Global strategic alliances

University Degree Business and Administrative studies

Introduction:

“Nike, the largest producer of Athletic footwear in the world, does not manufacture a single shoe. Gallo, the largest wine company on the earth, does not grow a single grape. Boeing, the pre-eminent aircraft manufacturer, makes little more than cockpits and wing bits (Guinn, 1995, P1)”.

These companies, like many other companies nowadays have entered into global strategic alliances for building collaborative relationship with customers, competitors, suppliers and a variety of other institutions for the need to pursue multiple source of competitive advantage and creating customer value. Many companies shifted strategic focus and began to embrace both competitive and co-operative strategies (Bartlett & Ghoshal, 2000). Here comes one question: Why the alliance is strategically important to win the competition and how it influences local operations. On the one hand, financial pressures know how with shortening product innovation lifecycle and time strains leaves the company without enough resources and time to fill the gap by developing itself alone, on the other hand, acquisition proves expensive and inefficient, even it will lead to lots of redundancies, that is simply because that when you make an acquisition you not only buy advantages but also have to buy the defects. In view of these drawbacks, alliances are being regarded as the latest phase in the search for innovation, entrepreneurial spirit and globalisation among organizations.

Increasingly, business firms address the challenges of international competition by forming alliances with other firms to perform key strategic activities.

Let us examine in a first part the what means global strategic alliance with its definition, purpose and theories. In a second part, we will see how important are strategic alliances through their different types and the implications of local operations when setting up a strategic alliance .Then in a third part why global strategic alliances are important even if they are not simple or easy to create, drop or support and plus they have impact on local operation, which we are going to look at through benefits and barriers.

What means strategic alliances?

Definition

Strategic alliances are becoming more and more prominent in the global economy. Peter Drucker, who has been called the father of management theory, states: “the greatest change in corporate culture, and the way business is being conducted, may be the accelerating growth of relationships based not on ownership, but on partnership” (Drucker, 1996)

The growing role of co-operative strategy is manifest particularly in the phenomenon of strategic alliance (Bartlett and Ghoshal 2000), which are inter-firm co-operation agreements to share or transfer skills and resources to meet mutually agreed goals. Indeed, we define a strategic alliance as a co-operative agreement between 2 or more autonomous firms pursuing common objectives or working towards solving common problems through a period of sustained interaction (Ibarra, 1992). For instance, the agreement between British Airways and American Airlines concerning the coordination of their rates, schedules and reservations systems was definitely an alliance, both companies remained independent and each pursued its own strategy but benefited from the advantages conferred by the co-operation agreement that linked them to one another. Co-operation or collaboration can be considered as a counterpart to the pursuit of competitive advantage. Strategic alliances are partnerships of two or more corporations or business units that work together to achieve strategically significant objectives that are mutually beneficial. The potential of strategic alliances strategy is enormous. Alliances are interorganizational co-operative structures formed to achieve strategic objectives of the partnering firms. Formally, they are “relatively enduring interfirm co-operative arrangements, involving flows and linkages that use resources and for governance structures from autonomous organizations, for the joint accomplishment of individual goals linked to the corporate mission of each sponsoring firm” (Parthe, p794). Allowing alliance, firms can share the fixed costs (and associated risks) of developing new products or processes (Hill, 2000). It is also a way to bring together complementary skills and assets that either company could easily develop on its own. As a whole the term here represents a generic catchall for structures which include discussion of alternatives involving full equity ownership(merges/acquisition, internal ventures), alternatives involving partial ownership (joint venture or minority investment), and alternatives involving no ownership control (cooperative agreements, research and development partnership, cross-licensing and distribution agreement, outsourcing arrangement, and joint bidding activities).

Purpose:

Companies around the world are expected to do more with less: to offer more choices, reach more markets and provide better solutions and experiences to their customers to and their enterprises or consumers. That’s why businesses must have a global perspective in order to identify opportunities and threats of today’s marketplace. Although warding off threats from global competitors is necessary, firms should also actively seek to penetrate foreign markets and one of the ways is to create a strategic alliance. A global strategic alliance is an agreement among two or more independent firms to co-operate for the purpose of achieving common goals such as a competitive advantage or customer value creation (Harris, Moran, Stripp 1993). An increasing number of global enterprises recognize that strategic alliances can provide growth at a fraction of the cost of going alone. Alliances provide a way for organizations to leverage resources and a smart way to grow.

Among strategic alliance, they are viewed as one of the most attractive ways to restore the balance in competitiveness. In today’s fast changing world, the traditional competitive model that is essentially adversarial in its orientation may no longer be sufficient. Rather than striving to beat all corners, management is recognising the effectiveness of more co-operative approaches.

Traditional strategic alliances were used by multinational companies as a vehicle to enter the markets of developing countries that enforced restrictive conditions or foreign investment (Hood and Young, 1979). More recently firms in developed market economies have been increasing willing to participate in co-operative ventures often with their direct competitors. The momentum for this has come from the firm themselves which have voluntarily adopted alliances as a strategic option in response to changing marketing conditions rather than in compliance to enforced rules (Harrigan, 1988)

In recent years, giants such as Siemens and Fujitsu and General Motors and Toyota have formed alliances to strengthen their competitive positions. An example of this kind of relationship is the Ford-Mazda connection, which has led to joint projects in Canada, the United States, Japan, Europe, Mexico, Taiwan and Korea. More recently strategic alliance has been identified as a vehicle through which mid-sized firms can compete more effectively against large companies. Finally, strategic alliance can be used to avoid trade restriction and allow an organization to enter a market very quickly, without the time lag and investment of funds in building new plants and obtaining equipment. As a matter of fact, alliance is emerging in all industries. In the past 3 years alone, more than 2000 alliances have been formed worldwide and surprisingly enough, more than ½ of them are even competitors. For example, Boeing and British Airways, TNT, Siemens and Snecma (a French aero engine manufacturer) build aircraft together, sell them, technology and services. This surely proves that alliances are a central, essential and permanent engine to achieve growth and profitability. In addition, alliances permit firms to confront issues associated with differing managerial systems head-on and enable managers to take the initiative in learning to live with and learn from such systems. Alliance with Japanese car makers, for example have let American automakers learn and internationalise such approaches as working closely with suppliers to design new components, lower costs and improve quality. American firms have also learned to accelerate their product life cycles by using Japanese practices.

Theories

As we all understand that alliance is cost effective and most attractive means to enhance performance of partner companies. So lets see through theories how global strategic alliance is strategically important in order to accelerating to mutual benefit. In this paper, we consider four main theories, which contribute to the understanding of the Global strategic alliances

The transactions cost (Willamson, 1975).approach to strategic alliance is perhaps the most well developed in the area. According to this transaction cost holds an assumption that strategic alliances are formed in order to lower the ...

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Theories

The transactions cost (Willamson, 1975).approach to strategic alliance is perhaps the most well developed in the area. According to this transaction cost holds an assumption that strategic alliances are formed in order to lower the transaction costs. Transaction costs are those which are incurred in arranging, managing and monitoring transaction across markets such as the cost of negotiation, drawing up contracts, managing the necessary logistics and monitoring accounts receivable (Williamson, 1985). This theory suggests that the ultimate goals of the firms is to choose the most efficient form while opportunistic behaviours exist among parties. As environments become complex and uncertain, the transaction cost become prohibitive. The transaction cost perspective proves to be useful to analyse cost effect relationship as motives, but it often appears to be useful to analyse cost effect relationship as motives, but it often appears too abstract to capture individual behaviour (Child and Faulkner 1998).The cost of writing and enforcing of contracts is affected by five factors, asset specificity, uncertainity, information asymmetry, frequency of transactions and opportunities (Willamson 1975). Since the internationalisation of activities is an effective means of controlling transaction cost, internal development within the firm will be preferred when the transactions costs of an exchange are high and production costs are low. By contrast, market exchanges will be preferred when production costs are high and transaction costs are low.

Game theory has been used to model the independent decision making in various field, and it’s application especially in economics proves to be useful for understanding co-operative and competitive behaviours. It can also highlight the interdependency aspect of the alliance relationship (Stiles 2001). Game theory suggests that the essence of strategic competition is the interaction among players such that the decisions made by any one player are dependent on actual and anticipated decisions of other players. This concept permits the framing of strategic decisions and offers insight into competition and bargaining. This system can predict the equilibrium outcomes of competitive situations and the consequences of strategic moves by any one player. The continuing tradeoff between cooperation and competition within alliances has led to their conceptualization as repeated games. The most frequently used game scenario is called “prisoner’s dilemma,” which involves two players who can either cooperate with each other or cheat. Depending on their choice of action, their payoffs will be different. If two players cooperate with each other, they have a much greater payoff than if they both choose to cheat. If one of them cheats while the other one cooperates, however, then the cheating player receives the highest possible payoff while the cooperative player loses. Consequently, two self-interest maximizing players who are aware of their payoff structure will both cheat although they could be better off cooperating. The reason is because no player would knowingly risk cooperating when the chance exists that the other player would cheat. (Child and Faulkner ,1998).

A resource-based view (RBV) (Child and Faulkner ,1998) of the firm suggests that the important determinants of competitive advantage are the resources possessed by the firm, deployed by the manager, and used and further developed by the organization. This view holds that there are key assets that give rise to competitive advantage. This view conceives the firm as a unique bundle of heterogeneous resources, capabilities, and competencies.These resources and capabilities are the basis on which a firm’s sustainable advantage is built and are the primary determinant of profitability. Establishing a competitive advantage involves formulating and implementing a strategy that recognizes and exploits the unique features of each firm. Firm resources can include tangible resources such as financial and physical resources, intangible resources such as technology, reputation, and culture, and human resources (including specialized skills and knowledge). The basic premise of RBV is that a sound business strategy should be based on firm resources, competences, and capabilities, which yield a competitive advantage over rivals. Establishing a competitive advantage through the development and deployment of resources and capabilities has become a primary goal for strategy formulation.Prahalad and Hamel called such capabilities “core competences,” which are fundamental to a firm’s performance and strategy and have to make a disproportionate contribution to ultimate customer value or to the efficiency with which that value is delivered and provide a basis for entering new markets.
Organizational learning is defined from a variety of perspectives. In simple terms, however, it refers to “the process by which the organizational knowledge base is developed and shaped” (Shrivastava 1981, p.15). Alliances facilitate organizational learning and are “relatively enduring interfirm cooperative arrangements, involving flows and linkages that utilize resources and/or governance structures from autonomous organizations, for the joint accomplishment of individual goals linked to the corporate mission of each sponsoring firm” (Parkhe 1993, p.794). Alliances are vehicles of opportunity: “the formal structure of an alliance creates a laboratory for learning” (Inkpen 1998, p.224). Alliance partnerships grow over time, and learning occurs throughout the evolutionary process. However, the dynamics of learning and partner interactions continuously change over the course of time. Initial motivating conditions for exploring partnerships generate adaptive learning capacities in firms, and these lead to greater responsive abilities to meet new conditions encountered at each phase (Doz 1996). Learning capacities accumulated over time permit more efficient and diverse learning as partnerships progress. Partners use various mechanisms to learn individually and mutually as alliances evolve. These include scanning, vicarious means, and a variety of experiential methods, in addition to learning acquired during the birth of the alliance. The following paragraphs give a brief outline of the interactive dynamics inherent in alliance evolution.

How important are Strategic alliances and its implications on local operations at the beginning?

In a rapidly evolving world of uncertainties facing the new millennium, and all the trends sweeping across the business landscape, few will have more of an impact on companies into the next decade than strategic alliances.

In some cases, companies choose to fully integrate their international operations by for instance establishing subsidiaries abroad. Other companies again decide to keep most international activities external, and if they are international in their intent and scope, especially where international operation costs are high, they will depend on the market and engage in simple import or export only.

Thus the more common alternative nowadays is to set up a strategic alliance where the company operates as if it was a multinational company but relies on not-owned units for its international presence, again proved to be very successful in the case where the activities profited from being carried out disintegrated, or locally, at the same time as they required a considerable amount of coordination. (Jarillo, 1993). That’s why Strategic alliances strategy has been prescribed as an important tool for attaining and maintaining a competitive advantage. In addition, strategic alliances concept is growing in appeal to organizations because of the cost savings achieved in executing operations.

Strategic alliances can take various forms. They can be classified according to equity involvement in the partnership. Some alliances are equity collaboration while others do not involve any equity input. Equity alliances, in turn, can take two forms: the first is the most well-known form of strategic alliance, international joint venture (IJV). The second is equity participation by which a company owns certain shares of another company for the purpose of control or influence. On the other hand, non-equity alliances include a variety of contractual agreements consisting of technology agreement, R&D partnership, marketing agreements, supplier agreements, franchising, licensing, and production sharing. Here, strategic alliances are introduced as a mode of business conduct versus internalization and market transaction.

Indeed, many companies are forming alliances looking for the best quality or technology or the cheapest labor or production costs. While such relationships can pay off, no business should form partnerships just because they are trendy. Companies sometimes enter into alliances without thoroughly analyzing their options, only to realize a merger or acquisition, or even selling the business, would have been best. This is a primary reason that many alliances fail, so it is imperative that companies make sure that an alliance is the best option for their needs. Therefore, companies should be clear about why they are entering the alliance and what they expect to gain from it. They also need to understand how it fits into their business plan.

It is essential that businesses enter into strategy alliances arrangements with a comprehensive plan outlining detailed expectations, requirements, and expected benefits. Strategic alliances partners should be selected based on their expertise in the operation and their cultural fit with the firm. Management of the strategic alliances project should be constant to ensure that requirements are being met and potential problems are identified early enough to be resolved. The firm must create a management structure that will work with the new organizational arrangement.

The success factor importance depends on the complexity of the alliance. The success factors presented in this paper can provide a template for success in entering and maintaining a successful international strategic alliance, especially since firms will need to expand into the expanding global markets in order to economically survive. This point is well reiterated by Ohmae:"... the relentless challenges of globalization will not go away. And properly managed alliances are among the best mechanism that companies have found to bring strategy to bear on these challenges. In today's uncertain world, it is best not to go alone (Ohmae, 1992)."

Why strategic alliances are important and their impact on local operation hrough their objectives and overcoming barriers.

Objectives of strategic alliance

As mentioned previously, the factors and motivations for forming a strategic alliance in the business field have been extensively studied. Table 1 summarizes common motivations and objectives into four categories. They are: (1) gaining access to international markets; (2) sharing resources and skills; (3) gaining technology expertise; and (4) initiating organizational learning. These objectives are not mutually exclusive, and some combination of them may be formulated simultaneously. Each of them is briefly described in the following sections.

Table 1: Individual Motivations and Objectives of Forming Strategic Alliances

Gaining access to international markets

Firms may not have all the necessary skills and resources for entering the global markets, or even national markets. They may have competencies in producing high quality product, but are unable to market them globally. By forming strategic alliances, Vyas, Shelburn and Rogers (1995) argue that these firms are able to access international marketing resources (e.g., international advertising and promotion), and acquiring international marketing skills (e.g., international distribution power). As an illustration, an Indian software house specialized in producing accounting software realized its weakness in global marketing. It therefore collaborated with some large computer corporations like IBM and Microsoft to distribute their advance accounting software worldwide (Mertens 1998). The software house was able to make use of the marketing power and skills of the large corporations to make substantial profit despite the economic downturn of Singapore. In return, those large corporations were also able to diversify into the accounting software markets more efficiently.

Sharing resources and skills

Globalization is inherently a complex business, and a firm may not be willing to absorb all the risks involved (Admin, Hager and Sterrett 1995). Thus, firms may form strategic alliance to pool resources together so as to obtain leverage effects and hence, larger profits. In a similar vein, Ohmae((1989) argues that most costs of a firm are fixed costs when it becomes global since the costs are substantial when compared to the expected revenues. Ohmae (ibid) further indicates that the fixed costs are essential. As a result, firms are not able to obtain higher profit by merely improving efficiency. They must increase sales volume in order to achieve the economies of scale. In many instances, R&D budget is essential. Otherwise, the firm may not be able to keep the pace with the competitors in developing innovative products. To attain higher profit, the firm needs to broaden its customer base by entering the global markets while containing fixed costs. Therefore, a strategic alliance becomes an attractive alternative.

For example, BMW (automotive, West Germany) invested in an automatic machine-vision inspection system for automotive parts developed for them by American Cimles (USA). Through the alliance, BMW gained rapid and effective access to a highly innovative product and a fast track from the laboratory to a marketable commercial prototype. American Cimles, a small company, gained access to otherwise unobtainable financial resources and to BMW’s manufacturing know-how and global marketing capabilities (Vyas, Shelburn and Rogers 1995).

(3) Acquiring new technologies

Most companies nowadays find the rapid development of technology difficult to follow. Even if a firm is willing to master some new technology, it may not have sufficient time and resources to accomplish the task. Thus, as indicated by Walters, Peters and Dess (1994), many firms attempt to form strategic alliance to build jointly on the technical expertise of two or more companies when developing products that are beyond the capability of individual companies. Hence, the firms are able to access technology in a more efficient manner.

For instance, IBM, AT&T and MIT work together on research in superconductivity. Although IBM’s largest research facilities are in the US, the company also has research facilities in Switzerland and Japan. When collaboration on manufacturing represents the main gain for the Tokyo center, it also gives IBM access to top notch Japanese universities and their graduates for research and development (Vyas, Shelburn and Rogers 1995)

(4) Initiating organizational learning

Scholars in Mangement increasingly recognize the importance of organizational learning in today’s dynamic business environments. Some even argue that the ability to learn faster than the competitors may be the only source of sustainable competitive advantage (DeGeus 1988; Dickson 1992). According to Slater and Narver (1994), organizational learning is facilitated when information is acquired, disseminated, and interpreted in the organizations. Two levels of learning, namely adaptive learning and generative learning, are possible. Adaptive learning occurs within the boundary of the firms when organization’s theory-in-use. Generative learning, on the other hand, is frame-breaking in nature, which helps re-shape the assumptions of the organizations. In this regard, generative learning is more important as it directs the organizations to new visions and new capabilities. However, it requires an organization to examine itself and its theory-in-use from different perspectives. Unfortunately, most firms are too committed to their current theory-in-use and are unable to see themselves from different angles. In contrast, the firm’s partners in a strategic alliance may provide some different perspectives, and motivate the firm to initiate generative learning. This is consistent with Osland and Yaprak’s (1994) argument that strategic alliance can be used to initiate organizational learning.

Overcoming Barriers to Success which impact on local operations

Managing a strategic alliance is no easy task, and the review process may reveal some impact on local operation through a variety of obstacles to the ongoing relationship (Brouthers, Brouthers and Wilkinson 1995). For example, strategic alliances often terminate or fail because of evolving power imbalance (for example, Brouthers, Brouthers and Wilkinson 1995; Reardon and Spekman 1994; Vyas, Shelburn and Rogers 1995). Others (Brouthers, Brouthers and Wilkinson 1995; Stiles 1994) attribute unsuccessful alliances to various forms of unequal power distribution, such as incompatible skills, cultures, goals and risk-taking behaviour. These barriers are most prominent when firms from different countries, such as the US and China, collaborate. Cultural incompatibility, such as methods for rapport development (Reardon and Spekman 1994), has also shown to be another factor with a potential to result in failure of business alliance. Differences in trade laws, hopes and expectations, and unclear profit and loss sharing formula among the countries can all hinder the development of a successful alliance despite careful planning. In addition, Barkema and Vermeulen (1997) argue and verify that partners from countries with different uncertainity avoidance and long-term orientation are likely to perceive global opportunities differently. Partners in a strategic alliance therefore must be willing to cooperate to overcome these barriers and maintain long-term relationship.In fact this need of maitaining long term relationship have an impact on management because the style of management required here will be more softer.

Vyas, Shelburn and Rogers (1995) instigate three attempts in tackling the limitated impact on global strategic alliances . Firstly, firms should understand and adapt “new style” of management. The adaptation of a new style of management requires a change in corporate culture which must be initiated and nurtured from the top. Firms need to devote more resources to understanding the alliance management process, from contract negotiations to establishing effective communications. They need to graduate managers with a new set of competence, including foreign languages, and other communication and team-building skills which means that strategic alliance influence on the style of management iniatiated by the company linked.

Another impact of strategic alliance on local operations will be regarding culture and shareholders issues. Cultural differences often create problems in making strategic alliances work, particularly between Asian and Western companies. For example, Japanese companies place employee interests ahead of the shareholders interest. Western companies, on the other hand, are managed to benefit their shareholders. Such a difference can cause serious conflict over investment and individual policies (Vyas, Shelburn and Rogers 1995). Thus, the second suggestion is that firms should learn and understand cultural difference between partners. Flexibility and learning are the greatest tools in overcoming this barrier. For instance, the success of Northern Telecom’s joint ventures in Turkey and China is because the autonomy of each venture’s board of directors and expatriate managers, an autonomy that allows them to depart from the practices the company follows in the North American markets. In China, the ability to adapt to local markets, for example, in accounts receivable policies and incentive schemes for sales personnel helped Northern Telecom succeed (Kanter 1994).

Thirdly, the strategic alliances have also an influence on organizational strucute and infrastruture because firms should develop iron-clad commitment to succeed. The personnel from individual companies who negotiated and implemented the initial alliance agreement may change due to promotions, transfer, retirement, or termination. Continuity of total commitment for the alliance is needed at all levels in the organization, without which the alliance would fail to reach its full potential.

Conclusion

The number of strategic alliances has been growing in most industries in recent years.

Strategic alliances can be a powerful tool for achieving a company’s strategic goals. Through cooperation and sharing of resources, "one plus one" may "equal three."In fact Strategic alliance become more and more important in the global strategies of an organization. Strategy can be defined as the art of bringing values and resources together to influence and shape the future. (Moore, 1996)Companies join together in order to affect the future.

This however requires them to change some of their attitudes regarding different issues that strategic alliances affect on their local operations. In this wider perspective, leadership becomes thus a completely new challenge for managers. The main objective of this essay is to give an understanding the importance of strategic alliance and its impact on local operations of companies in the challenging and dynamic competition of today and in the future. By collecting the results of various studies made on strategic alliances in different industries, the forming alliances

is not any longer a differential strength of companies but rather a simple necessity for companies to survive today and in the future which gives its importance.

Within this main objective, the importance of strategic alliance has been especially highlightened for the internationalization efforts of companies as well as for the growth of most companies.

Lastly there is a need for comprehensive research that investigates the factors underlying the successes and failures of global strategic alliance and its influences on local operations.

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MMU MBA 2003/2004