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Alliance Structure

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Shaon Biswas

The document discusses the alliance governance structure between KLM and Northwest Airlines over a 20 year period from 1989 to 2007. It describes how the alliance adjusted its governance in response to environmental changes from 1989-1997, adopting a more integrated structure. From 1997-2007, the alliance was able to survive without major adjustments due to features like cross-board positions, extensive informal communication channels, and a focus on trust and commitment between partners. The case provides lessons on effective alliance governance, like the importance of formal and informal coordination mechanisms.

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Alliance Structure
CONTENT KEYTHEORIESOF ALLIANCE GOVERNANCE THE REASONS OF CHANGE KEYTHEORIESOF ALLIANCE GOVERNANCE ADJUSTMENT FOR SURVIVAL SURVIVALWITHOUT MAJOR ADJUSTMENT THE ULTIMATEGOVERNANCE STRUCTURE FOR SURVIVAL LESSONTO LEARN FROMTHIS CASE CRITICALANALYSIS
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 COMPANIESTO CHANGEALLIANCE STRUCTURE -DAS &TENG (2000) ALLIANCE GOVERNANCE NEEDSTO CHANGETO 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 INTHE CASE) ENVIRONMENTAL DYNAMICS INTERNAL CHANGE SUCCESS AND FAILURE OF ALLIANCE BUSINESS RELATIONSHIP BUILDING INHERENTTENSION 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: GETTINGTHE BENEFIT OF US GOVERNMENTS AIRTRAFFIC DEREGULATION AND UTILISING MAXIMUM CAPACITIES OBJECTIVES: USING HUB AND SPOKE SYSTEM & GETTING BENEFIT OF CODE SHARING Source: Roijakkers, N. & Man, A. 2010
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 GROUPTO MINIMISE RISK. PROBLEM: INTERNAL CHANGE C: NWA POISON PILL STRATEGY A: ENHANCED ALLIANCE AGREEMENT - RT: DECISION MAKING,TRUST AND COMMITMENT Source: A. P. De Man et al. (2013)
SURVIVAL WITHOUT MAJOR ADJUSTMENT (1997-2007) INCREASE OF SCOPE: NORTH ATLANTIC & INDIA EXCLUSIVITY: KLM (EUROPE MIDDLE EAST AFRICA), NWA (NORTH AMERICA), SALES PARTNERSTICKET GOVERNANCE BODY:THE ENHANCE AGREEMENT HELPS BOTH MANAGEMENT ARE PART OF EACH OTHER. FINANCIAL AGREEMENT: FIFTY-FIFTY PROFIT STARING ONTRANSATLANTIC ROUTE. (A VIRTUAL JOINTVENTURE) COMMUNICATION STRUCTURE: MULTIPOINT, INFORMAL, CONTINUOUS COMMUNICATION TRUST AND COMMITMENT: 10YEARS CONTRACT, CLOSE DOWN SALE ON PARTNERS AREA Source: Ard-Pieter de Man, 2013
GOVERNANCE STRUCTURE KLM CEO BECOME NON-EXECUTIVE DIRECTOROF NWA AND NWA CEO ON KLM SUPERVISORY BOARD FORMATION OF ALLIANCE STEERINGCOMMITTEE (INCLUDES EXECUTIVE & SENIORVPS OF BOTH COMPANY) PROVIDE MORE FOCUS ON BUILDING PERSONAL RELATIONSHIP BUILDING USE BOTH SPECIALISTAND GENERALIST MANAGERS FORQUALITYASSURANCE REULAR STAFF MEETINGWITH STEERINGCOMMITTEE FOR SUGGESTION NO FORMAL COMMUNICATIONWITH CEO ALL COMMUNICATION LEVEL IS INFORMAL PROMOTE MULTITASKING BETWEENTHE MANAGERS. REGULAR CALLSAND EMAIL REQUIREDTO SOLVETHE PROBLEMS BEFORE REACHTO 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 CLEARVERTICAL 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 IMPORTANCETHAT PEOPLE FULFILL MULTIPLE ROLES IN ALLIANCE IMPORTANCE OF EXTENSIVE USE OF INFORMAL CHANNELS Source: Roijakkers, N. & Man, A. 2010
IMPORTANCE OF CLEAR VERTICAL DIVISION OF LABOR THEVERTICAL DIVISION OF LABOR COULD GREATLY DEALWITH ENVIRONMENTAL DYNAMICSTHROUGH: KLM-NWA ALLIANCES WORKING GROUP- DYNAMICS, SUCH AS PASSENGER, NETWORK, OPERATIONAL, CARGOAND FINANCIALWORKING GROUP ALLIANCE STEERING COMMITTEE RESPONSIBLE FOR SUBSTANTIAL CHANGES- A BOTTOM UP PROCESS Source: A. P. De Man et al. (2013)
IMPORTANCE OF A FIFTY-FIFTY REDUCING INTERNAL FRICTION OF ALLIANCE - AFTER 9/11- GIVING UP SOMETO MEET LOW MARKET DEMAND- DECREASING REVENUE Source: Roijakkers, N. & Man, A. 2010
IMPORTANCE OF A MIX OF SPECIALISTS AND GENERALISTS IN ALLIANCE SPECIALISTS- SPECIFIC KNOWLEDGEWITH MANY DIFFERENTTYPES OF CHANGES GENERALISTS- FOCUSING ON BROADER CONTEXT OF ALLIANCE Source: Roijakkers, N. & Man, A. 2010
IMPORTANCE THAT PEOPLE FULFILL MULTIPLE ROLES IN ALLIANCE FOR INSTANCE, ONE ALLIANCE MANAGER IS A MEMBER OFTHE PASSENGER WORKING GROUP, ATTENDSTHE ALLIANCE STEERING COMMITTEE MEETING AND REPORT ABOUT HOW DEVELOPMENTS INTHE SKYTEAM ALLIANCE. - SIGNALING POSSIBLE PROBLEM - RECONCILINGVARIOUS COMMITTEES ANDWORKING GROUP Source: Roijakkers, N. & Man, A. 2010
IMPORTANCE OF EXTENSIVE USE OF INFORMAL CHANNELS KLM-NWA- IMPORTANCE OF INFORMAL COMMUNICATION INFORMAL CONTACT- EVERY HIERARCHICAL LEVEL PLANS CAN BETESTED, PROBLEMS DEBATED AND SOLUTIONS PROPOSED DYNAMIC BUSINESS ENVIRONMENT- SMOOTH OUT INTERNALTENSION MAKE ALLIANCE EASIERTO ADAPT CHANGES Source: Roijakkers, N. & Man, A. 2010
CRITICAL ANALYSIS DOES NOT MATCH WITHTHE PREVIOUS LITERATURE OF DYNAMIC CHANGE SUGGESTED BY DAS &TENG, (2000); ERNST AND BAMFORD (2005) AND REUER AND ZOLLO (2000) DOES NOT HAVE ANYVALIDITY, RELIABILITY AND GENERALIZABILITY AS THIS ISTHE ONLY ONE EXAMPLE WE HAVE GOT ABOUTTHIS LITERATURE TALKS ABOUT CONFLICT BUT LIMITED INFORMATION ABOUT CONFLICT RESOLUTION ABSENCE OF RISKANALYSIS Source: Roijakkers, N. & Man, A. 2010
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 BRIANTJEMKES, 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, ANDJOINT VENTURES. 2 EDITION. OXFORD UNIVERSITY PRESS ROIJAKKERS, N. & MAN, A. 2010, "MANAGING DYNAMICSTHROUGH ROBUSTALLIANCE 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 GUIDETO DESIGNING SUCCESSFUL STRATEGIC PARTNERSHIPS. 1 EDITION.WILEY.

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Alliance Structure

  • 2. CONTENT KEYTHEORIESOF ALLIANCE GOVERNANCE THE REASONS OF CHANGE KEYTHEORIESOF ALLIANCE GOVERNANCE ADJUSTMENT FOR SURVIVAL SURVIVALWITHOUT MAJOR ADJUSTMENT THE ULTIMATEGOVERNANCE STRUCTURE FOR SURVIVAL LESSONTO LEARN FROMTHIS CASE CRITICALANALYSIS
  • 3. 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
  • 4. BACKGROUND INTERNAL AND EXTERNAL DYNAMICS IN ALLIANCE FORCE COMPANIESTO CHANGEALLIANCE STRUCTURE -DAS &TENG (2000) ALLIANCE GOVERNANCE NEEDSTO CHANGETO MEET CHANGING BUSINESS REQUIREMENT - ERNST AND BAMFORD (2005) AND REUER AND ZOLLO (2000) Source: Roijakkers, N. & Man, A. 2010
  • 5. ALLIANCE GOVERNANCE- THE REASONS OF THE CHANGES FIVE REASONS (MENTIONED INTHE CASE) ENVIRONMENTAL DYNAMICS INTERNAL CHANGE SUCCESS AND FAILURE OF ALLIANCE BUSINESS RELATIONSHIP BUILDING INHERENTTENSION Source: A. P. De Man et al. (2013)
  • 6. 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: GETTINGTHE BENEFIT OF US GOVERNMENTS AIRTRAFFIC DEREGULATION AND UTILISING MAXIMUM CAPACITIES OBJECTIVES: USING HUB AND SPOKE SYSTEM & GETTING BENEFIT OF CODE SHARING Source: Roijakkers, N. & Man, A. 2010
  • 7. 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 GROUPTO MINIMISE RISK. PROBLEM: INTERNAL CHANGE C: NWA POISON PILL STRATEGY A: ENHANCED ALLIANCE AGREEMENT - RT: DECISION MAKING,TRUST AND COMMITMENT Source: A. P. De Man et al. (2013)
  • 8. SURVIVAL WITHOUT MAJOR ADJUSTMENT (1997-2007) INCREASE OF SCOPE: NORTH ATLANTIC & INDIA EXCLUSIVITY: KLM (EUROPE MIDDLE EAST AFRICA), NWA (NORTH AMERICA), SALES PARTNERSTICKET GOVERNANCE BODY:THE ENHANCE AGREEMENT HELPS BOTH MANAGEMENT ARE PART OF EACH OTHER. FINANCIAL AGREEMENT: FIFTY-FIFTY PROFIT STARING ONTRANSATLANTIC ROUTE. (A VIRTUAL JOINTVENTURE) COMMUNICATION STRUCTURE: MULTIPOINT, INFORMAL, CONTINUOUS COMMUNICATION TRUST AND COMMITMENT: 10YEARS CONTRACT, CLOSE DOWN SALE ON PARTNERS AREA Source: Ard-Pieter de Man, 2013
  • 9. GOVERNANCE STRUCTURE KLM CEO BECOME NON-EXECUTIVE DIRECTOROF NWA AND NWA CEO ON KLM SUPERVISORY BOARD FORMATION OF ALLIANCE STEERINGCOMMITTEE (INCLUDES EXECUTIVE & SENIORVPS OF BOTH COMPANY) PROVIDE MORE FOCUS ON BUILDING PERSONAL RELATIONSHIP BUILDING USE BOTH SPECIALISTAND GENERALIST MANAGERS FORQUALITYASSURANCE REULAR STAFF MEETINGWITH STEERINGCOMMITTEE FOR SUGGESTION NO FORMAL COMMUNICATIONWITH CEO ALL COMMUNICATION LEVEL IS INFORMAL PROMOTE MULTITASKING BETWEENTHE MANAGERS. REGULAR CALLSAND EMAIL REQUIREDTO SOLVETHE PROBLEMS BEFORE REACHTO OFFICIAL MEETING. Source: Ard-Pieter de Man, 2013
  • 10. 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
  • 11. LESSON TO LEARN FROM THIS CASE IMPORTANCE OF CLEARVERTICAL 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 IMPORTANCETHAT PEOPLE FULFILL MULTIPLE ROLES IN ALLIANCE IMPORTANCE OF EXTENSIVE USE OF INFORMAL CHANNELS Source: Roijakkers, N. & Man, A. 2010
  • 12. IMPORTANCE OF CLEAR VERTICAL DIVISION OF LABOR THEVERTICAL DIVISION OF LABOR COULD GREATLY DEALWITH ENVIRONMENTAL DYNAMICSTHROUGH: KLM-NWA ALLIANCES WORKING GROUP- DYNAMICS, SUCH AS PASSENGER, NETWORK, OPERATIONAL, CARGOAND FINANCIALWORKING GROUP ALLIANCE STEERING COMMITTEE RESPONSIBLE FOR SUBSTANTIAL CHANGES- A BOTTOM UP PROCESS Source: A. P. De Man et al. (2013)
  • 13. IMPORTANCE OF A FIFTY-FIFTY REDUCING INTERNAL FRICTION OF ALLIANCE - AFTER 9/11- GIVING UP SOMETO MEET LOW MARKET DEMAND- DECREASING REVENUE Source: Roijakkers, N. & Man, A. 2010
  • 14. IMPORTANCE OF A MIX OF SPECIALISTS AND GENERALISTS IN ALLIANCE SPECIALISTS- SPECIFIC KNOWLEDGEWITH MANY DIFFERENTTYPES OF CHANGES GENERALISTS- FOCUSING ON BROADER CONTEXT OF ALLIANCE Source: Roijakkers, N. & Man, A. 2010
  • 15. IMPORTANCE THAT PEOPLE FULFILL MULTIPLE ROLES IN ALLIANCE FOR INSTANCE, ONE ALLIANCE MANAGER IS A MEMBER OFTHE PASSENGER WORKING GROUP, ATTENDSTHE ALLIANCE STEERING COMMITTEE MEETING AND REPORT ABOUT HOW DEVELOPMENTS INTHE SKYTEAM ALLIANCE. - SIGNALING POSSIBLE PROBLEM - RECONCILINGVARIOUS COMMITTEES ANDWORKING GROUP Source: Roijakkers, N. & Man, A. 2010
  • 16. IMPORTANCE OF EXTENSIVE USE OF INFORMAL CHANNELS KLM-NWA- IMPORTANCE OF INFORMAL COMMUNICATION INFORMAL CONTACT- EVERY HIERARCHICAL LEVEL PLANS CAN BETESTED, PROBLEMS DEBATED AND SOLUTIONS PROPOSED DYNAMIC BUSINESS ENVIRONMENT- SMOOTH OUT INTERNALTENSION MAKE ALLIANCE EASIERTO ADAPT CHANGES Source: Roijakkers, N. & Man, A. 2010
  • 17. CRITICAL ANALYSIS DOES NOT MATCH WITHTHE PREVIOUS LITERATURE OF DYNAMIC CHANGE SUGGESTED BY DAS &TENG, (2000); ERNST AND BAMFORD (2005) AND REUER AND ZOLLO (2000) DOES NOT HAVE ANYVALIDITY, RELIABILITY AND GENERALIZABILITY AS THIS ISTHE ONLY ONE EXAMPLE WE HAVE GOT ABOUTTHIS LITERATURE TALKS ABOUT CONFLICT BUT LIMITED INFORMATION ABOUT CONFLICT RESOLUTION ABSENCE OF RISKANALYSIS Source: Roijakkers, N. & Man, A. 2010
  • 18. 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
  • 19. 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.
  • 20. REFERENCE BRIANTJEMKES, 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, ANDJOINT VENTURES. 2 EDITION. OXFORD UNIVERSITY PRESS ROIJAKKERS, N. & MAN, A. 2010, "MANAGING DYNAMICSTHROUGH ROBUSTALLIANCE 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 GUIDETO DESIGNING SUCCESSFUL STRATEGIC PARTNERSHIPS. 1 EDITION.WILEY.