Fundamentals of Global Strategy Chapter 8 Globalizing the Value Chain Infrastructure

Chapter the Value Chain Infrastructure a company value creation the sourcing of raw materials and components , to manufacturing and research and development ( to distribution and customer three primary dimensions ( a ) deciding which activities to perform and which ones to outsource , and to whom and where ( developing the right partnerships to support a company globalization efforts and ( implementing a suitable management model for integrating them into a , seamless network . This chapter looks at the two dimensions the the subject of the next chapter . URL books 169

Core Core represent unique capabilities that allow a company to build a competitive advantage . has developed a core competency in . Canon has core in optics , imaging , and microprocessor controls . Gamble marketing prowess allows it to adapt more quickly than its rivals to changing opportunities . The development of core has become a key element in building a strategic advantage . An evaluation of strategic resources and capabilities must therefore include assessments of the core a company has or is developing , how they are nurtured , and how they can be leveraged . Core evolve as a develops its business model and incorporates its intellectual assets . Core are not just things a company does particularly well rather , they are sets of skills or systems that create a uniquely high value for customers at levels . To qualify , such skills or systems should contribute to perceived customer , be for competitors to imitate , and allow for leverage across markets . Honda use of small engine technology in a variety of motorcycles , jet skis , and lawn a good example . Core should be focused on creating value and should be adapted as customer requirements change . Targeting a carefully selected set of core also innovation . Charles , for example , successfully leveraged its core competency in brokerage services by expanding its client communication methods to include Internet , telephone , and advisors . Hamel and suggest three tests for identifying core . First , core should provide access to a broad array of markets . Second , they should help differentiate core products and services . Third , core should be hard to imitate because they represent multiple skills , technologies , and organizational elements . Experience shows that only a few companies have the resources to develop more than a handful of core . Picking the right ones , therefore , is the key . A key question to ask is , which resources or capabilities should be kept and developed into core and which URL books 170

ones should be outsourced ?

Pharmaceutical companies , for example , increasingly outsource clinical testing in an effort to focus their resource base on drug development . Generally , the development of core should focus on platforms capable of adapting to new market circumstances on unique sources of leverage in the value chain in which the firm thinks it can dominate on elements that are important to customers in the long run and on key skills and knowledge , not on products . and Hamel ( 1990 , URL books 171

To Outsource or Not to Outsource Few companies , especially ones with a global presence , are in all of the activities that make up their value chain . Growing global competitive pressures force companies to focus on those activities they judge as critical to their success and excel capabilities in which they have a distinct competitive that can be leveraged across and lines of business . Which activities should be kept in house and which ones can effectively be outsourced depends on a host of factors , most prominently the nature of the company core strategy and dominant value discipline . In principle , every functional or activity , from research to manufacturing to customer service , is a candidate for outsourcing . It is hard to imagine , however , that operationally excellent companies would consider outsourcing activities that are critical to the of their supply chain . Similarly , companies operating with a business model should be reluctant to outsource functions , while product leaders should nurture their capacity to innovate . That is why made continuous investments in its production system as it globalized its operations , Gamble focused on strengthening its innovation and marketing capabilities as it expanded abroad , and continued to its management capabilities . Firms tend to concentrate their investments in global value chain activities that contribute directly to their competitive advantage and , at the same time , help the company retain the right amount of strategic . Making such decisions is a formidable that may seem unrelated at glance can turn out to be critical for creating an essential advantage when they are combined . As an example , consider the case of a leading consumer company that created strong embedded capabilities in sales . Its smaller brands showed up on retailers shelves far more regularly than comparable brands from competitors . It was also known for the of its in rapidly bringing product variations to market . These capabilities are worth investing in separately , but , together , they add up to a substantial advantage over competitors , especially in introducing new products . URL books 172

Outsourcing and of component manufacturing and support services can offer compelling strategic and financial advantages including lower costs , greater , enhanced expertise , greater discipline , and on core business activities . Lower Costs Savings may result from lower inherent , structural , systemic , or realized costs . A detailed analysis of each of these cost categories can identify the potential sources of advantage . For example , larger suppliers may capture greater scale than the internal organization . The risk is that efficiency gains lead to lower quality or reliability . typically offers significant infrastructure and labor cost advantages over traditional outsourcing . In addition , many providers have established very operations that are not economically possible for domestic providers . Greater Flexibility Using an outside supplier can sometimes add to a company such that it can rapidly adjust the scale and scope of production at low cost . As we have learned from the Japanese keiretsu and Korean chaebol conglomerates , networks of organizations can often adjust to demand more easily than fully integrated organizations . Enhanced Expertise Some suppliers may have proprietary access to technology or other intellectual property advantages that a can not access by itself . This technology may improve operational reliability , productivity , efficiency , or total costs and production . The significant scale of offshore manufacturers , in particular , allows them to invest in technology that may be cost prohibitive for domestic providers . Greater Discipline Separation of purchasers and providers can assist with transparency and accountability in identifying true costs and benefits of certain activities . This can enable transactions under contracts where the focus is on output rather than input . At the same time , competition among suppliers creates choice for purchasers and encourages the adoption of innovative work practices . URL books , 173

Focus on Core Activities The ability to focus frees up resources internally to concentrate on those activities at which the company has distinctive capability and scale , experience , or differentiation to yield economic benefits . In other words , focus allows a company to concentrate on creating relative advantage to maximize total value and allows others to produce supportive goods and services . While outsourcing is largely about scale and the ability to provide services at a more competitive cost , is primarily driven by the dramatic differentials that exist between developed and developing nations . However , cost should not be the only consideration in making decisions other relevant factors include the quality and reliability of labor continuous process improvements , environment , and infrastructure . Political stability and broad economic and legal should also be taken into account . In reality , even very labor cost differentials between countries can not be the sole driver of decisions . Companies need to be assured of quality and reliability in the services they are outsourcing . This is the same whether services are outsourced domestically or offshore . Special report on outsourcing ( 2006 , January ) URL books 174

The Growth in Outsourcing In the last 20 years companies have outsourced many activities , including manufacturing , functions , information technology ( IT ) services , and customer support . Now the focus is shifting to more areas , such as product development , engineering , and analytical services . For example , as noted above , pharmaceutical companies depend on a steady pipeline of new products from . The competitive pressures on these to bring out new products at an ever rapid pace to meet market needs are increasing . With it , the pressures on the function are increasing . In order to alleviate the pressure , have to either increase budgets or ways to utilize the resources in a more productive way . There are situations when a should consider outsourcing some of its work to contract research organizations or universities , for example , when ( a ) new product design is ineffective or too slow , the company is plagued by consistent project time and cost overruns , loss of key talent has slowed new product development , there is a need for an immediate competitive response , or ( when problems of quality or yield reduce effectiveness . The growth in outsourcing is mainly driven by cost imperatives , but , increasingly , shortages of talent in home markets and the growing availability of skills in nations such as India , China , and Russia play a role . A second driver behind the growth in outsourcing is the increasing of standard business processes and IT services , depressing margins on such activities for . This has further encouraged service providers to switch to other activities for which profits are potentially innovation services such as new product development ( and engineering . According to Company , there has been 95 growth in the provision of such capabilities since the millennium . At the same time , providers of standardized services have come to recognize that they need to focus on and more seamless client integration if they are to continue making sufficient returns . By contrast , innovation services , including everything from prototype design to credit analysis , are more complex and , and therefore are more likely to command a premium . URL books 175

For companies considering outsourcing , the lack of standardization means that partner vetting is critical and that need to consider investing in captive or operations that can be sufficiently customized . That may mean turning to smaller is , those with fewer than 500 are better able to meet exacting requirements . The process of contracting with multiple , small service providers in different parts of the world is challenging . Many companies are still struggling to integrate more standardized processes with their existing core operations . Outsourcing activities will involve a whole new level of managerial complexity , potentially fundamental notions of how companies see themselves and what they do . Outsourcing vital activities such as prototype design and engineering support will be fraught with risk , with potentially downsides . However , organizations will have little choice the need to identify talent outside the home territory will force them to work with partners overseas , whatever the pitfalls . Companies that successfully manage outsourcing are looking to create collaborative management models that share responsibilities , risks , and rewards , enabling both sides to reach their objectives . This approach involves treating contractors as valued collaborators even in cases where competitors are employing the same company . It will also necessitate joint investment in offshore staff development , helping providers to retain talent and maintain their revenue margins . Increased use of could have on how companies are organized . Rather than multinational organizations with business units staffed by expatriate managers and orchestrated from a central headquarters , the organization of the future will be more globally distributed , with managers seeking out talent wherever it is located and plugging in capabilities when needed . Unlike the outsourcing of the past , is not simply about labor arbitrage it is about transforming companies into more nimble , entities . Outsourcing of in the Pharmaceutical Industry To cut costs and speed development , Eli Lilly a substantial portion of its clinical countries such as India and China . Lilly is not the only pharmaceutical company that has URL books 176

relocated operations to the developing world tests drugs in Russia , and conducts clinical trials in China . The main driver is rising development costs , estimated at some billion per expenses on all the products that do not make it to the expected to increase to billion by 2010 . More recently , Lilly and other drug makers have begun to expand their efforts in India and China to include clinical trials . These are the experiments to prove a drug can be used on humans . These tests are enormously expensive Lilly estimates that each Phase III test costs at least 50 million a year . To reduce costs , Lilly plans to move 20 to 30 of this testing in the next few years . While cost reduction is the main reason for the migration , this migration is made possible by the investments these nations have made in the necessary research labs , hospitals , and professional staffs to conduct studies that meet the stringent regulations of the Food Drug Administration or drug regulators in the European Union . While these outsourcing initiatives are extremely successful , it is unlikely that Lilly will move its entire portfolio abroad . It will likely keep a number of centers of excellence in the United States , renowned for their research in cancer and heart disease , to maintain its leadership in these areas and to keep a research presence in the country . Another reason that prevents pharmaceutical companies from outsourcing all of its research is that they may not be able to sell their newest products in countries like India and China because patients can not afford them or because of worries about patent protection . Myers and Cheung ( 2008 , Summer ) Bliss , and Shorter ( 2007 ) Special report on outsourcing ( 2006 , January ) URL books 177

Risks Associated With Outsourcing Outsourcing can have significant but is not without risk . Some risks , such as potentially higher costs due to the eroding value of the dollar , can be anticipated and addressed through contracts by employing strategies . Others , however , are harder to anticipate or deal with . As a general principle , functions that have the potential to interrupt the of product or service between a company and its customers are the riskiest to outsource . For example , delegating control of the distribution process to an online retailer can result in customers not receiving goods promptly outsourcing responsibilities can result in customers being with the product or service and , thus , in higher product returns , lower , or complaints that could endanger the company reputation . The second riskiest type of activity to outsource is one that affects the relationship between a company and its employees . Outsourcing the human resources function , for example , can affect quality outsourcing payroll and processing can result in information breaches that generate identity theft issues and resultant legal issues or outsourcing software design can generate a decline in organizational innovation . By contrast , support functions such as accounts payable and maintenance are less risky to outsource because they have few direct links to customers or internal organizational processes . More formally , risks associated with outsourcing typically fall into four general categories loss of control , loss , loss trust , transaction costs . Loss of Control Managers often complain about loss of control over their own process technologies and quality standards when processes or services are outsourced . The consequences can be severe . When tasks previously performed by company personnel are given to outsiders , over whom the firm has little or no control , quality may suffer , production schedules may be disrupted , or contractual disagreements may develop . If outsourcing contracts inappropriately or incorrectly detail work , URL books 178

may be tempted to behave example , by using subcontractors or by charging unforeseen or unwarranted price increases to exploit the company dependency . Control issues can also be exacerbated by geographic distance , particularly when the vendor is offshore . Monitoring performance and productivity can be challenging , and coordination and communication maybe with offshore vendors . The inability to engage in discussions , brainstorm , or explore nuances of obstacles could cripple a project . Distance , too , can increase the likelihood of outages disabling the communication infrastructure between the vendor and the outsourcing firm . Depending on where the outsourced work is performed , there can be critical cultural or differences between the outsourcing company and the vendor . Such differences can have important customer implications . For example , if customer call centers are outsourced , the manner in which an agent answers , interprets , and reacts to customer telephone calls ( especially complaints ) may be affected by local culture and language . Loss of Innovation Companies pursuing innovation strategies recognize the need to recruit and hire highly qualified individuals , provide them with a focus and minimal control , and appraise their performance for positive impact . When certain support as IT , software development , or materials outsourced , innovation may be impaired . Moreover , when external providers are hired for the purposes of cutting costs , gaining labor pool , or adjusting to market , standing cooperative work patterns are interrupted , which may adversely affect the company corporate culture . Loss of Organizational Trust For many firms , a significant risk occurs because outsourcing , especially of services , can be perceived as a breach in the relationship . Employees may wonder which group or what function will be the next to be outsourced . Workers displaced into an outsourced organization often feel as to who their real boss is the new external service contractor or the client company by which they were previously employed ?

Transaction Costs URL books , 179 Some outsourcing costs and benefits are easily identified and quantified because they are captured by the accounting system . Other costs and benefits are but not part of the accounting system . Such factors can not be ignored simply because they are difficult to obtain or because they require the use of estimates . One of the most important and least understood considerations in the decision is the cost of outsourcing risk . There are many other factors to consider in selecting the right level of participation in the value chain and the location for key activities . Factor conditions , the presence of supporting industrial activity , the nature and location of the demand for the product , and industry rivalry should all be considered . In addition , such issues as tax consequences , the ability to repatriate , currency and political risk , the ability to manage and coordinate in different locations , and with other elements of the company overall strategy should be factored in . Global Brain Trust Encouraging the Mobility of Ideas likes to team up with leading international universities in search of the next great communications technology ideas . The Finnish company research center in the United Kingdom works with the University of Cambridge to develop for mobile communication and what is being called ambient intelligence environments that are sensitive and responsive to the presence of people . In Beijing , research hub was set up to take advantage of China universities and to gather valuable local perspectives on communications trends and market potential . But the other aspect of open innovation abundant use of the Internet to harvest new far less conventional . The progress of current projects is posted on company . The Beta Labs website plays host to a legion of testers who provide feedback on new and potential applications . And Forum , a portal available in English , Chinese , and Japanese , gives outside developers access to resources to help them design , test , certify , market , and sell their own applications , content , services , or websites to mobile users via devices . By encouraging the mobility of ideas across its network and then exploiting them commercially , is able to succeed with an innovation strategy that represents the best of global and local approaches . But URL books 180

thrust is by itself only part of a innovation strategy aimed at supporting sustained expansion into markets outside the company traditional European markets . Venture capital investment is the other thrust . The company Growth Partners , with offices in China , Finland , India , and the United States , manages 350 million for direct investments and fund investments in other venture capital players , primarily in the United States , Europe , and Asia . One recent fund investment was in Madhouse , China leading mobile advertisement crucial driver for continued growth in mobile communications markets . Butler , and ( 2009 ) URL books 181

Locating Activities The search for growth is a primary driver of manufacturing relocation . economies have significantly higher trend rates of growth than mature economies . This is the inevitable result of the arrival of capital investment in and economies . This phenomenon is clearly evident in the automotive industry challenged by low sales growth and declining margins in mature markets . The world automotive want to capture market share in the fastest growing markets of the near future , and they want their chosen suppliers to be with them . Suppliers , for their part , also want to be part of the growth story , serving not only their traditional global Original Equipment Manufacturer customers but also the emerging local automakers that are capturing new markets with low cost and often innovative products , such as China Auto and India Tata Motors . Reducing cost is a second powerful driver of manufacturing relocation . A recent survey by Peat showed that among companies that are primarily motivated by costs to invest in new markets , the opportunity to lower material costs is considered marginally more important than labor or capital costs . This somewhat surprising result the fact that companies still find that the costs of internationally traded raw materials and partially processed commodities , such as automotive steel , remain cheaper in some economies . The same survey showed that even if costs can be reduced , companies remain concerned about the cost of complexity that may be introduced when operations become distributed over several locations that may be separated by large distances and may be in numerous jurisdictions . The companies interviewed also cited a wide range of other cost drivers of relocation . These include government incentives , regional interest rates , wages , and trade agreements . The relative importance of a third increasing as the center of gravity of global business activity continues to shift eastward . In the automobile industry , for example , a vehicle manufactured today has , on average , 10 times the number of electronic functions of a vehicle manufactured 10 years ago . But while innovation has intensified , the sales volume to support the costs of this product innovation has failed to materialize . Price and income trends mean that sales URL books 182

volumes are unlikely to be rebuilt in the developed industrial markets on the contrary , they are likely to fall . In these markets , the average price of a new car has doubled over the last 20 years , but average incomes have only risen by 50 , and this gap continues to widen , implying further falls in sales volumes if costs can not be cut . These trends are driving a multidirectional globalization of innovation in the supplier industry . Established companies in the automotive triad need both to cut the costs of innovation and new sources of technology and process innovation . Suppliers in emerging economies need to acquire , rather than just develop , technologies and skills in order to gain the innovation critical mass that will allow them to compete as global suppliers . Companies participating in the Supplier Survey divide roughly equally between those who believe that should be located close to production and those who are happy with geographically separated and production . These responses suggest that a minority of companies plan to relocate to emerging markets , despite cost pressures . Companies who believe that should be located close to production tend not to be planning . They believe that for process improvement is more important than for application engineering , and their centers are most likely to be located in Western Europe and Asia , followed by North America . In contrast , companies willing to operate centers remote from production are predisposed to relocating production facilities , although most of these companies say that innovation is a less important criterion than cost , growth , or risk . These primary need to find growth , to reduce costs , and to facilitate be balanced by a company capacity to manage risks . Yet , in many cases , the upside and downside of all these factors may be more subtle or less clear than companies commonly suppose . Where markets offer the promise of growth , companies should consider how consistent that growth would be over the term of the investment . They might consider whether it is necessary to locate in a given economy , or even region , to access the expected growth . Where companies seek to reduce costs , they should also consider whether direct cost reductions in areas like labor and raw materials are accompanied by indirect cost increases in areas like logistics and quality assurance . Where companies seek to URL books 183

facilitate innovation , they should consider whether risks and costs are best balanced by a conservative strategy of centralized or a radical strategy of globally distributed . And , in seeking to manage risks , companies need to understand that globalized operations may offer risk mitigation opportunities through the hedging of production , currency exposure and raw materials sourcing , as well as the increased risk challenges inherent in global operations . Adapts Its Business Model to Target the Global Halal Food Market In 2006 , the Malaysian operations of the worlds biggest food company played a leading role as began to target the halal food business . Its annual turnover of 73 billion ( in 2005 ) dwarfed that of its nearest rivals , notably Kraft Foods , and , whose sales ranged from 20 billion to 35 billion . Nevertheless , was positioning itself to grow its food business even further . With a market share of only of the global food industry , had ample room for growth . The halal segment , where it was well ahead of its major competitors in terms of market share and preparation , looked particularly promising . Worth 150 billion and with Muslims forming about 25 of the world population and having higher per capita income growth , estimated that the halal food business would grow to 500 billion by 2010 . 2006 sales of halal products were in the region of billion . The strategic importance of this segment of the market was clearly highlighted at product exhibition center on the sixth of its headquarters in , Switzerland . In a special corner for halal food exhibits , posters displayed such messages as As disposable incomes of Muslim countries increase , global halal food sales will skyrocket In Europe , many supermarkets are selling halal products and Worldwide , halal food sales exceed 150 Growth was expected to come from not only large , populated Muslim countries like Indonesia , Pakistan , and the Middle East but also countries with a large number of Muslims , like India and the Muslim belt of North Africa , and in cities such as London . books 184

There were a number of factors believed would drive growth . One was an increasing demand for products that follow Islamic law . Another was the growing divide between the West and the Islamic world . One implication of the latter was an expected increase in trade between Muslim food products would be strong . Third , Muslim governments were widely expected to launch initiatives to encourage participation in expanding the halal food business . In the case of Malaysia , for example , the government had initiated an ambitious plan to turn the country into the worlds premier halal hub . Finally , the international Muslim community was getting closer to and harmonizing matters pertaining to halal food manufacturing practices , certification , and product labeling . To capitalize on these opportunities , was prepared to make significant changes to its business model . First , it designated its Malaysian operations to take the lead . had begun producing halal food in Malaysia in the . That was the decade when the company established a halal committee comprising Muslim senior executives of various disciplines from the side and the corporate level . In the 19905 , the committee became more structured , and a halal policy was established . In 1995 , Malaysia took the halal initiative to the global platform within the Group . Two years later , Malaysia , in collaboration with the Group , established internal guidelines with input from ( the Department of Islamic Development in Malaysia ) to what constituted halal food and how to manage its production and supply . Second , working with the international Muslim community and governments , it had 75 of its 487 factories in 84 countries halal . were in Asia and the Middle East , seven were in Europe , and two were in the Americas . All eight of Malaysian factories were , producing more than 300 products . The big items were powdered Milo beverage , noodles , sauces , and culinary mixes . The Malaysian operation was also the regional producer for Milo , Kit Kat chocolate , and infant cereals . Third , at the retail level , worked with the United Kingdom largest supermarket chain , to promote halal food products as a specialty category . had agreed to create halal corners in 40 stores in the United Kingdom , with the potential for expanding that number to 500 stores . was URL books 0797 ?

185 a list of products , including those made by its Malaysian factories , to be featured in this section of the supermarket . Finally , to help the Malaysian government reach its target , conducted a mentoring program for and enterprises in the food industry to improve their standards with regard to hygiene and food safety . All these preparations were about to pay a dividend . 2009 ) 2009 ) 2006 , December 18 ) URL books ( 186

Partnering Formulating cooperative ventures , strategic alliances , and other partnering the complement of outsourcing . For many corporations , cooperative strategies capture the of internal development and acquisition while avoiding the drawbacks of both . Globalization is an important factor in the rise of cooperative ventures . In a global competitive environment , going it alone often means taking extraordinary risks . Escalating fixed costs associated with achieving global market coverage , keeping up with the latest technology , and increased exposure to currency and political risk all make a necessity in many industries . For many companies , a global strategic posture without alliances would be untenable . Cooperative strategies take many forms and are considered for many different reasons . However , the fundamental motivation in every case is the corporation ability to spread its investments over a range of options , each with a different risk . Essentially , the corporation is trading off the likelihood of a major payoff against the ability to optimize its investments by betting on multiple options . The key drivers that attract executives to cooperative strategies include the need for risk sharing , the corporation limitations , and the desire to gain market and technology access . Risk Sharing Most companies can not afford moves to participate in all product markets of strategic interest . Whether a corporation is considering entry into a global market or investments in new technologies , the dominant logic dictates that companies prioritize their strategic interests and balance them according to risk . Funding Limitations Historically , many companies focused on building sustainable advantage by establishing dominance in all the business activities . Through cumulative investment and vertical integration , they attempted to build barriers to entry that were hard to penetrate . However , as the globalization of the URL books 187

business environment accelerated and the technology race intensified , such a strategic posture became increasingly difficult to sustain . Going it alone is no longer practical in many industries . To compete in the global arena , companies must incur immense fixed costs with a shorter payback period and at a higher level of risk . Market Access Companies usually recognize their lack of prerequisite knowledge , infrastructure , or critical relationships necessary for the distribution of their products to new customers . Cooperative strategies can help them fill the gaps . For example , has an alliance with Company in North America and with Fiat in Europe to distribute its hydraulic excavators . This arrangement makes sense because product line is too narrow to justify a separate distribution network . What is more , customers because the gaps in its product line are filled with quality products such as bulldozers and wheel loaders from its alliance partners . Technology Access A large number of products rely on so many different technologies that few companies can afford to remain at the forefront of all of them . Carmakers increasingly rely on advances in electronics , application software developers depend on new features delivered by in its operating platform , and advertising agencies need more and more sophisticated tracking data to formulate schedules for clients . At the same time , the pace at which technology is spreading globally is increasing , making time an even more critical variable in developing and sustaining competitive advantage . It is usually beyond the capabilities , resources , and good luck in of any corporation to garner the technological advantage needed to independently create disruption in the marketplace . Therefore , partnering with technologically compatible companies to achieve the prerequisite level of excellence is often essential . The implementation of such strategies , in turn , increases the speed at which technology diffuses around the world . Other Factors URL books , 188

Other reasons to pursue a cooperative strategy are a lack of particular management skills an inability to add value and a lack of acquisition opportunities because of size , geographical , or ownership restrictions . The airline industry provides a good example of some of the drivers and issues involved in forging strategic alliances . Although the industry has been deregulated for some time , international aviation remains controlled by a host of bilateral agreements that smack of protectionism . Outdated limits on foreign ownership further distort natural market forces toward a more global industry posture . As a consequence , airline companies have been forced to confront the challenges of global competition in other ways . With takeovers and mergers blocked , they have formed all kinds of code sharing to aircraft maintenance to frequent plans . Cooperative strategies cover a wide spectrum of , and arrangements . Selecting the most appropriate arrangement involves analyzing the nature of the opportunity , the mutual strategic interests in the cooperative venture , and prior experience with joint ventures of both partners . The essential question is , how can this opportunity be structured in order to maximize ) to both parties ?

The Boston Consulting Group ( divides alliances into four groups on the basis of whether the participants are competitors or not and on the relative depth and breadth of the alliance itself expertise alliances , new business alliances , cooperative alliances , and merger and acquisition alliances . Expertise alliances typically bring together noncompeting to share expertise and specific capabilities . Outsourcing of IT services provides a good example . New business alliances are partnerships focused on entering a new business or market . Many companies , for example , have partnered when venturing into new parts of the world , such as China . Cooperative alliances are joint efforts by competing , formed to attain critical mass or economies of scale . Competitors combining to seek cheaper health insurance for employees , for example , or combined purchasing arrangements , illustrate this kind of alliance . the name on integration but may be prevented from doing so , either because of legal regulatory constraints ( airline industry ) or because of unfavorable stock market conditions . URL books 189

found that while alliances compose a clear majority ( over 50 ) based alliances are most favored by the stock market , and alliances are least favored . The latter is not surprising since such alliances are created in response to unfavorable regulatory or market conditions . May 2009 The Air Group and Delta Air Lines Launch New Transatlantic Global Joint Venture The Air France Group and Delta Air Lines announced a new , joint venture whereby the partners will jointly operate their transatlantic business by coordinating operations and sharing revenues and costs of their network . The airlines will cooperate on routes between North America and Africa , the Middle East and India , as well as on between Europe and several countries in Latin America . For customers , this joint venture will result in more choices , frequencies , convenient schedules , competitive fares , and harmonized services on all transatlantic operated by the partners . The joint venture represents approximately 25 of total transatlantic capacity , with annual revenues estimated at more than 12 billion ( approximately billion euros , reference year ) Global passengers will be able to access a vast network offering over 200 and approximately seats daily . That network is structured around six main hubs Amsterdam , Atlanta , Detroit , New , and , together with Cincinnati , Lyon , Memphis , and Salt Lake City . The airline partners will provide their corporate clients with a broad global offering that best meets their expectations for the most convenient airline system , while providing account management as well as ease of travel for their clients . Going forward , this structure will represent a major strength for the alliance , of which all three airlines are members . The joint venture geographic scope includes all between North America and Europe , between Amsterdam and India , and between North America and Tahiti . On these routes , the business will be jointly operated , with the strategy and economics equally shared among the Air Group and Delta . URL books 0792 . 190

Air France and have been working with their respective American partners for many years . signed a joint venture agreement with Northwest in 1997 , while Air France and Delta signed a venture agreement in 2007 . Following the merger of Delta and Northwest , the next logical business strategy was to establish a single transatlantic joint venture . The agreement is the result of that collaboration . Governance of the joint venture will be equally shared between the Air France Group and Delta . An executive committee comprising the three CEOs and a management committee comprising representatives from marketing , network , sales , alliances , and operations will strategy . Ten working groups will be responsible for implementing and managing the agreement in the sectors of network , revenue management , sales , product , frequent , advertising and brand , cargo , operations , IT , and . The joint venture will not lead to the creation of a subsidiary . The venture is a , evergreen arrangement that can only be canceled with a notice and after an initial term of 10 years . GE Money Announces Joint Venture With One of Largest Banking Groups , Connecticut , February 28 , 2007 Furthering its growth strategy in Latin America , GE Money , the consumer lending unit of General Electric Company , today announced that it would acquire a minority position in Banco consumer and commercial bank based in Bogota , Colombia . GE Money will acquire a stake in Red in two installments , with options to acquire up to an additional 25 stake from by 2012 . The initial purchase , subject to regulatory approvals , is expected to close within the next few months . We are excited to be entering Colombia to partner with Banco and its customers , said the president and CEO of GE Money , Americas . Colombia is an important growth market for GE as we continue to expand our business in Latin America . The Banco team has built an exciting bank in Colombia . We look forward to partnering with them to help accelerate their Banco , a member of the group , had over billion in assets and was the credit card issuer in Colombia . With 139 branches , the bank served more than million URL books ' 19

customers . The new partnership positioned the two companies to deliver enhanced consumer credit products to the growing Colombian financial services market . This partnership will enable Banco to expand its product offerings and to further accelerate the strong growth in the Colombian market , said the chairman of the board of Banco . This is part of the vision that we share with our new partner . GE Money is the perfect partner to help us broaden our business in GE Money , Latin America , began operations in 2000 , offering consumer loans and credit cards . The business now operates in Mexico , Argentina , and Brazil , as well as in Costa , El Salvador , Honduras , and Panama , through a joint venture with Holding , BAC ) With approximately billion in assets , GE Money , Latin America , offers a wide range of products , including mortgages , auto loans , credit cards , insurance products , and personal loans in more than 430 branches and locations . 1993 ) Cools and ( 2005 ) GE money to form a joint venture ( 2007 , February 28 ) URL books 192

Points to Remember . a company value creation the sourcing of raw materials and components to manufacturing and to distribution and customer three primary dimensions ( a ) deciding which activities to perform in house and which ones to outsource , to whom and where ( developing the right partnerships to support a company globalization efforts , and ( implementing a suitable management model for integrating them into a , seamless , network . Core represent unique capabilities that allow a company to build a competitive advantage . Experience shows that only a few companies have the resources to develop more than a handful of core . Picking the right ones , therefore , is the key . Few companies , especially ones with a global presence , are in all the activities that make up their value chain . Growing global competitive pressures force companies to focus on those activities that they judge critical to their success and excel capabilities in which they have a distinct competitive that can be leveraged across and lines of business . Which activities should be kept in house and which ones can effectively be outsourced depends on a host of factors , most prominently the nature of the company core strategy and dominant value discipline . Outsourcing and of component manufacturing and support services can offer compelling strategic and financial advantages including lower costs , greater , enhanced expertise , greater discipline , and on core business activities . In the last 20 years , companies have outsourced many activities , including manufacturing , functions , IT services , and customer support . Now the focus is shifting to more areas , such as product development , research and development , engineering , and analytical services . Outsourcing can have significant benefits but is not without risk . Some risks , such as potentially higher costs due to the eroding value of the dollar , can be anticipated and addressed through contracts by employing financial hedging strategies . Others , however , are harder to anticipate or deal with . Risks associated with outsourcing typically fall into four general categories loss of control , loss , loss trust , and transaction costs . URL books 193

. 10 . 11 . The search for growth is a primary driver of manufacturing relocation . Others include cutting costs and innovation . Formulating cooperative ventures , strategic alliances , and other partnering the complement of outsourcing . For many corporations , cooperative strategies capture the benefits of internal development and acquisition while avoiding the drawbacks of both . The key drivers that attract executives to cooperative strategies include the need for risk sharing , the corporation funding limitations , and the desire to gain market and technology access . The Boston Consulting Group divides alliances into four groups on the basis of whether the participants are competitors or not and on the relative depth and breadth of the alliance itself expertise alliances , new business alliances , cooperative alliances , and alliances . found that while alliances compose a clear majority ( over 50 ) based alliances are most favored by the stock market , and alliances are least favored . The latter is not surprising since such alliances are created in response to unfavorable regulatory or market conditions . URL books 194