Hitt et al, 1999:109). As shown in Figure 2-1, Grant (1998:112-116) divides resources into three principal types: tangible, intangible and human resources. Tangible resources are the easiest to identify and evaluate because these are valued in a firm’s financial statements. The most important types of tangible resources are physical and financial resources. Intangible resources on the other hand remain largely invisible because these are not shown in a company’s financial statement. Technological resources, reputational or cultural assets can form these intangible resources. While human resources are the productive services that human beings offer in terms of their skills, knowledge, and reasoning and decision-making abilities. Examples of human resources are specialized skills and knowledge, communication and motivation.

However, a resource or capability needs to conform with one or more of the following criteria in order to be Sustainable Competitive Advantage: Valuable, Rare, Costly to imitate or non-substitutable (Hitt et al, 1999:99).

Figure 2-1: The Relationships among Resources, Capabilities and Competitive Advantage (Source: Grant, 1998: 113)

Resources are valuable when they create value for a company by exploiting opportunities and/or neutralize threats in the environment. Valuable resources cannot become strategic

Organizational capabilities Resources Industry Key Success Factors Competitive advantage Strategy

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advantages when many competitors possess them. A competitor can also try to develop a resource by its own. Sometimes competitors cannot easily copy a resource due to certain unique historical conditions. As firms develop, they create their own unique capabilities. Besides that, a resource is hard to copy when competitors cannot perfectly understand the cause and effect, which determines the success of a certain resource. Entrepreneurs are often not able to explain their success for example. Imperfect inimitable resources are also caused by complex social relationships such as organizational culture. Furthermore, a resource is only strategic when it cannot be replaced by common resources. A certain manager can be for example substituted by a well-designed strategic planning system. Off course, a company also needs to have a certain strategy in order to exploit its resources and capabilities.

As shown in Figure 2-2, Grant (1991) proposes a five-step approach for a strategy analysis. This approach forms the basis for this thesis:

1. Identify and classify the firm’s resources in terms of strengths and weaknesses

2. Combine the firm’s strengths into specific capabilities. These are core competencies.

3. Appraise the profit potential of these resources and competencies in terms of their

potential for sustainable competitive advantage and the ability in harvesting the profits resulting from the use of these resources and capabilities.

4. Select the strategy that best exploits the firm’s resources and competencies relative to

the external opportunities.

5. Identify resource gaps and invest in upgrading the weaknesses.

Figure 2-2: A Framework for Analyzing Resources and Capabilities (source: Grant, 1998: 138)

5. Identify resource gaps that

need to filled 3. Appraise the

rent-earning potential of resources/capabilities

Potential for sustainable competitive advantage

4. Select a strategy Strategy

2. Identify capabilities

1. Identify the firm’s resources; appraise strengths and weaknesses

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2.3 Problem definition

The management has proposed a foundry or forging company as a suitable alliance partner. There are perhaps other types of suitable alliance partners. Secondly, the management needs a framework for selecting the partner. This has lead to the following research objective:

This objective has been translated to the following research question:

2.4 Sub-questions

Based on the conceptual and the research model the sub-questions are given below: Internal Analysis:

As mentioned before, the most important part of a resource-based analysis is to assess the resources and capabilities of a company. One can also determine the potential of resource to form a sustainable competitive advantage. After that, one must assess which resources and capabilities can be potentially strengthened or complemented by an alliance partner. Therefore, the following sub question is set:

1. What are the strengths and weaknesses of CLI?

External analysis:

Although the resource-based theory puts a strong emphasis on the internal analysis, the environment still needs to be taken into perspective. Especially since the industry environment of CLI is very complex. Moreover, the focus of this research is on an alliance within the supply chain. One must therefore establish which factors are key success factors in the industry. After that, a comparison is made between CLI’s resources and that of its competitors. The following sub questions are formulated for the external analysis:

2. What does CLI’s position in the supply chain and the industry environment tell us?

3. What are the key success factors in the machining industry?

4. Which resources and capabilities does CLI lack in comparison with its direct

competitors? Strategic analysis:

In addition, a strategy is needed in order to exploit these resources and capabilities. The strategic analysis is covered by the next question:

5. Which strategy allows CLI to exploit its resources and capabilities in line with the

requirements of the machining industry? Objective:

Provide the management insight in the various options of alliance formation and developing a framework for selecting an alliance partner.

Central question:

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Determining the partner:

In order to determine which resources (and capabilities) the alliance partner needs to complement or strengthen, the potential gap that exists between the current situation and the strategy is assessed. After that, the type of partner(s) that can strengthen or complement these resources and capabilities are established. The management has proposed an alliance with a foundry or forger, this can possibly be extended by other alliance options. In order to establish the profile of the partner, the following two sub questions are formulated:

6. Which resources/capabilities does CLI need to gain or strengthen in order to perform

its strategy successfully?

7. Which type of partner(s) is able to strengthen CLI’s core competences and/or

complement its weaknesses? Finding the partner:

Since CLI’s goal is to expand into other markets, an assessment is made of potentially attractive markets. This assessment will make clear in which type of markets the partner has to be active. Since the time of this project is limited, a selection has to be made of the countries that are investigated. The following sub questions are formulated for this appraisal: 8. Which industries/markets are attractive for CLI to enter or exploit, besides the truck

industry?

9. Which countries offer the best chances for finding the ‘ideal’ partner?

Alliance framework and design:

Finally, the profile of the partner is established. The partners that are selected fit more or less the description of this profile. Some recommendations are also given for the structure of the partnership and issues that need to be kept in mind in order to make the alliance a success. The following two questions address these issues:

10. What is a good framework for selecting a partner and which partners can be selected

from this model?

11. What aspects does CLI need to keep in mind in order to have a successful alliance?

2.5 The Scope/boundaries

The following boundaries are set for this research:

• Hoffman (2001) describes five stages in alliance forming. As shown in Figure 2-3, this

research intents to give advice for the first two stages of alliance formation: The first phase of the strategic analysis and the decision to co-operate. In addition, the second stage of the search for a partner and partner selection. There will be also some recommendations given for the design of the partnership.

• The search for a partner focuses on European countries. This also includes four

Eastern European countries: Poland, Czech Republic, Slovakia and Hungary. A large number of automotive suppliers are expected to be located in these Eastern European countries, besides the important automotive countries that include Germany, France and Spain.

• Due to time limitations of the project, a selection will be made of the number of

countries that are investigated.

• Mergers and acquisitions are not included in this research since these two options

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• The potential partnership must be in line with CLI’s strategy and capabilities.

Figure 2-3: Focus of the research

2.6 Research model

This research model is an adapted model of one presented by Huyzer (1990). In the first phase of the research an internal analysis is made in order to determine the strategic competitive advantages of Cross-Line and its weaknesses. After that, the actors in the environment are described and CLI’s position in the supply chain. The external analysis also describes the forces that play an important role in the industry in order to determine the key success factors of the machining industry. CLI’s strategic competencies will be compared with its competitors in order to see what resources the company lacks in comparison with these competitors. After that, there are some recommendations made for a potentially attractive strategy in which the company can exploit its resources and how it will become successful in the machining industry. In the next chapter, an analysis will be made of the gap that potentially exists between CLI’s strategy, competencies and the goals set by the management. Then the various options that exist for a strategic alliance are described. However, the search for a partner will be focused on an alliance with a foundry or forger. In order to establish in which markets the potential partner needs to be active, a short market analysis is performed. This market analysis is not only an assessment of CLI’s current markets but it used to determine which markets are potentially attractive for the company to enter. The foundry industries of various countries are also assessed in order to see which countries offer the highest chance for finding the ‘ideal’ partner. This will also reduce that amount of time that is needed the partner search. Finally, the criteria of the alliance partner are described and a short list is given of possible partners. There are also some recommendations given for the alliance structure and the conditions that need to be taken into perspective for a successful alliance.

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Figure 2-4: The Research model

2.7 Selection process

The process for selecting the potential alliance partner will take several steps. First, a database is made of all foundry and forging companies in various European countries. After that, the companies are screened on the basis of a list of criteria. The short list is drawn after one has an impression of the quality and prices of the various foundries. The reliability of its delivery is also assessed when possible. The final list is drawn when the potential partners show interest in a partnership and there is a potential for mutual advantage. The fit between the company cultures of the partner and Cross-Line can be established during meetings. Further diligence can be performed by requesting an accounting report for determining the financial stability of the prospective partner. An assessment of the mutual advantages can off course also be done in an earlier stage when enough information is provided by external reports and by evaluating a company’s capabilities. Due to the time limitations of this project, not all stages of this process can be carried out. This research will only provide the management with a short list of few potential partners that are in line with CLI’s needs and capabilities. The process of due diligence and the negotiations has to be performed by the management.

External Analysis Position in the Chain

Industry rivalry Competitor analysis Chapter 5 Internal analysis Core competences Weaknesses Chapter 4 Strategic options Gap analysis Chapter 7 & 8

Recommendation for the Alliance structure

Chapter 11 Framework of alliance

Chapter 10 Selection possible partners

Short-List Chapter 10

Analysis and choice of countries Chapter 9 Attractive markets

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The process for selecting the potential partners is given below:

Figure 2-5: the selection process

2.8 Conceptual model

The conceptual model shown below is based on a figure provided by Vyas et al (1995). These authors state that there are four critical issues that determine the success of an alliance: (1) goal compatibility among alliance partners in the long term and short term, (2) synergy among partners: a partner can compensate for a company’s weakness, (3) value chain: there must be a clear understanding of what value each party will bring to the alliance, (4) There must be a balance among the contributions of the partners in the areas of product development, manufacturing, and marketing so that not one of the partners will dominate the alliance.

This model is combined with the theory of Das & Teng (2000). These authors use a typology where there can be an alignment between alliance partners of complementary or supplementary resources. An alignment between partners is complementary when different resources that are compatible are brought into the alliance. Resource alignment between partners is supplementary when both partners bring the same types of resources into the alliance. Das & Teng (2000) also take into perspective to what extent these resources can be used for the goals of the alliance. Since the alliance still has to be formed, this will be difficult to measure on beforehand. Therefore this part is left out of the model. Das & Teng (2000) also provide a model for the preferred alliance structure in an alliance depending on the type of resources that are brought into the alliance. An alliance structure can be a joint venture or it is formed by a contract. This model and the resource theory are further elaborated in chapter 3. The relative position of the partner in the supply chain also determines the success of an alliance. Alliances can be formed with suppliers, manufacturers or competitors. Each type of partner brings its own value into the supply chain.

The model of Vyas et al. (1995) also mentions three barriers to successful strategic alliances. First, if one wants to maintain a successful alliance, a ‘new management style’ has to be

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adopted. This style of management views alliances as a strategic tool. The management needs to have a long-term view by setting objectives for the company in order to get access to the newly acquired abilities. Another example is the use of alliances as a strategic leverage by the procurement of resources that create strategic advantages. Second, a failure to understand the cultural differences often leads a break-up in the alliance. This is especially true in international alliances. Also a continued commitment is needed to the alliance by all levels in the organization. Individuals that negotiated and implemented the initial alliance agreement may not be present in the organization after a while as a result of promotion, retirement, or transfer.

Figure 2-6: Conceptual model

2.9 Research method

This is a ‘practical research’ according to Verschuren and Dodewaard (2000:36): a research with the objective of providing solutions in order to change an existing situation in practice. It can also be defined as a ‘policy supporting research’ (De Leeuw, 1996:207). The first part of the research is descriptive (Saunders et al, 2003). This will entail a desk research for collecting the internal data, e.g. from semi-structured interviews, in order to determine the objectives and motives for the alliance. After that, the strengths and weaknesses of CLI are evaluated. In addition, the environment will be investigated by a desk research and possibly

Alliance structure must be aligned with the types of resources that are brought in by both partners (Das &Teng)

Relative Position in the supply chain Complementing or supplementing resources alignment

Goal compatibility: Short and long term among alliance partners

Clear understanding of the value that each partner brings

Barriers to success:

- Failure to adopt a ‘new

style of management’ - Failure to understand

cultural differences - A lack of continued

commitment in all levels of the organisation

Successful strategic

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some interviews with trade representatives. Furthermore, a list of criteria will be set up on the basis of the internal and external analysis and literature. The names of the possible partners are supplied by a desk research. Trade associations and internet databases provide the most detailed information about these companies. After that, a database is made with possible partners. These partners have to be matched with the criteria for the partner in order to make a short-list of suitable companies. In addition, the interest of the potential partners for an alliance with CLI has to be determined by phone or E-mail. After that, a final list of high potential partners will be drawn. On the basis of the literature, there are also some recommendations given for the structure of the alliance.

2.10 Data-collection

The data collection methods are described below for each part of the research.

Part Methods/Sources

1. Internal analysis - Internal data within the company: products,

turnover, market area etcetera.

- In-depth interviews within CLI: the two

directors, the purchasing manager, the logistical and production managers.

2. Environment: opportunities

and threats Desk research: internet, trade publications etcetera. 4. Strategic options Literature

5. Partner selection criteria - Interviews with the management of CLI: the

two directors, the purchasing manager, the logistic and the production managers. - Literature

6. List of partners - Desk research: internet databases such as

Kompass, foundry associations, trade fairs etc. - Brochures of the companies

- Contact by telephone or E-Mail

- Data collected by the management about

various companies.

7. Short list of companies Match of the established criteria with companies in the long list.

8. Cultural factors and

benchmarking Literature and internal data 9. Form of the alliance Literature

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Chapter 3. Theoretical background

The goal of this chapter is to provide a general overview of the literature about strategic alliances. These theories are used as input for the design of the partnership. In the first section the motives for alliance formation are outlined. The second section will show the different types of alliances that exist, described by various authors. Finally, a summary of the theoretical background is given.

3.1 Motives for alliances

Alliances can be driven by several motives. A company’s motive for starting an alliance is that it wants to maintain its flexibility and core competencies while at the same time it is able to utilize complementary resources for efficiency and learning (Nooteboom, 1999:60). Other examples of a company’s objectives to start an alliance are scale, scope and time benefits that can be gained (Ohmae, 1998). Collaborations can for example help to reduce idle set-up times or stock by just-in-time delivery. Besides that, alliance partners can spread risk amongst themselves of specific investments. One can also get positional advantages in the market by forming an alliance with a partner. A company is for example able to develop all relevant competences much faster with a partner than on its own (Lei and Slocum, 1990). Furthermore, a company can get faster access to new markets in cooperation with a local partner. Together with a partner the company can also offer a full product package for its customers. Sometimes it is needed to cooperate with multiple partners in order to set a product standard for the market. This partner is able to provide the knowledge and the contacts for the local market. Collaborations such as cartels are sometimes also formed in order to reduce the competition in the market.

As shown in the summary below, Nooteboom (2002) has grouped the motives of collaborations into three broad categories:

1. Developing competencies - Complementary competencies - Variety of learning - Flexibility of configuration 2. Efficiency gains - Avoiding overcapacity

- Economy of scale, scope or time

- Spread risk

- Combine or swap products

3. Positional advantages

- Satisfy demands of local government

- Fast access to new markets of products and outputs

- Adjustment of product, technology or inputs to local markets and conditions

- The offer of a joint product package

- Attack a competitor in its home market

- Establish a standard in the market

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Rationale for alliances in the Resource-basted theory

The resource-based view states that the rationale for strategic alliances is to aggregate, share, or exchange valuable resources with other firms when these resources can not be obtained by mergers or acquisitions (Das & Teng, 2000: 37). A company wants to create the most value out of one’s existing resources by combining them with the resources of another firm. This off course has to lead to an optimal result. According to Kogut (1988) a firm starts an alliance either to acquire the partner’s organizational know-how or it maintains its own know-how while benefiting from the other’s resources. The authors Das & Teng (2000) extend this approach to all types of resources and state that there are two motives for a firm to use strategic alliances or mergers & acquisitions: the first motive is to obtain the resources of another firm and the second one is to retain and develop its own resources by combining them with the resources of another firm.

A company tries to create a competitive advantage by obtaining new resources. However, a firm secures its competitive advantage by retaining its resources. In both situations the value of the resources that are put into the alliance has to be higher than the value that will be achieved either by selling them or by utilizing the resources in-house (Das & Teng, 2000).

3.2 Types of alliances

Various authors describe different types of alliances. However, mergers and acquisitions are not seen by many authors as a form of alliance. Das & Teng (2000) describe the conditions when alliances are preferred over mergers and acquisitions. The most common used distinction between alliance forms is the amount of financial integration. These alliance types are often referred to as equity and non-equity alliances. Non-equity alliances are formed through contract agreements (Hitt et al., 1999: 314). A joint venture is a hybrid form. Hitt et al. (1999) make the distinction between business-level and corporate-level cooperation strategies. The authors Das & Teng (2000) use a four-part alliance typology to determine the preferred structure of an alliance. Furthermore, an alliance can be formed with multiple partners in the form of a strategic alliance network. Some of these concepts will be further elaborated in the next four subsections.

3.2.1 Alliance preferred over mergers and acquisitions

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3.2.2 Business-level versus corporate level cooperative strategies

Hitt et al. (1999:318-333) make the distinction between business-level and corporative level cooperation strategies as shown in the drawing below.

Figure 3-1: Business level and corporate level cooperative alliances (Source: Hitt et. al, 1999:318)

Business-level cooperative strategies are subdivided in four types of strategic alliances: complementary, competition reduction, competition response and uncertainty reduction alliances. Companies try to create value in complementary strategic alliances by combining their resources in a complementary way. There are horizontal and vertical complementary alliances. In horizontal complementary alliances both partners are at the same stage in the value chain. These alliances are formed for the long-term and can include joint production, marketing, services and technology. When horizontal alliances are formed between competitors there are more risks involved. There is a lower basis for trust in such a partnership. Vertical alliances are formed with suppliers or customers. Since these partners do not compete directly with another there is a better basis for trust. Some companies however are inclined to hedge against risk and uncertainty. Changes in regulations can be a good example. While firms combine their forces in competition reduction alliances so they are can manage the prices and output in the industry. This is often done in the form of cartels. They are also formed in order to respond to the strategic actions of competitors. When one company starts an alliance in a growing market other companies may follow this action. Corporate-level cooperative strategies are designed to facilitate product and/or market diversification. These strategies include three types of strategic alliances: diversifying, synergistic and franchising. A company tries to expand in new product or market areas by a diversifying alliance. In this way there is no need for a take over or a merger when a firm lacks the capital or the will. Synergistic alliances on the other hand are formed to create joint economies of scale and scope between the partners. The difference with horizontal strategic alliances at the business level is that they generate multiple synergies between multiple functions and businesses. Partners can for example start joint production and research facilities while at the same time share economies of scope. Companies are also able to join franchises in order to have a better competitive position.

3.2.3 Alliance theory by Das & Teng

The authors Das & Teng (2000) describe four types of alliances in their article about the resource-based theory: joint ventures, minority equity alliances, bilateral contract-based alliances and unilateral contact-based alliances.

Business level

cooperative strategies

Corporate level cooperative strategies

• Complementary strategic alliances

- Vertical

- Horizontal

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Partner Firm (B)

Firm (A) Property-Based Resources Knowledge-Based Resources Property-Based Resources Unilateral Contract-Based

Alliances Equity Joint Ventures

Knowledge-Based Resources Minority Equity Alliances Bilateral Contract-Based Alliances

Table 3-1: Resource Types and a Firm's Structural Preferences. (Source: Das & Teng, 2000)

Two major types of resources influence the choice of alliance structure and their combinations form: property-based resources and knowledge-based resources. Property-based resources are legal properties owned by firms such as financial capital, physical resources etcetera (Das & Teng, 2000: 41). Knowledge-based resources refer to the intangible know-how and skills of a company. Different combinations of the two types of resources between a firm and its partner result in a preferred alliance structure. These combinations form a four-part typology which is shown in Table 3-1.

In a joint venture both partners have an equal stake of equity in each other. Shared ownership structures will prevent opportunistic behaviour since it is more complicated to get out of the alliance. These types of alliances are therefore set up for the longer term. This alliance type therefore provides the best way for acquiring the knowledge-based resources of a partner. This is also the best alliance form for the transfer of tacit knowledge. Transfer of technologies can be more easily facilitated for example. Das & Teng (2000) also state in their article that a joint venture is preferred when the primary resources of a company are property-based and the primary resources of the partner are knowledge based.

In minority equity alliances, companies also have an equity stake in one another although this is not an equal stake. The authors have stated that a minority equity alliance is preferred when the primary resources of the company are knowledge-based and its partner’s primary resources are property based. In this case a contract does not offer enough protection against opportunistic behaviour for knowledge-based resources and this is therefore less attractive. A joint venture is not desired in this case since there is no considerable amount of knowledge-based resources put in by the partner. It is also risky to form a joint venture since there are too many knowledge-based resources put into the relationship which the partner can acquire. When both partners bring a substantial amount of knowledge-based resources into the alliance, a joint venture is not an attractive option. The complexity and tacitness of such resources will automatically result that the partner will also acquire these resources; this simply involves a lot of risk. It is also likely that the relationship will be terminated when both partners have completed their learning tasks. A bilateral contract alliance is favoured over a unilateral contract-based alliance when also learning activities need to take place in situations like joint marketing, production, or R&D.

Unilateral contracts are formed when companies in cases such as licensing, subcontracting and distribution agreement. This alliance is preferred when only property-based resources are brought into the alliance.

3.2.4

Network alliances

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There are two types of network alliances:

1. Stable alliance networks: these networks evolve by long term relationships. These

networks often occur in mature industries because of the stable and relatively predictable demand in the market.

2. Dynamic alliance networks: these networks develop in rapid changing markets. These

networks are formed in order to create product innovations and to explore new ideas.

3.3 Summary

This section gives a short summary of the theoretic concepts that are described in this chapter: Motives for a strategic alliance

The rationale for strategic alliances in the resource-based view is to aggregate, share, or exchange valuable resources with other firms when these resources can not be obtained by mergers or acquisitions (Das & Teng, (2000: 37). A company wants to create the most value out of one’s existing resources by combining them with the resources of another firm.

There are different types of alliances and structures described by different authors:

- Business-level and corporative level cooperation strategies: Hitt (1999) makes the

distinction between business level and corporate level cooperative strategies. Business-level cooperative strategies are subdivided in four types of strategic alliances: complementary, competition reduction, competition response and uncertainty reduction alliances. Companies try to take advantage of market opportunities in complementary strategic alliances by combining their resources in a complementary way in order to create value. Corporate-level cooperative strategies are designed to facilitate product and/or market diversification. These strategies include three types of strategic alliances: diversifying, synergistic and franchising.

- Das & Teng (2000) describe four types of alliances in their article about the resource

theory in alliances: joint ventures, minority equity alliances, bilateral contract-bases alliances and unilateral contact-based alliances. The choice for a certain alliance structure is dependent on the different combinations between know-ledge and property-based resources that are brought into the alliance. Property-based resources are legal properties owned by firms such as financial capital, physical resources etcetera (Das & Teng, 2000: 41). Knowledge-based resources refer to the intangible know-how and skills of a company.

- Network alliances: alliances formed with multiple partners in order to achieve shared

Strike while the iron is hot!