Alliance Structure

ALLIANCE STRUCTURE

MANAGING DYNAMICS THROUGH ROBUST ALLIANCE

GOVERNANCE STRUCTURE

Shaon Biswas Chao Lin Pei Jieng

CONTENT• KEY THEORIES OF ALLIANCE

GOVERNANCE

• THE REASONS OF CHANGE

• KEY THEORIES OF ALLIANCE GOVERNANCE

• ADJUSTMENT FOR SURVIVAL

• SURVIVAL WITHOUT MAJOR ADJUSTMENT

• THE ULTIMATE GOVERNANCE STRUCTURE FOR SURVIVAL

• LESSON TO LEARN FROM THIS CASE

• CRITICAL ANALYSIS

KEY THEORIES OF ALLIANCE GOVERNANCE

•GOAL

• LEGAL FORM

• FINANCIAL AGREEMENT

•COMMUNICATION STRUCTURE

•SCOPE AND EXCLUSIVITY

• PERSONAL RELATION

•REPUTATION

•DECISION MAKING

•GOVERNANCE BODY

•CULTURAL DIFFERENCE

• TRUST AND COMMITMENT

•CONFLICT RESOLUTION

• LEADERSHIP

•NORMS

Source: Roijakkers, N. & Man, A. 2010 J.J Reuer 2004

BACKGROUND“INTERNAL AND EXTERNAL DYNAMICS IN ALLIANCE FORCE

COMPANIES TO CHANGE ALLIANCE STRUCTURE”

-DAS & TENG (2000)

“ALLIANCE GOVERNANCE NEEDS TO CHANGE TO MEET CHANGING BUSINESS REQUIREMENT”

- ERNST AND BAMFORD (2005) AND REUER AND ZOLLO (2000)

Source: Roijakkers, N. & Man, A. 2010

ALLIANCE GOVERNANCE- THE REASONS OF THE CHANGES

FIVE REASONS (MENTIONED IN THE CASE)

• ENVIRONMENTAL DYNAMICS

• INTERNAL CHANGE

•SUCCESS AND FAILURE OF ALLIANCE BUSINESS

•RELATIONSHIP BUILDING

• INHERENT TENSION

Source: A. P. De Man et al. (2013)

KLM & NORTHWEST AIRLINES•ADJUSTMENT FOR SURVIVAL (1989-1997)

•SURVIVAL WITHOUT ADJUSTMENT (1997-2007)

BACKGROUND

DUTCH AIRLINE KLM (PART OF AIR FRANCE NOW) 1989 US: NORTHWEST

AIRLINE (DELTA AIRLINE MERGE)

AIM: GETTING THE BENEFIT OF US GOVERNMENT’S AIR TRAFFIC DEREGULATION AND UTILISING MAXIMUM CAPACITIES

OBJECTIVES: USING HUB AND SPOKE SYSTEM & GETTING BENEFIT OF CODE SHARING


ADJUSTMENT OF SURVIVAL (1989-1997)PROBLEM: ENVIRONMENTAL DYNAMICS

C: US-DUTCH OPEN SKY AGREEMENT (1992) - A: KLM- NWA BLOCK SPACE AGREEMENT- R.T: GOAL, SCOPE

C: NWA BANKRUPTCY (1993) – A: INCREASE SHARE 25% TO KLM – R.T: LEGAL FORM

FORMATION OF “NETWORK GROUP” AND “PASSENGER GROUP” TO MINIMISE RISK.

PROBLEM: INTERNAL CHANGE

C: NWA “POISON PILL” STRATEGY – A: ENHANCED ALLIANCE AGREEMENT - RT: DECISION MAKING, TRUST AND COMMITMENT


SURVIVAL WITHOUT MAJOR ADJUSTMENT (1997-2007)

• INCREASE OF SCOPE: NORTH ATLANTIC & INDIA

• EXCLUSIVITY: KLM (EUROPE MIDDLE EAST AFRICA), NWA (NORTH AMERICA), SALES PARTNER’S TICKET

• GOVERNANCE BODY: THE ENHANCE AGREEMENT HELPS BOTH MANAGEMENT ARE PART OF EACH OTHER.

• FINANCIAL AGREEMENT: FIFTY-FIFTY PROFIT STARING ON TRANSATLANTIC ROUTE. (A VIRTUAL JOINT VENTURE)

• COMMUNICATION STRUCTURE: MULTIPOINT, INFORMAL, CONTINUOUS COMMUNICATION

• TRUST AND COMMITMENT: 10 YEARS CONTRACT, CLOSE DOWN SALE ON PARTNER’S AREA

Source: Ard-Pieter de Man, 2013

GOVERNANCE STRUCTURE• KLM CEO BECOME NON-EXECUTIVE DIRECTOR OF NWA AND NWA CEO ON KLM

SUPERVISORY BOARD

• FORMATION OF ALLIANCE STEERING COMMITTEE (INCLUDES EXECUTIVE & SENIOR VPS

OF BOTH COMPANY)

• PROVIDE MORE FOCUS ON BUILDING PERSONAL RELATIONSHIP BUILDING

• USE BOTH SPECIALIST AND GENERALIST MANAGERS FOR QUALITY ASSURANCE

• REULAR STAFF MEETING WITH STEERING COMMITTEE FOR SUGGESTION

• NO FORMAL COMMUNICATION WITH CEO ALL COMMUNICATION LEVEL IS INFORMAL

• PROMOTE MULTITASKING BETWEEN THE MANAGERS.

• REGULAR CALLS AND EMAIL REQUIRED TO SOLVE THE PROBLEMS BEFORE REACH TO

OFFICIAL MEETING.Source: Ard-Pieter de Man, 2013

THE ULTIMATE G. S FOR SURVIVAL

Corporate level

Corporate level

KLM NWA

Corporate levelCross-board

positions

Alliance Steering Committee – Executive VPs and Senior VPs

Passenger Working Group (PWG)

Network Working Group (NWG)

Operational Working Group (OWG)

Cargo Working Group (CWG)

Financial Working Group (FWG)

Source: Source: Ard-Pieter de Man, 2013

LESSON TO LEARN FROM THIS CASE• IMPORTANCE OF CLEAR VERTICAL DIVISION OF LABOR IN

ALLIANCE

• IMPORTANCE OF A FIFTY-FIFTY PROFIT SHARING ARRANGEMENT IN CONTRACTUAL ALLIANCE

• IMPORTANCE OF SPECIALIST AND GENERALIST MANAGERS IN MAINTAINING QUALITY

• IMPORTANCE THAT PEOPLE FULFILL MULTIPLE ROLES IN ALLIANCE

• IMPORTANCE OF EXTENSIVE USE OF INFORMAL CHANNELS


IMPORTANCE OF CLEAR VERTICAL DIVISION OF LABOR

THE VERTICAL DIVISION OF LABOR COULD GREATLY DEAL WITH ENVIRONMENTAL DYNAMICS THROUGH:

•KLM-NWA ALLIANCE’S WORKING GROUP- DYNAMICS, SUCH AS PASSENGER, NETWORK, OPERATIONAL, CARGO AND FINANCIAL WORKING GROUP

•ALLIANCE STEERING COMMITTEE RESPONSIBLE FOR SUBSTANTIAL CHANGES- A BOTTOM UP PROCESS


IMPORTANCE OF A FIFTY-FIFTY

•REDUCING INTERNAL FRICTION OF ALLIANCE

- AFTER “9/11”- GIVING UP SOME TO MEET LOW MARKET DEMAND- DECREASING REVENUE


IMPORTANCE OF A MIX OF SPECIALISTS AND GENERALISTS IN ALLIANCE

•SPECIALISTS- SPECIFIC KNOWLEDGE WITH MANY DIFFERENT TYPES OF CHANGES

•GENERALISTS- FOCUSING ON BROADER CONTEXT OF ALLIANCE


IMPORTANCE THAT PEOPLE FULFILL MULTIPLE ROLES IN ALLIANCE

FOR INSTANCE, ONE ALLIANCE MANAGER IS A MEMBER OF THE

PASSENGER WORKING GROUP, ATTENDS THE ALLIANCE STEERING

COMMITTEE MEETING AND REPORT ABOUT HOW DEVELOPMENTS

IN THE SKY TEAM ALLIANCE.

- SIGNALING POSSIBLE PROBLEM

- RECONCILING VARIOUS COMMITTEES AND WORKING GROUP


IMPORTANCE OF EXTENSIVE USE OF INFORMAL CHANNELS

•KLM-NWA- IMPORTANCE OF INFORMAL COMMUNICATION

• INFORMAL CONTACT- EVERY HIERARCHICAL LEVEL PLANS CAN BE

TESTED, PROBLEMS DEBATED AND SOLUTIONS PROPOSED

•DYNAMIC BUSINESS ENVIRONMENT- SMOOTH OUT INTERNAL

TENSION MAKE ALLIANCE EASIER TO ADAPT CHANGES


CRITICAL ANALYSIS•DOES NOT MATCH WITH THE PREVIOUS LITERATURE OF DYNAMIC

CHANGE SUGGESTED BY DAS & TENG, (2000); ERNST AND BAMFORD (2005) AND REUER AND ZOLLO (2000)

•DOES NOT HAVE ANY VALIDITY, RELIABILITY AND GENERALIZABILITY AS THIS IS THE ONLY ONE EXAMPLE WE HAVE GOT ABOUT THIS LITERATURE

• TALKS ABOUT CONFLICT BUT LIMITED INFORMATION ABOUT CONFLICT RESOLUTION

•ABSENCE OF RISK ANALYSIS


KEY WORDS• AIR TRAFFIC DEREGULATION: US GOVT. DECIDED TO LOOSEN

PROTECTIONIST POLICY FOR LOCAL CARRIERS

• HUB AND SPOKE SYSTEM: ALLOW PARTNER TO USE THEIR OWN AIR TRAFFIC NETWORK TO GAIN ACCESS TO LARGE NETWORK

• CODE STARING: DELIVERING CUSTOMER TO EACH OTHER NETWORK BY COMBINING FLIGHTS

• C = CHALLENGE, A = ACTION, R.T. = RELEVANT THEORIES

• PRISON PILL: LEAVE POTENTIAL ACQUIRING PARTIES FACING HIGHER COST

KEY WORDS• PRISON PILL: LEAVE POTENTIAL ACQUIRING PARTIES FACING HIGHER COST

• US-DUTCH OPEN SKY AGREEMENT: ALLOW DUTCH AIRLINE TO FLY MANY MORE US DESTINATION AND US FLIGHT GET MORE SPACE IN AMSTERDAM SCHIPHOL AIRLINE.

• KLM-NWA BLOCK SPACE AGREEMENT: AN AGREEMENT THAT BOTH AIRLINES PURCHASE SEATING CAPACITY OF THE PARTNER TO SELL THEM FOR THEIR OWN ACCOUNT.

REFERENCE• BRIAN TJEMKES, 2012. STRATEGIC ALLIANCE MANAGEMENT. 1 EDITION. ROUTLEDGE

• J.J REUER, 2004. STRATEGIC ALLIANCES: THEORY AND EVIDENCE (OXFORD MANAGEMENT READERS). EDITION. OXFORD UNIVERSITY PRESS.

• JOHN CHILD, 2005. COOPERATIVE STRATEGY: MANAGING ALLIANCES, NETWORKS, AND JOINT VENTURES. 2 EDITION. OXFORD UNIVERSITY PRESS

• ROIJAKKERS, N. & MAN, A. 2010, "MANAGING DYNAMICS THROUGH ROBUST ALLIANCE GOVERNANCE STRUCTURES: THE CASE OF KLM AND NORTHWEST AIRLINES", EUROPEAN MANAGEMENT JOURNAL, VOL. 28, NO. 3, PP. 171-181.

• TENG, B. & DAS, T.K. 2008, "GOVERNANCE STRUCTURE CHOICE IN STRATEGIC ALLIANCES", MANAGEMENT DECISION, VOL. 46, NO. 5, PP. 725-742.

• ARD-PIETER DE MAN, 2013. ALLIANCES: AN EXECUTIVE GUIDE TO DESIGNING SUCCESSFUL STRATEGIC PARTNERSHIPS. 1 EDITION. WILEY.

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Alliance Structure