So thanks very much for staying on. In this very last video lecture for

today, we're going to be looking at strategic partnerships and how they can

foster coordination between firms that produce complementary products.

We're also going to look at the form that these strategic partnerships are most

likely to take for complementary products producers.

So what's special about complementary products producers?

Well they pretty much depend on each other anyway.

Right? So, as we've seen in the previous videos

it's good if I can work with someone who's producing complementary

products. I profit from the fact that he produces high

quality or produces at a low price, or produces a large variety of my

complementary product. So, we're always, already, depending on

each other. So, helping each other, coordinating each

other's behavior, somehow comes naturally and it maximizes the postive effects of

complementarity. We also saw that it may be desirable to

integrate into one firm because that aligns interests even more.

But sometimes integrating into this one single company is just not feasible or

not desired by the involved firms. So, if you think of two massive

conglomerates that may have complementary interests in a particular segment, it's

unlikely that this is going to make them merge.

But, on the other hand it's clear that

they do have complimentary interests in this particular segment of the market.

So, an alternative to integrating and to forming a single company is to form a

strategic partnership, which is, generally speaking, a powerful way of

institutionalizing coordination and of formalizing interests.

And strategic partnerships, of course, in the very broadest sense are relationships

between firms, they're long term relationships between firms, with a

number of characteristics that are typical to strategic partnerships.

First of all, there's an element of shared decision making, right?

So if we produce complements, then maybe product introduction decisions or

quality decisions or pricing decisions will be made somehow in a shared way.

We also try to achieve some kind of organizational linkage and we try to

implement coordination mechanisms. This is what we call organisational

integration. We also often have joint equity

ownership. We don't have to have it.

But joint equity ownership is often a form of building a strategic partnership.

This is what we call economic integration.

And so how do these two features, organizational integration and economic

integration, pan out? What do they involve?

So, think of these two firms A and B. They have organizational units

represented by the green rectangles. What does organizational integration

involve? It involves forming teams across firms.

So maybe some employees of firm A and firm B in these units will work on a

team together. There's often some established reporting

and decision routines across firms. So, the exchange of information is

formalized, it's usually very heavy. So, there's a lot of exchange of

information in both ways and bi-directionally.

So it's important that organizational integration relies very much on the

exchange of information, and on the routinized exchange of information

through teams, through reporting, through decision rules, or generally speaking,

through a lot of interaction. Okay?

Note that, however, organizational integration does not depend on the fact

that I have shared asset ownership. So what does economic integration mean,

then? It means direct cross ownership of

equity. So this would mean that firm A holds x

percent of firm B's assets, and vice versa, firm B may hold y percent of firm

A's assets. It might also mean that economic

integration takes the form of setting up a new legal entity in the form of a joint

venture which is owned to some part by firm A, and to some part by firm B.

And clearly there are benefits to that. You align the interests, right?

So if you have joint asset ownership, you want the other firm to do well,

because that means that your share of the other firm is going to do well, as well.

You retain some control and exclusivity. So if you own firm B, if you own a part

of firm B, it's unlikely that firm B is just going to turn around and start

dealing with your closest competitor. So, that's retaining control, retaining

exclusivity as well. And finally it makes inter-organisational

coordination, so the whole issue of organisational

integration that we discussed just now, easier, right?

So sometimes, reporting structures are greased or made easier by the fact that

you have joint asset ownership, for example.

Now, how does complementarity play into this situation?

Well, as we've seen, and as we've discussed, if firms produce complementary

products already, they already have high incentives to work together in a

cooperative way. That's what a lot of today's lecture

basically was about. So we would expect that there's probably

less need for economic intergration to align those interests because they are fairly

well aligned already. So in other words, if our products are

highly complementary, then we would perceive less of a need for economic

integration. So as we've seen just now, companies that

produce complementary products will gain from coordinating their behavior with

each other. And the best way to achieve this is to

integrate both companies into a single organization. But sometimes this is not

possible.

So this could be for several reasons: a desire for independence, only a small

part that is complementary between two firms and so on.

So as an alternative, firms will often consider forming a strategic

partnership. And a strategic partnership is

characterized by some degree of shared decision making, by creating and

maintaining organizational linkages and possibly holding joint

equity. So, the general idea of joint equity

ownership is often to align, is mostly to align, the interests of firms and make the

strategic partnership work effectively. In our special case of two new firms

producing complements, these firms already have a strong incentive to work

together closely. Why?

Because their products are complements, so if you do well, I do well.

Alright? So this is not necessarily dependent on

joint ownership. So we focused on complements this week.

So we'll summarize what we've learned today in the following wrap-up video,

and in the end of the week quiz. Thanks very much, and I'll see you at the wrap-up.

Strategic Partnerships

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