Dyadic Analysis in Inter-Corporate Alliance: Merits and Risks
Takafumi

MoriokaCollege of Business Administration and Information Science
Chubu University
1200 Matsumoto-Cho Kasugai,
Aichi, 487-8501 Japan

ABSTRACTThe purposes of this paper have three points. First, Inter-corporate alliance can beclassified into four patterns by its alliance-form. About four patterns in Inter-corporate
alliance, the focused corporate is supposed to consists of two business-layers;
application and infrastructure. Application is direct activity for goods and services orsystems. Infrastructure is an activity or system to promote activities of applications.
The four patterns of Inter-corporate alliance are horizontal alliance, cross-industry
alliance, vertical alliance, and infrastructure-application alliance. Horizontal alliancemeans the interactions of applications underlying the same infrastructures.
Cross-industry alliance means the interactions of applications underlying the difference
infrastructures. Vertical alliance means supply-chain activity. Infrastructure-application alliance means hierarchical activity between application-player andinfrastructure-player.
Second, from the view points of Inter-corporate alliance, the concepts of economies are
redefined. There are traditionally two concepts of economies: economies of scale andeconomies of scope. Economies of scale have defined factors that cause the average costof producing a commodity to fall as output of the commodity rise. The new definition of
economies of scale is internal and external effects ( merits and risks) that increases
activity -scale by alliance. While economies of scope have defined factors that make itcheaper to produce a range of related products than to produce each of the individual
products on their own. The new definition of economies of scope is internal and external
effects (merits and risks) that cause combinations or connections of the different
products, business and activities by dyadic corporate-alliance. Here internal effects
mean influence and effect between one player and the other player that constitutealliance. External effects mean influence and effect between a customer and a player.
Third, the paper analyzed those four inter-corporate alliances (four case studies), eachof which we assume has its own merits and risks. The merits and the risks are divided

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Dyadic Analysis in Inter-Corporate Alliance: Merits and Risks

into internal and external effects, and four concepts of economies are proposedcorresponding to four alliance-forms. Horizontal alliance is influenced by economies ofscale, and the other three types of alliances are influenced by economies of scope but indifferent ways. The internal merits of horizontal alliance cause the average cost of
producing a commodity to fall per unit and critical-mass. Its external merits make easy
access to purchase and use. Its internal risk makes flexibility the rate of operation low.
Its external risk makes a choice range reduce. The internal merits of cross−industry
alliance cause complementation and assimilation. Its external merit makes increase of
one stop shopping. Its internal risk makes complexity of coordinations and judgmentswith activities. Its external risk makes brand image confuse. The internal merits ofvertical alliance cause the constant supply and improvements across the supply chainsand differentiation. Its external merit makes easy proposal across the supply chains. Itsinternal risk makes difficulty of changing membership. Its external risk makes brandimage limited by the alliance partner. The internal merits of infrastructure-application
alliance cause whole business formation and the limit of business domain. Its external
merit makes users’ convenience promote. Its internal risk makes developing constrains
underlying partner’s standard. Its external risk makes minority opposition without
uses of government and infrastructure. The paper proposes each corporate must adopt
the alliance strategy considering the merits and risks.
Keywords: economies of scale, economies of scope, horizontal alliance, cross-industry
alliance, vertical alliance, and infrastructure-application alliance

New Classification of Inter-Corporate AllianceIn these days, there are many kinds of the inter-corporate alliance among maker,
wholesalers and retailers. There are much intent of the company doing theinter-corporate alliance; the promotion of product quality controls, the increase thenumber of customers, the gain of product complement, and the stability of businessshare, etc. The purpose of this paper is to make merits and risks by the differences ofalliance–patterns clear.
As a pre-study , the concepts of economies are redefinedInter-corporate

in connection withalliance. Inter-corporate alliance defines the plural 1 companies

sustain cooperative activity more than ordinary activity. There are some typicalIn this paper, the plural companies are analyzed from the dyadic view not from the
network view.
1

2

Dyadic Analysis in Inter-Corporate Alliance: Merits and Risks

classifications of the inter-corporate alliance. There is one of the typical classificationsof Inter-Corporate Alliance focused on

the vertical relationshiprelationship, in other words ,the vertical alliance

and

the

and the horizontal
horizontal

alliance(Milgrom・Roberts,1992 ). There is the other of Inter-Corporate Alliance focused on thecorporate functions; R&D, procurement, production and sales (Takeda, 1992; Ogawa,
1995; Matsuyuki, 2000). There are three patterns of corporate integrations that are
regarded as specific Inter-Corporate Alliances; horizontal integration, vertical
integration, and diversified integration ( Hasegawa, 1997).
But some inter-corporate alliances can’t be applied the typical classifications. Thereis one example of Inter-corporate alliance of convenience stores and banks. The
customers of Banks (Bank of Mitsubishi-Tokyo UFJ. etc.) withdraw their own accounts
with ATM (automatic teller machine) located in the convenience stores (Lawson
convenience stores etc). There is the other one of Inter-corporate alliance of Sony Bankand the other banks. Sony Bank has no branch. The customers of Sony Bank withdraw
their own accounts with ATM in the other banks branch (Sumitomo-Mitsui Banking
Corporation branch), Postal savings branch and Convenience store (am/pm).What
alliance is Inter-corporate alliance of convenience stores and banks ? Is it a horizontal
alliance? What alliance is Inter-corporate alliance of Sony Bank and the other banks? Is
it a vertical alliance?

Recent Inter-corporate alliances are very diversified. Recent

Inter-corporate alliances can’t be classified with typical category, for example, thevertical alliance and the horizontal alliance.
I suppose the business is made of two business layers to examine these questions and I
propose new classification of Inter-corporate alliance. On the Inter-corporate alliance,
the focused corporate is supposed to consists of two business-layers; application andinfrastructure. Application is direct activity for producing goods and services or systems.
Infrastructure is an activity or system to promote activities of applications. I propose
new classifications of Inter-corporate alliance are four patterns; horizontal alliance,cross-industry alliance, vertical alliance, and infrastructure-application alliance.
Horizontal alliance means the Interactions of applications underlying the same
infrastructures. Cross-industry alliance means the interactions of applications
underlying the different infrastructures. Vertical alliance means supply-chain activity.
Infrastructure-application
application-player

andalliancemeans

infrastructure-player.

hierarchical
Adapting

newactivity

betweenclassificationofInter-corporate alliances, I want to call Inter-corporate alliance of convenience stores3

Dyadic Analysis in Inter-Corporate Alliance: Merits and Risks

and banks “Cross-industry alliance ”. I want to call Inter-corporate alliance of Sony
Bank and the other banks, postal saving branches“Infrastructure-application alliance”．

Relationship between the Economies and the patterns of Inter-Corporate
Alliance
In this paper, I suppose the strong relationship between economy concepts and thepatterns of Inter-corporate alliances. There are traditionally two concepts of economies:
economies of scale and economies of scope. Economies of scale have defined factors thatcause the average cost of producing a commodity to fall as output of the commodity rise.
Economies of scope have defined factors that make it cheaper to produce a range ofrelated products than to produce each of the individual products on their own. I propose
the new definition of two concepts of economies. Economies of scale are internal andexternal effects (merits and risks) that increase activity -scale by alliance. Economies ofscope are internal and external effects (merits and risks) that cause combinations orconnections

of

the

different

products,

businessandactivities

bydyadiccorporate-alliance. Internal effects mean influence and effect between one player andthe other player that constitute alliance. External effects mean influence and effectbetween a customer and a player.
There are other two concepts of economies in relation to economies of scope; Economies
of coupling2 and Network Externalities. Economies of coupling defines plural firms arecoupling, and the connection of information and know-how of them cause synergistic
effects (Miyazawa, 1988). Miyazawa doesn’t distinguish the vertical alliance from thecross-industry alliance that this paper does. The concept of Network Externalities is apart of external effects on economies of scope of the infrastructure-application alliance.
The traditional definition is that Network Externalities are the effects on a user of a
product or service of others using the same or compatible products and services. The
benefits of a user are increasing as increasing the number of other user. Network
Externalities may effect on the small scale as a whole. For example, a small number ofusers can be increasing the benefits by accessing the infrastructure on theinfrastructure - application alliance.

Case Study

2

The concept of Economies of coupling is thought up by Miyazawa, Kenichi.
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Dyadic Analysis in Inter-Corporate Alliance: Merits and Risks

The four cases are studied in detail to distill merits and risks of Inter-corporate alliance.
The case of horizontal alliance is Star Alliance .The case of cross-industry alliance isInter-corporate alliance of Convenience stores and Banks. The case of vertical allianceis the supply chain of Kentucky Fried Chicken Japan Ltd. The case of
infrastructure-application alliance is Sony Bank.
Star Alliance: Economies of scale on the horizontal allianceStar alliance wasestablished in 1997, a group of five world-class airlines got together

to create something never seen before – an alliance that brought together networks,
lounge access, check-in services, ticketing and dozens of other services to improve thetravel experience for customers and efficiencies for the carriers. By 2006 the alliance
had grown to 17 members and three smaller, regional members with two otherinternational carriers in China scheduled to join in 2007. The member of Star Alliance
are AIR Canada, Air New Zealand, ANA, Asiana Airlines, Austrian, bmi, LOT Polish
Airlines, Lufthansa, Scandinavian Airlines, Singapore Airlines, South African Airways,
Spanair, SWISS,TAP Portugal, THAI, United, US Airways, and Regional Members. The
equipments that use in the airplane; many pieces of paper cup, blankets are
standardized and can be procured in the worldwide (Internal merit). The common
mirage highly increases the attractions of the mirage system. The flight schedule ofanother member is coordinated in the case of the cancellation (External merit). The
critical mass of passengers is needed by the width of flight network (Internal risk). As
Star Alliance is a big group of air flight companies, it makes flight choices of passengers
less (External risk).
Figure1. Star Alliance: Economies of scale on the horizontal alliance

Airplanes

goods and services

Facilities in airport
Flight reservation service
etc.
Application
The same sortinfrastructureofApplication

Application

Application

The same sort of

The same sort of

The same sort ofinfrastructure

infrastructure

infrastructure5

Dyadic Analysis in Inter-Corporate Alliance: Merits and Risks

CVS (Convenience Store) and Banks: Economies of scope on Cross-industry alliance
As going on the Japanese financial big bang, the other industries adding the banking
industry provide a wide of financial services. The Customers of Banks (Bank of
Mitsubishi-Tokyo UFJ. etc.) withdraw their own accounts with ATM (automatic teller
machine) located in the convenience stores (Lawson convenience stores etc). The rate ofoperation both in the space of convenience store and banking information system isincreasing. Without the constraint of payable money, the activity of customer’spurchasing can be increasing (Internal merit). A customer pulls out his/her account in aconvenience store and buys something more. The effect on one stop shopping becomesstrong (External merit). The salesclerk of the convenience store need to both sale goods
and services and manage enough and many sorts of money (Internal risk). The customer
may confuse the brand image of convenience store (convenient) and bank (safety)(External risk).
Figure2. CVS and Banks: Economies of scope on Cross-industry allianceStore Network

Goods andDistribution Network

services

ATM
Application

Procurement
Replenishment

The different sortof infrastructure

Application
the different sortofBranch NetworkBankinfrastructure

Application

CVS

the different sortATM
Branch Networkof infrastructureBank

Supply-chain of KFCJ : Economies of scope on the vertical alliance
Kentucky Fried Chicken Japan Ltd. is a fast food franchiser and main food isfried-chicken. Kentucky Fried Chicken Japan Ltd. has instituted and managed the
supply –chain; Contract Firm-Authorized Factory-Distributor-Direct management
stores and FC stores.

6

Dyadic Analysis in Inter-Corporate Alliance: Merits and Risks

The supply chain to supply chicken stably makes the business activity smoothly andeffectually. The unification of information systems over the supply chain makes aprospect of the demand and supply more accurate (Internal merit). The franchiser caneasily reply the references of the franchisees that confirm the additional supply(External merit). The franchiser can easily reply the references of the franchisees that
confirm the additional supply. As it is hard to take part in the supply chain newly forthe reason of adding specific relational investment, the change of the members is very
hard (External risk). As the products under the brand of KFCJ depend on the suppliers,
the suppliers effect on the brand image strongly (External risk).

Figure3. Supply-chain of KFCJ: Economies of scope on the vertical alliance

fattendissection

stock and
distribution

cooking andselling

Application

Application

Application

Application

Infrastructure

Infrastructure

Infrastructure

Infrastructure

Firm

Factory

Stockyard
and Truck

Direct management
stores and FC stores

Contract
Firm

AuthorizedDistributor

Direct management
store and FC store

Factory

goods andservicesSony Bank: Economies of scope on the infrastructure-application allianceSony Bank is established in April 2, 2001. Sony Bank is a member of Sony Financial
Holdings that is Japan’s first financial holding company to hold both insurance andbanking business under one umbrella. The shareholders of Sony Bank are SonyFinancial Holdings Inc. (Number of shares owned 440,000 shares, 88%) and
Sumitomo-Mitsui Banking Corporation (Number of shares owned 60,000 shares, 12%).
Sony Bank has no real branch. The customers of Sony Bank withdraw their own
accounts with ATM in the other banks (Sumitomo-Mitsui Banking Corporation
branches and Postal savings branches, etc). Sony Bank can make a banking businesswith the use of ATM in the Sumitomo –Mitsui BANK branches, Postal Savigs branches,
Convenience stores (am/pm). The ATM network limited the domain of Sony banking
business (Internal merit). A customer who uses ATM in the Post office is served withother postal services(External merit). Sony Bank tends to research and development the7

Dyadic Analysis in Inter-Corporate Alliance: Merits and Risks

banking services considering the application (Internal risk). The customers of Sony
Bank are limited with the location of the applications (External risk).
Figure4. Sony Bank: Economies of scope on the infrastructure-application alliancegoods andservices

Application

Infrastructure

SONY BANK
Sumitomo –Mitsui BANK branches,
Postal Savigs branches, Convenience
stores (am/pm)

CONCLUSION
Through the analyses of four cases, the examples of both the internal and external
merits and the internal and external risks are shown as follows. The internal merits ofhorizontal alliance cause the average cost of producing a commodity to fall per unit andcritical-mass. Its external merits make easy access to purchase and use. Its internalrisk makes flexibility the rate of operation low. Its external risk makes a choice range
reduce.
The internal merits of cross−industry alliance cause complementation and assimilation.
Its external merit makes increase of one stop shopping. Its internal risk makes
complexity of coordinations and judgments with activities. Its external risk makes
brand image confuse.
The internal merits of vertical alliance cause the constant supply and improvements
across the supply chains and differentiation. Its external merit makes easy proposal
across the supply chains. Its internal risk makes difficulty of changing membership. Its
external risk makes brand image limited by the alliance partner.
The internal merits of infrastructure-application alliance cause whole businessformation and the limit of business domain. Its external merit makes users’ convenience
promote. Its internal risk makes developing constrains underlying partner’s standard.
Its external risk makes minority opposition without uses of government and8

Dyadic Analysis in Inter-Corporate Alliance: Merits and Risks

infrastructure.
These examples aren’t exhaustive. These examples are found the relationship between
concepts of economies and the internal and external merits and the internal andexternal risks may be different. In relation to activities and effects of each
Inter-corporate alliance, I argue that horizontal alliance strongly relates to economies ofscale and cross-industry alliance, vertical alliance, and infrastructure-application
alliance strongly relate to economies of scope.
In this paper, First, Inter-corporate alliance can be classified into four patterns by its
alliance-form; horizontal alliance, cross-industry alliance, vertical alliance, andinfrastructure-application alliance. Second, from the view points of Inter-corporate
alliance, the concepts of economies are redefined. I argue economies of horizontal
alliance, cross-industry alliance, vertical alliance, and infrastructure-application
alliance are different(Economies of horizontal alliance is a kind of economies of scaleand each cross-industry alliance, vertical alliance, and infrastructure-application
alliance is a kind of economies of scope) .
Furthermore, the concepts of economies are redefined. I point out that the content of
economies makes of internal and external effects (merits and risks). Here internal
effects mean influence and effect between one player and the other player that
constitute alliance. External effects mean influence and effect between a customer anda player. Finally, the examples of internal and external effects (merits and risks) on
Inter-corporate alliance are represented from the analyses of four case studies. It isfound form the result that the contents of four economies are different. Each corporate
must adopt the alliance strategy considering the merits and risks. To generalize thetheory in this paper, the effects of each concept of economies must be represented
exhaustively. The practical checklist on guiding useful Inter-corporate alliance isneeded to complete.

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