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Managing Risk Essay

2028 words - 9 pages

managing risks in international strategic alliances
Risks and guidelines to manage them

MANAGING RISK
Emphasise protectionof the firm’s own primary resource
♣Risks are relatively low in protecting physical and financial resources, including patents, contracts, logos, and trademarks (ownership protected by law)
♣Risks are high in protecting technological, managerial, and organizational resources
♣Be careful about unintended transfer of knowledge and imitation; you have little legal protection here

Introduction: We now discuss the ways in which firms with particular resource orientations can manage the two kinds of risks—relational and performance—
inherent in strategic ...view middle of the document...

U S West claimed that these deals would potentially compete with its
own local telephone franchise.^" These proposals were all vetoed by U S West. Apparently, with considerable properties at stake, the orientation of the firm in such circumstances will be tighter control— that is, making sure that its properties are
used in consonance with its own interests and intentions.2' In essence, the issue is about dealing with the relational risk of the alliance.

Control can be achieved in different ways, as contractual control, equity control, and managerial control. Contractual control means specifying the details of usage of properties in the alliance agreement. There should be explicit specification of when, where, and how money, plants, distribution channels, and patents are to be used.

Equity control is about ensuring desirable behavior and outcome in an alliance through equity ownership. While contractual control is useful in virtually all alliances, equity control is relevant only if an alliance involves equity creation, such as joint ventures, or other equity arrangements, such as minority equity alliances. Equity control can be exercised by having majority equity ownership, which implies more authority and bargaining power, or by inviting the partner on board, asking the partner to take some equity position in the alliance.

Shared ownership aligns the interests of partners and deters opportunistic behavior. As a
result, more coUegial behavior may be expected. When Procter & Gamble first entered the Russian market in 1991, it did so with nonequity alliances. P&G transferred knowledge to its Russian partners so that they could produce P&G brand of products.Eventually, P&G realized that it needed to exercise more control over its alliances and chose to do so through equity participation. In its latest alliance with NBKh, P&G acquired a $50 million stake, and
the alliance has thus far been successfui.^^A third type of control for a partner firm is managerial, which ensures tight monitoring of alliance operations. To have one's own staff in key posts in an alliance is a significant mechanism for effective managerial control.

Partner firms can also have regular meetings to prevent sudden complications in operations. In an alliance between Kodak and Chinon, a medium-sized Japanese camera company, Kodak insisted on having its division manager manage the relationship.^^ The manager exercised managerial control through frequent interactions and communications, which helped make the alliance work.

MANAGING RISK
Retain flexibilitythrough short-term recurrent contracts, limiting commitment, and effective exit provisions. You need the ability to adapt, to be free from rigid contracts, and to be able to recover invested resources. Hence:
♣Have contracts specifying an incremental process of alliance making.
♣Avoid joint ventures and minority equity alliances in favour of less engaging forms such as licensing, shared distribution, and...

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