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.
