In every strategic partnership, parties involved need to set up an important communication process at all stages of the organisation: the workforce level, the operational level and, of course, the top management (according to I. Ronkainen, E. Moynihan, M. Czinkota, M. Moffett, “Global Business”, p. 417, 418).
As a consequence, strategic alliances clearly involve a multiple decision making process, with regular bargaining and negotiation phases. Theses characteristics are actually a risk for companies as they can slow down decision-making processes or even create disagreements between partners, (Eleanor Davies, “Strategic Alliances”, lecture). To avoid such situation, we will explain how to elaborate “winning” alliances in the second part
- B. Types of Strategic Alliances
In the book “Marketing Management”, the author Philip Kotler, p. 108, claims that most of strategic alliances actually take the form of “marketing alliances”: Four main categories are evoked:
- Product / Services alliances: When a firm licenses another to manufacture its products, or when two firms jointly market their complementary products or a new product.
- Logistic alliances: When one firm offers logistical services for another firm’s product. This is notably the case of the company “Abbott” that delivers the complete range of “3M’s” medical products to hospitals all over the U.S. territory.
- Promotional alliances: For example, when a firm agrees to carry out the promotion for the product of another firm. To illustrate that, we can evoke the company “McDonalds” that often carries a promotion for new “Walt Disney’s movies” (“Happy Meals “).
- Pricing collaborations: This occurs when firms get together to elaborate a special pricing collaboration. For example, many hotels and car rental companies have joined to offer specific and mutual discounts.
We can also classify strategic alliances into two main groups (according to the “Alliance Strategy Group”, online):
- Vertical partnerships: Relationships between buyers and suppliers for example.
- Horizontal partnerships: Relationships between companies selling similar products or services.
II. When using strategic alliances in international operations?
- A. Reasons for creating Strategic Alliances
One of the most important advantages of strategic alliances is that it brings “together complementary skills and assets that neither company would easily develop on its own”, (Charles Hill, “Global Business Today”, p. 388).
According to P. Kotler, “Marketing Management”, p. 108, elaborating strategic alliances is not only a “planning option” but also a strategic necessity to survive in this global economy, where competition gets more and more important over time (more products and choices notably). In addition, the author mentions several reasons why firms have to elaborate strategic partnerships:
▶ A way to minimise costs and risks when entering new markets:
Strategic alliances have many advantages for international businesses. First of all, the fast technological change nowadays is so significant that firms often have problems in meeting all the numerous costs of developing all the capabilities needed. With alliances, it is actually possible, for a company, to spread fixed costs to other companies and risks in development and manufacturing efforts (when developing new products or entering new markets notably). For example, “Texas Instruments” and “Hitachi” joined forces to create new “memory chips”, but they realised that the costs were too much important to develop such jet engines together. So they asked powerful aerospace companies to join them. As a result, costs management was made much easier as costs were shared, (according to I. Ronkainen, E. Moynihan, M. Czinkota, M. Moffett, “Global Business”, p. 416).
In addition, strategic alliances are an efficient way to facilitate the entry into a foreign market. Indeed, finding a local partner who approves common business conditions and who has good connections as well is a significant opportunity to catch.
Furthermore, according to P. Barnevick, “Global strategies”, “Harvard Business Review”, preface, p. xvii, and international strategic alliances are useful to get into new markets as it is a precious way for one partner to build according to the other’s experience. It also accelerate the entry into new market and thus, it can represent significant money saving. The author also mentioned that money savings can also be realised when using existing distribution channels of the other collaborator.
P. Kotler, “Marketing Management”, p. 108, also mentions that strategic alliances are also ways to cut exit costs when divesting operations and to turn excess manufacturing capacity into profits.
▶ A way to fill gaps in the existing market and technology:
It can be significant to elaborate a strategic alliance “that will help the firm establish technological standards for the industry that will benefit the firm”, (“Global Business Today”, p. 388). Strategic alliances are actually about creating values with the exploitation of the different partners’ core competencies.
▶ Speed up international market development:
Many reasons can justify the internationalisation of a firm: a way to increase market shares, profits, knowledge, materials, to reduce costs (off shoring production in countries with low labour costs), to get economic advantages (implementing its production in a Freeport area for example – low taxes), a way to diversify its portfolio, a way to extend the product life cycle to other markets and so on…
Getting into foreign market is the very first “big” objective of numerous companies. Forming a strategic alliance with another organisation (suppliers, competitors, firms specialised in other industries…) can strongly speed up a product introduction in foreign markets, as it is easier to know and overcome some cultural, legal, economical, political and geographical barriers. Developing a partnership can also help in finding new business opportunities (new partners, new manufacturing plans, new technologies, new commercial tools…).
For example, the company “Toshiba” was sharing manufacturing plans and “chip design” with “Motorola” to obtain a stronger access to the Japanese market, (“Global Business”, p. 416).
▶ To defend home markets:
A company facing difficulties in his home market (sales slow down, problems with manufacturing sites or suppliers…) might need to form a strategic partnership to overcome those issues. For example, the “Bechtel Group” was desperately waiting for new orders (nuclear power plants). To solve that problem, the group decided to create an alliance with the world famous German company “Siemens” in order to service several North-American plants (“Global Business”, p. 416).
▶ To generate economies of scales (costs reduction leading to a better competitiveness notably:
Getting new technological capabilities from a partner can allow a firm to strengthen its manufacturing process and to reduce cost per unit (thanks to an improved technology and a better organisation notably). In addition, it is to say that a firm expanding its scale of operations also generates economies of scales. This expansion, as we explained previously, is made possible with the formation of strategic alliances. Many things are actually linked.
▶ Combining capabilities to create value:
Strategic partnerships allows firms to combined a important range of complementary capabilities, as each firm involved in the alliance has a specific combination of competences. Here is a chart explaining how complementary strengths can create high value for firms involved in alliances, (according to I. Ronkainen, E. Moynihan, M. Czinkota, M. Moffett, “Global Business”, p. 417):
We can notice in this chart that, more globally, we can also categorised strategic alliances into two major groups:
- Alliances between competing companies
Vs.
- Alliances between non-competing companies
It is interesting to see how two completely different companies can get together to enlarge the scope of their active operations.
▶ To avoid competition:
In some cases, markets are not large enough to hold numerous competitors. As a result, firms have the possibility to create strategic partnerships in order that they do not have to compete with one another.
▶ Problems with mergers/acquisitions:
As we mentioned before, strategic alliances and mergers/acquisitions are different strategies. Dissatisfactions with mergers/acquisitions are numerous. First of all, we can evoke the quite low success of mergers/acquisitions such as a risk loss of flexibility for small companies. In addition to that, it is to say that mergers/acquisition quite often contain acquisitions of unnecessary activities for companies and also inconveniences with post-mergers integration (Eleanor Davies, “Strategic Alliances”, lecture).
▶ A way to stop potentially “dangerous” competitors:
Strategic alliances can be elaborated to block some rivals’ actions. To illustrate that, we can give the example of the company “Caterpillar” that formed a partnership with “Mitsubishi, Japan” in order to strike back at “Komatsu”, the main competitor in that domestic market (“Global Business”, p. 416).
▶ Getting new core values:
A company can form some strategic alliances in order to strengthen its core values. For example, the famous sports firm “Reebok” created an alliance with “Amnesty International”. Indeed, “Reebok” sponsored a series of concerts organised by “Amnesty” all around the world to “promote” the cause of Human Rights. It was actually a way for “Reebok” to mention Human Rights as a part of it core values (better image and reputation notably). When this alliance was elaborated, it was perceived as a very strange fit. But this shows us that organisation can get together to achieve goals even if they do not belong to the same “industry” at all… (E. Austin, “The Collaboration Challenge”, “Harvard Business School”, p. 4).
II. B. Choosing the Alliance structure
Still according to Charles Hill, p. 390, 301, international strategic partnerships have to be structured in a way that the company’s risk of letting too much competence to the ally is reduced at a reasonable and safe level.
Then, contractual protections must be established when creating the alliance in order to avoid the risk of opportunism.
Finally, the last “recommendation” of the authors is that the partner must have proved previously its commitment and interests in the alliance. That will, of course, bring certain credibility to this strategic operation.
II. C. Making Strategic Alliances efficient
According to the author P. Kotler, “Marketing Management”, p. 109, it is possible to elaborate a winning strategic alliance:
- Strategic fit: Before forming the alliance, firms need first to assess all of their core competencies to find the appropriate partner that will complement them in capabilities, competences, business lines and geographic location notably.
A partner absolutely needs to have the specific competences that the other firm lacks. The company’s visions have to be accepted as well.
Finally, the alliance should not be created just for its own needs. Sometimes, a partner can think about its own interests first. This problem can be detected too lately and lead to a conflicting rupture.
- Focusing on the long run: Firms should join forces by focusing on how much gains they could get from the alliance, rather than joining forces to save a negligible amount of money.
- The importance of flexibility: According to P. Kotler, strategic alliances can be successful on the long term only if they are flexible, p. 109.
II. D. Managing the Strategic Alliance
Charles Hill also mentioned that once the alliance formed, a company might have to pay attention to cultural differences when working with its partner.
Creating a trustful environment with collaborators is sometimes as important as the maximisation of profits. Alliances should be perceived as a risk and cost sharing strategic tool rather than as a simple way to get to know about how others are doing their business.
Furthermore, creating interpersonal relationships between managers can contribute to that positive and trustful environment.
II. E. Problems with Strategic Alliances
According to P. Kotler, “Marketing Management”, p. 109, we can evoke an important percentage of failure regarding strategic alliances. Indeed, according to a study conducted by the group “McKinsey & Company”, one –third of 49 strategic partnerships have failed to live up to the different companies’ expectations.
In addition, it is important to say that strategic alliances do not always benefit all firms involved. Indeed, some cooperative agreements can strongly benefit one firm and hurt actually the other one involved. It can also lead to competition rather than cooperation.
Charles Hill, p. 388, also said that strategic alliances are sometimes seen by companies as a cheap and easy way to learn about a competitor’s technology and any other specific competences.
Finally, according to P. Barnevick, “Global strategies”, “Harvard Business Review”, preface, p. xvii, and the benefits from the elaboration of strategic alliances are, most of the time, unequally shared. A partner might have to invest in a global strategy much more than the other collaborator.
To conclude, we can mention that strategic alliances represent many opportunities to strengthen international operations of firms.
First of all, alliances are remarkable strategic tools to create values and opportunities by learning from the others. International market developments are made much easier (possibility to use existing distribution networks, manufacturing processes, technological methods and so on). Competitiveness should be improved on the long run as well as profits.
In addition, strategic partnerships can be a way for firms to tackle competition, as it is possible to block some rival’s actions on international markets as we explained. Alliances also allow firms involved to considerably reduce costs and all of the associated risks when launching new products or processes into foreign markets. On the other hand, alliances can help defending a problematic home market.
However, in order to obtain positive results, every partner should see the alliance as a way of sharing competences, costs and risks, rather than a way of getting to know about how the others are managing their business. Furthermore, alliance can sometimes remain problematic for firms (high failure rates, disputes, disagreements…). So before elaborating any strategic partnership, firms should clearly know what their common objectives are, what will be the responsibility of each party and how they are going to manage their collaboration during all the alliance process.
Reference list
Harvard Business Review (1994) Global Strategies: Insights from the World’s Leading Thinkers. U.S.A.: Harvard Business Scholl Press.
J. E. Austin – Harvard Business School (2000) The Collaboration Challenge – How Nonprofits and Businesses Succeed Through Strategic Alliances. U.S.A.: Jossey-Basss Publishers.
A. M. Rugman, R. M. Hodgetts (2003) International Business. 3rd ed. U.K.: Prentice Hall.
P. Kotler (2003) Marketing Management. 11th ed. U.S.A.: Prentice Hall International Editions.
F. McDonald, F. Burton (2002) International Business. U.K.: Thomson.
M. R. Czinkota, I. A. Ronkainen, M. H. Moffett, E. O. Moynihan (2001) Global Business. 3rd ed. U.S.A.: Harcourt College Publishers.
C. W. L. Hill (2008) Global Business Today. 5th ed. (International Student Edition). U.S.A: McGraw-Hill.
Dr Eleanor Davies, E. D. (2008), International Business Strategy Lecture. [Strategic Alliances, February and March 2008, University of Huddersfield].”
Alliance Strategy (2007), Alliances Definition [online]. Available at: <http://www.alliancestrategy.com/PDFs/BGC%20AllianceDef%20Encyc02.pdf>
[Accessed 4th April 2008].
OTHER SOURCES not referred in the assignment but which helped in developing an understanding of the topic
R. L. Wallace (2004) Strategic Partnerships. U.S.A.: Dearborn Trade Publishing.
