AC311 Fall 2020 Session 8.1 (Dekker) PDF

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Summary

Lecture notes for the course...

Description

Henri Dekker

Visiting Professor LSE

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Professor of Management Control @ Vrije Universiteit Amsterdam Visiting positions @ LSE

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Research interests

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◦ Alliances, interfirm collaboration ◦ MCS design & performance management ◦ Regulation & compliance behavior

◦ Contact: [email protected]

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Interrelated themes: 1: The emergence & management of IORs (this lecture) 2: Contractual design for IORs 3: Management control in IORs

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Live sessions: ◦ Two case analyses  Renault-Nissan Alliance ; IBM Microelectronics  Relate to theory discussions & help preparing for the exam

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Group assignment: Suzuki-Volkswagen

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Is widespread in business.. and challenging! ◦ A substantial part of many firms’ market value ◦ Key ‘means’ to obtain/maintain a competitive advantage ◦ Effectiveness of (only) ‘intrafirm’ control?

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Substantial control problems ◦ A large proportion ‘fails’  A ‘50/50 bet’ (Kaplan, Norton & Rugelsjoen, 2010)  Good control can make a difference (Anderson & Dekker 2005)

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And.. it is not unlikely you will get involved with them

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Alliances, JVs, supply chain relations, licensing, franchising, knowledge sharing, networks…..

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Realize goals unattainable alone (in time!) ◦ Resource acquisition; scale & scope

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A broad concept (Gulati 1998): ◦ voluntary arrangements… ◦ exchange, sharing, co-development… ◦ products, technologies, services… ◦ many motives, goals & forms… ◦ across vertical & horizontal firm boundaries.

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Equity sharing: Joint ventures, minority equity alliances, contractual alliances Joint activities: R&D, development, purchasing, production, marketing, selling… Knowledge sharing: Licensing, technology/knowledge sharing & learning, startup collaborations Sourcing: Outsourcing, off-shoring, subcontracting, supply chain management Franchising Multi-partner: consortia, business networks, industry platforms… ….

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Anderson & Sedatole (2003): US firms 1985-2000

Number of Collaborations

12,000

10,000

strategic alliances joint ventures

8,000

6,000

4,000

2,000

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

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The scope of the activity of management control is enlarged and is no longer confined within the legal boundaries of the organization (Otley 1994).

Planning, budgeting and control processes flow from one organization into others, creating, as they do, a more explicit awareness of the interdependency of action and the role which joint action can play in organizational success (Hopwood 1996). Different modes of management accounting accompany the emergence of hybrid organizational forms (Anderson & Sedatole, 2003)

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Role financial managers in IORs (Ding et al., 2010)

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Data of 439 firms in The Netherlands Average: 2.5 types •21% has no IOR •17% in 1 •20% in 2 •18% in 3……

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120

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80

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Frequency

40

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e ne dg no le w r no he ot g k in ar sh M g SC in ns g n ce si Li hi nc ra F ng si ha JV urc tp in D jo & R t in jo od pr t in P jo & M t in ng jo ci ur ng i so In urc so ut O

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Realize goals unattainable alone (in time) ◦ Few firms possess all resources needed to compete effectively

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Four broad goals (Groot & Merchant, 2000): 1. Cost reduction (economies of scale, labor costs) 2. Minimizing / sharing risks 3. Accessing new markets 4. Accessing strategic resources / knowledge learning and social (relational) capital

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Extending or enlarging the resource base? ◦ Scope or scale alliances?

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“Make” Vertically Integrate

A ‘real option’ on the path to vertical integration (M&A) or the market?

Production Costs + Transaction Costs

“Buy” Arm’s-Length Market Exchange

“Hybrid” Collaboration

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Huge literature.. spread across economics, management, strategy, sociology… ◦ Diversity of questions & approaches ◦ Key questions: formation, governance & control, and performance effects

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Accounting & control: Mechanisms/practices of accounting & control in IORs  Contracts & management control instruments

How to support the realization of planned/desired collaboration benefits?

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High likelihood of failure → control problems ◦ unsatisfactory outcomes, unmet expectations, unexpected events/actions, conflict, opportunism, ‘cultural misfit’…

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Key roles for control Motivating partners (‘appropriation concerns’) Coordinating across firms’ boundaries

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Parallel with control problems within firms … creating the conditions that enable to achieve desirable or predetermined outcomes

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Alliance decision Partner selection Governance design Dynamic evolution Alliance performance Partner performance

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Alliance decision Partner selection Governance design

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Four broad goals

Dynamic evolution

◦ Cost reduction; e.g., outsourcing, off-shoring

Alliance performance

◦ Minimize/share risks; e.g., loan syndicates;

Partner performance

joint vessel investments in sea shipping ◦ Accessing new markets; e.g., VW-Suzuki ◦ Accessing strategic resources; e.g., ‘learning alliances’, biotech alliances (financial resources), IBM case 

Key drivers: competitive pressures, market & technological uncertainties, disruptive innovators, resource constraints…

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Alliance decision Partner selection Governance design

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Who to ally with?

Dynamic evolution Alliance performance

◦ Search for complementary resources

Partner performance

◦ Confidence in partner’s goodwill & competencies  Mitigating opportunism & competence problems  Often problems can be traced back to the selection stage 

Substitute or complement to other controls? ◦ E.g., contracts, performance measurement, incentives

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Control ◦ Mitigating & managing risk ◦ Value creation & appropriation

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Market, hybrid or hierarchy? ◦ More Market? Superior incentives! ◦ More Hierarchy? Superior coordination!

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Alliance decision Partner selection Governance design Dynamic evolution

Hybrid: Equity or non-equity?

Alliance performance

◦ JVs, minority-equity participation, contracts

Partner performance

◦ Mechanisms of control within those forms?

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Alliance decision Partner selection

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How do IOR processes, control & management evolve over time? Dynamic models

Governance design Dynamic evolution Alliance performance Partner performance

◦ Initial conditions & adaptive processes ◦ Learning (outcomes, behaviors, uncertainties) ◦ Contract renegotiations

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Alliance decision Partner selection

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Measuring performance; complicated

Governance design Dynamic evolution

◦ IOR performance and partners’ performance ◦ Diversity of goals →different performance measures

Alliance performance Partner performance

◦ Dissolution to indicate failure; weak proxy ◦ Anderson & Dekker (2005): do ‘good’ contracts affect performance? -> failure to measure (non)performance 

Effects on firm performance ◦ Stock market reactions, likelihood of survival, patenting behavior, financial results [controlling for many other factors]

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Ireland et al. (2002): 1. After determining the scope of the desired alliance,

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need to select ‘the right partner’, then jointly develop an alliance design .. adapt when necessary

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.. ultimately to an appropriate end-game management

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Main focus:

2. 3.

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Enhance the likelihood that potential benefits are realized

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Strategic, relational, operational ‘fit’ between partners

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Managing performance risk and relational risk

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Anderson & Sedatole (2003): 1. Alliance control – governance structure ◦

Managing alliance risk and trust

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Relational risk and performance risk

Alliance performance

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Performance measurement & evaluation

Alliance evolution

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Managing over time: partner selection & termination, learning & incentives

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