Advantages and Disadvantages of Strategic Alliances and Joint Ventures: Discuss With ReferenceTo the Auto Car Industry.

When Peugeot pulled out of its partnership with the Guangzhou Automobile Group in 1997, Honda Automobile Company seized the opportunity to take on the failing venture. Honda had already invested in several alliances in China, and this was just what they needed to establish an even stronger foothold in the nascent auto market. With a relatively small initial investment, Honda has seen a significant return on investment: by 2001, Guangzhou Honda reached sales of RMB 12 million (US $1.4 billion), with pre-tax profits of RMB 4.5 million (US $0.5 billion).

 Shared Risk 

Today’s major industries are so competitive that no firm has a guarantee of success when it enters a new market or develops a new product. Strategic alliances can be used to either reduce or control an individual firm’s risk. For example GM and Fiat have formed a strategic alliance to share risks and enhance the knowledge base for both partners, creating an important partnership for the companies in two of the world’s largest automotive markets, Europe and Latin America.  

Shared risk is an especially important consideration when a firm is entering a market that has just opened up or that is characterised by much uncertainty and instability.

 Shared Knowledge and Expertise

Still another reason for strategic alliances is the potential for a firm to gain knowledge and expertise that it lacks. The firm may want to learn more about how to produce something, how to acquire resources, how to deal with local government’s regulations, or how to manage in different environment information that a partner often can offer. The firm then can use the newly acquired information for other purposes. For example Rover formed an alliance at the time where Honda had a reputation sound engineering and high quality and high productivity.  Rover on the other hand was suffering from major losses, a declining market share, a reluctance by the state to increase financial support, a lack-lustre and under-performing product range and an established reputation for poor quality products, e.g. the Maestro and Montego models. Rover’s factories were operating at substantially below capacity.  Thus they needed the knowledge and expertise that Honda had to survive in the industry. This alliance led to the first tangible undertaking, in late 1978, which was the limited licensing of the Triumph Acclaim (a rebadged Honda Accord) to Rover to fill the gap in Rover’s product line. This car became one of the top ten UK sellers. This small start led to the Rover 200 (Honda Ballade) whose common platform, though built to Honda’s design, was modified by Rover to reflect European tastes. The Ballade was built by Rover for Honda. This alliance deepened with the joint designing of the Rover 800 (Honda Legend) and an improvement in Rover’s understanding of quality standards.

Synergy and Competitive Advantage 

Firms also may enter into strategic alliances to attain synergy and competitive advantage. These related advantages reflect combinations of the other advantages discussed in this section: The idea is that through some combination of the other advantages discussed in this section: The idea is that through some combination of market entry, risk sharing, and learning potential, each collaborating firm will be able to achieve more and to compete more effectively than if it had attempted to enter a new market or industry alone.

For example, while U.S. companies have invested heavily in foreign companies and in foreign production, the same is also true for Japanese and German firms, among others. Foreign investment in American production facilities has effectively revitalized a flagging industry. Honda, Toyota, Hyundai and Mercedes-Benz have all built factories in the United States, predominantly in the rural South, that churn out new vehicles by the hundreds of thousands. Those vehicles are both made and sold in the U.S., making them free of import duties and sticky quotas, while lining the pockets of foreign owners

Disadvantages

On the other hand, alliances and networks have a number of disadvantages. First, there are always the possibilities of being stuck with the wrong partner. A prospective alliance partner is advised to choose a partner with caution, preferably a firm it already knows (such as through satisfactory market transactions). Yet, the partner should also be sufficiently differentiated to provide some complementary (non-overlapping) capabilities. Many firms find it difficult to evaluate the true intentions and capabilities of their prospective partners until it is too late.

Second, the costs of negotiation and coordination are nontrivial. During the early 1980s, American Motors (later acquired by Chrysler), Volkswagen, and Peugeot, spent four, six, and five years, respectively, to negotiate JV deals with Chinese partners. After the negotiations, the costs to coordinate operations may be much to handle.

A third possible disadvantage is partner opportunism. While opportunism is likely in any kind of economic relationship, the alliance or network setting may provide especially strong incentives for some (but not all) partners to be opportunistic. This is because cooperative relationships always entail some elements of trust, which may be easily abused. For instance, in an alliance with Britain s Rover, Honda shared a great deal of proprietary technology beyond what was contractually called for, which significantly added value to Rover. Honda was stunned when being informed by Rover s parent firm that Rover would be sold to BMW and that Honda would be literally kicked out.

Finally, alliances and networks, especially those between rivals, can be dangerous, because they may help competitors. Traditionally, the sources of firm-specific competitive advantage, by definition, lie within firm boundaries, and firms are advised to make their capabilities hard to imitate. By opening their doors to outsiders, alliances and networks may make it easier to observe and imitate firm-specific resources and capabilities. In horizontal alliances between competitors, there is a potential learning race in which partners aim to outrun each other by learning the tricks from the other side as fast as possible. Probably the most challenging alliances to manage are those with competitors also known as dancing with the wolf or the bear. For example, the alliance between GE and Rolls Royce to jointly develop jet engines collapsed because both firms could not solve issues raised by their long-standing rivalry.

Advantages and Disadvantages of Joint Ventures

Joint ventures have their advantages and disadvantages.   Some advantages of joint ventures is that firms benefit from their local partners local knowledge of the host country. This is interpreted in terms of competitive conditions, regulations and policies, culture, and business environment. Occasionally the firm offers resources and technology and the local partner the market and local knowledge. Also, firms minimize their development costs and risks by sharing them with local partners. In addition, by sharing risk companies can learn from each other which in turn forms a strong synergy. Joint ventures have the advantages of sharing the costs and risks of opening a foreign market and of gaining local knowledge and political influence.

A disadvantage of joint ventures can be attributed to a diversity of interests and cultural backgrounds of managers. The joint venture between Ford and GM is a typical example where GM failed because the manager driving the joint venture lacked or lost the support needed from his organisation. Shared ownership can lead to conflicts for control and decision-making. This happens due to different views and strategies. Joint ventures do not provide the firm with the control it would like to have over the local partner. Lastly, there is risk of giving access to new technologies or production techniques to partners.  When the venture is over local partners can be considerable competitors in the market. For example, the joint venture of Boeing and Japanese firms, which was argued that, Boeing was giving away valuable airline technology. Finally there is the risk of losing control over technology and a lack of tight control in decision-making

Conclusion

Looking at these advantages and disadvantages, it is vital that a company picks a partner which is compatible. A compatible ally is one whose products or markets complement the firms own products and customers. It is important that the firm learns about its partner’s technology thoroughly before creating an alliance. The firm must be careful not to divulge competitively sensitive information to a partner. The alliance must be always thought of as a temporary arrangement so the firms can each remain competitive and not rely on the partner for success. Partners in an alliance often attempt to learn as much as possible from the other partner while guarding their distinctive skills. One of the greatest costs to a firm is the liquidation cost of the alliance, if the partners do not agree. Losing proprietary know-how is considered to be a high impact drawback of forming alliances.