In the context of alliances, scholars have generally tended to argue that partnerships between culturally similar partners are likely to be more successful than those between culturally dissimilar partners. Cartwright and Cooper elaborate on this by referring to culture as ‘social glue’ serving to bind individuals and create organizational cohesiveness. They state that in alliances ‘selection decisions are mainly driven by financial and strategic considerations, yet many organizational alliances fail to meet expectations because the cultures of partners are incompatible’ and that the degree of cultural fit is directly correlated to the success of the combination. National and organizational cultural characteristics have, consequently a significant impact on the knowledge transfer process within and among the organizations causing a ‘cultural shock’ when these cultures cross, which is often accompanied by negative effects on work climate in international alliances.
In the automotive industry, for example, it is helpful to look at the case of General Motors and Toyota. In 1983, GM and Toyota entered into a joint venture, called New United Motor Manufacturing (NUMMI), with the objective of producing a version of Toyota’s sub-compact Corolla model in a formerly shut-down GM plant in Fremont, California. Toyota, the operating manager of the joint-venture used Japanese supplies for automotive components until it could teach US suppliers how to meet its quality standards (Womack, 1988). Due to adequate marketing and distribution activities in the US, Toyota did not seek its partner’s market access to penetrate the US market. However, their motivations for the alliance were a response to US criticism against the tide of rising Japanese imports, thus enabling them to learn more about the US labour environment through the alliance. On the other hand, GM aimed to apply Japanese management techniques to a US unionized labour force, thus giving Toyota maximum freedom in the agreement to bring in their programmes and work methods.
Even though NUMMI faced great improvements in efficiency with labour productivity being comparable to that of Toyota’s in Japan, techniques including new approaches to supplier relations, continuous improvement, teamed multi-skilled workers and efforts to eliminate inventories could not be transferred to GM. GM had to install these techniques in its own personnel so that they may be diffused throughout the company – giving birth to an entirely new corporate culture. Womack’s (1988) interviews with several GM managers showed that there was a very partial understanding to NUMMI’s procedures within the managers and that there was, in many cases, a defensive conviction that these techniques would never work in their plant. From a learning perspective, the knowledge transfer process is often defined as slow and painful, since Toyota’s knowledge system was deeply imbedded in the company’s history and culture, thus making it difficult for GM to change its attitudes and behaviours. It was, as highlighted above, the ‘distance’ in organizational culture that negatively affected the knowledge transfer process.
Canestrino (2004) argues that another very important dimension affecting a firm’s openness towards international alliances is the group belonging feeling – namely individualism vs collectivism (Hofstede, 1980). This dimension clarifies the ‘the extent to which culture encourages personal initiative and achievement, the importance of private life and personal separation, in contrast with a sense of community or collective characterized by a social framework’ (Canestrino, 2004 p. 189). In regards to international alliances, individualistic cultures are generally associated with less cooperative behaviour whereas collectivism would relate positively to cooperation propensity of the firms. From a learning perspective individualism and collectivism seem to play an important role in affecting the knowledge transfer in the international inter-firm cooperation because of their impact on the stability of the alliance themselves, as well as the partners’ cooperation attitude.
For example, in an alliance formed between Ford and Mazda, Ford aimed to implement a fundamental change in its organizational purpose and corporate culture. This was due to Ford losing business to Japanese products in the US during the oil crisis in the 1970s and 1980s when the demand for big luxury cars fell dramatically. Ford began to send managers to Japan in order to observe workers and managers in the automobile plants of Mazda. Through this, they realized that the Japanese had used their people rather than their high levels of automation and advanced technology to their advantage. This observation, consequently led to Ford implementing employee involvement which was met with much resistance on the part of supervisors who thought that the change would lead to them losing their powers. It took a lot of effort and training to finally make the supervisors and managers understand the potential benefits of the programme, and develop the skills to respond to workers.
It is evident from the example above, that the individualistic culture of a firm may take form of opportunistic behaviour – as it happened in the case of Ford’s supervisors who associated the implementation of employee involvement with the loss of power – and that this behaviour could play a negative role in the process of knowledge transfer in and alliance. On the flip side, the presence of collectivism (Mazda had a strong culture promoting employee empowerment), favours long-term and trust based relationships which leads members of groups to act in the interest of the group – consequently leading to a hospitable environment for knowledge transfer and innovation.
Organizational Structure in International Alliances
Companies that make proactive investments in establishing a formal structure and systems to manage their alliance activity are better positioned to enjoy greater alliance success and value creation with their alliance portfolio. The alliance management structure is essentially a management team that is explicitly responsible for coordinating and managing alliance activity within the company. Due to motives of entering new businesses, geographies and product segments, the alliance responsibility is often assigned to managers in the business development or corporate development function. However, in some alliances, a completely separate ‘alliance management teams are setup by the two partnering firms. Companies that create a formal alliance management team adopt a variety of approaches to organize or locate an alliance team within their organization (Kale et al, 2001).
A company may set up separate alliance teams, each with an alliance manager supported by a technology or marketing manager to coordinate its multiple alliances with its strategic partners. These alliance teams in turn report to a corporate level alliance function. They implement or facilitate several important activities to drive alliance success and value creation. Firstly, these teams facilitate the learning and leveraging of alliance know-how and best practices embedded in prior alliance experience. Secondly, they provide additional value by building support for alliances among key external stakeholders, coordinating availability of internal organizational resources for alliances and measuring and monitoring performance of all alliances (Kale et al, 2001).
For example, in the case of the GM-Fiat alliance, the two companies have mandated all activities relating to design and manufacturing of powertrains to Fiat-GM Powertrain B.V. The company is equally owned by GM and Fiat Auto, with a Chairman from Fiat and a CEO from GM and operates many plants and R&D centres in Europe. Given the importance of powertrains in the personality and commercial value of an automobile brand, the company has a very delicate task which requires significant amount of work and efforts for convergence towards a compact package of solutions in the respect of engines and transmissions. The management of this particular joint venture (amongst others between Fiat-GM) aims to produce a package of innovative solutions which can be calibrated to the needs of the two partners, as well as position itself to as a supplier to other automakers (Camuffo & Volpato, 2001).
In doing so, the management team relies heavily on their developed competences in the past. For example, Fiat Auto has a relative leadership position in diesel engines and GM has a relative leadership position in gearboxes. Thus the management uses past experiences in this particular kind of technology to speed up the convergence process, with the result being an important innovation process for the partners aiming to meet the objectives of continuous improvement in the competitiveness of engines and transmissions. The benefits from the joint-venture will then be transferred to the mother companies of the alliance.
On the other hand, some alliances may be organized geographically. A separate alliance team may coordinate and support all alliance activities in a number of geographical locations. This is clear in Fiat and GM’s joint venture for purchasing where the two partners have rationalised their purchasing activities through the establishment of a company called GM-Fiat Worldwide Purchasing B.V. The company operates on a worldwide scale but with the objective of supplying manufacturing and assembly plants directly managed by Fiat and GM. The alliance, headquartered in Germany, is organized on a regional basis with two organizations. One of these is for the Latin American market (whose head comes from GM), and the other one for Europe (run by a Fiat manager). Alongside the structure there are staff units (Cost accounting and management, IT, HR, Legal etc.) that are unique for both branches.
Further, as pointed out above, the management teams communicated this complex initiative to various stakeholder groups in order to gain support. This was especially true in relation to communication with suppliers, in order to demonstrate the strategic opportunity of increasing sales while lowering marketing costs the alliance presented for them (Camuffo & Volpato, 2001).
Types of Alliances
There are a wide range of types of cooperative agreements reflecting various degrees of inter-organizational interdependency and levels of internalization. However, within the rubric of collaborative experience, Narula & Hagedoorn (1999) considers two main groupings of agreements which can be regarded as representing different kinds of internalization: equity based and non-equity agreements. Equity agreements (joint ventures and minority equity alliances) tend to be complex forms to administer and control, and take longer to establish and dissolve; whereas non-equity agreements are easier to establish and dissolve and usually take the form of R&D agreements. It is safe to say that equity-based agreements represent a higher level of internalization and inter-organizational interdependence than non-equity agreements. Given the effect of globalization and fast evolving sectors leading to shorter product life cycles, the past two decades have seen a rise in contractual non-equity alliances, which provide greater strategic flexibility. This allows firms to conjure quick responses to rapidly changing technologies.
Due to the risks involved with innovative activity and the possibility of one partner benefiting more than the other in an alliance and thus terminating the agreement prematurely (mostly the case in cross-border alliances), firms in international alliances have tended to prefer equity agreements. However, with the development of supra-natural institutions such as WIP and WTO, the enforcement of contracts across border for non-equity R&D agreements has become easier. It is also important to note that choosing the type of agreement depends greatly on the objective and industry of the alliance. For instance, non-equity forms of agreements are more efficient for undertaking more research intensive activity since they promote more negotiation and intensive cooperation than equity agreements. However, where firms seek to learn and transfer tacit knowledge back to the parent firm, equity forms of agreements may be more appropriate (Narula & Hagedoorn, 1999).
An example of equity-based agreements can be found in the Ford-Mazda alliance, where Ford entered the alliance in order to fundamentally change its corporate culture and organizational purpose in order to improve productivity. Having witnessed the success of Japanese products in the US market, Ford intended to implement the strategies that led Japanese managers to attain this success. In order to transfer organizational knowledge, Ford had to establish long-term relationships with Mazda as the mere copying of the Japanese manufacturing processes, without the tacit know-how of how to operationalize them, would not have led to higher productivity levels. This was clear in the case of Ford’s plant in Mexico which used Mazda’s Hofu factory as a blueprint. The plant quickly became one Ford’s top-ranking plant for quality and a model for renovating other facilities. Further, the Mexican plant followed Mazda’s practice of building a nearby stamping plant to prevent damage to parts during transit (which was a regular occurence in Ford’s previous centralized stamping plants system). The Mercury Tracer made in the Mexican plant was Ford’s best built car (Chan & Wong, 1994).
On the other hand, the recent alliance between BMW, DaimlerChrysler and GM is one that aptly portrays the nature of non-equity agreements. Agreements were signed between the three automakers with the objective to develop a two mode hybrid drive system that reduces fuel consumption whilst not compromising vehicle capability. While the design for the system was to remain common, the technologies were to be adapted to the individual vehicle models, thus retaining each brand’s distinctive character. This limited the degree of internalization and interdependence between the partners. Further, the underlying aim of the alliance was to create a shared technology platform for hybrid drives that would allow the partners to quickly integrate the best technologies in the market in order to exploit and strengthen the innovative potential of all the partners. The non-equity agreement would enable all participating companies to pool their development expertise and to respond quickly to rapid changes in technology in the sector.
‘Coopetiton’
We noted the types of agreements that firms engage in but very often even though firms cooperate, they may also compete at the same time. This is common when alliances are formed by companies that exist within the same industry. Bengtsson and Kock (2000) argue that when firms compete and cooperate simultaneously in one relationship it is known as ‘Coopetition’. An example of this is the relationship between GM and Toyota. The companies are currently competing to gain the position of market leader in auto sales. The current leader is GM but during the first quarter of 2007 Toyota briefly took the number one position and analysts predict that is will be a matter of time before the company regains the spot. Even though the two companies compete vigorously for the top place in sales but at the same time they cooperate through NUMMI as described above. Bengtsson and Kock’s ‘empirical findings point out that the firms tend to more frequently cooperate in activities carried out at a greater distance from buyers and compete in activities closer to buyers’. NUMMI is an activity of greater distance to its customers, therefore, there will be no threat to either companies cooperating. However auto sales is an action which involves direct interaction with the customers therefore firms are less likely to cooperate for these activities. In today’s industry some ‘relationships consist of pure competition, others of pure cooperation, and between the two extremes, there are relationships consisting of a mix of both’ (Bengtsson and Kock 2000).
Relationship Development in International Alliances
Having discussed the types of agreements a firm may enter into, it is important to consider factors of relationship development and management strategies in the context of strategic alliances. Apart from the hard functional side of an alliance (e.g. financial and other operational issues), it is imperative for managers to correspond attention to the soft side of an alliance. The soft side of management refers to the development and management of relationship capital in the alliance. Coleman (1990) considered relationship capital in an alliance as the quality of relationship that exists between social actors (Cullen et al, 2003) and includes socio-psychological aspects (of the alliance) which are positive and beneficial in the alliance. Relationship capital involves the pattern of interaction between partner firms that facilitates and allows for the effective functioning of the alliance on a day-to-day basis and parent companies are expected to grant local alliance managers the autonomy, resources and time to build a relationship between partners that generates positive feelings between the two.
Many researchers find that trust and commitment are the two major aspects of relationship development and without these, the alliance will fail entirely or fall short of reaching its strategic potential, no matter how mutually beneficial or logical the venture may seem at the start. Trust and commitment are imperative to an international alliance as contracts and agreements may fail to account for every contingency that might arise in a partnership and alliances usually tend to create a strong potential for dysfunctional conflict and mistrust. It is thus important for managers to fill ‘gaps’ in an agreement and tackle conflicts relating to objectives, goals and cultures by development trust and commitment in order to keep the relationship running smoothly. The development of mutual trust and commitment also aids organizations to freely exchange information while eliminating opportunism and unfair behaviour. In a scenario where learning, innovation or technology transfer are the main objectives of an alliance, the absence of trust and commitment could lead to inhibiting the transfer of scientific and ‘tacit’ knowledge between partners.
Performance in strategic alliances may produce a range of outcomes: learning a new market, gaining a new technology and learning new business practices etc. Cullen et al (2003) find that performance of all types interplay with commitment and trust and argue that there is a positive relationship between commitment and trust. Further, they also argue the existence of a feedback loop which suggests that strong performance reinforces the trust/commitment cycle making partners even more committed and trusting.
An example of the above can be found in Nissan and Suzuki’s announcement in 2006 to expand their business collaboration. The expansion was to go beyond the two partners’ existing OEM supply of Suzuki minicars to Nissan and the supply of automatic transmissions to Suzuki through Nissan’s affiliate company Jatco Lrd. According to the COO of Nissan, the expansion was a result of the current ‘relationship of trust and mutual benefit’ between the two partners and that it complemented Nissan’s continuing drive into new market segments and further global expansion. Similarly, the expansion also ensures that Suzuki achieves its mid-term five-year business plan by complementing its product portfolio in new segments. It can be seen that good performance in the former alliance has strengthened the relationship based on trust and mutual benefit between the two partners and has led them to further expand the horizons of their relationship.
On the other hand, we may examine the 50:50 alliance formed between GM and Daewoo in 1986 in order to build a car, Pontiac LeMans, in Korea for sale in the US. GM aimed to tap Korea’s low-wage workforce for an inexpensive car to compete against the Japanese while Daewoo wanted to become a major carmaker through an export drive. GM transferred designs and process technology to build practically the entire car at world scale production volumes. GM was literally teaching the personnel of the joint venture everything it knew about auto manufacturing; everything except their state-of-the art production management. The US sales of the venture collapsed 39% from 1988 to 1990 due to quality and labour problems and export market rights. GM charged that Daewoo has mismanaged labour relations leading to work-stoppages, slowdowns and strikes whereas Daewoo claimed that GM was not promoting the car aggressively enough. Thus, the lack of production management capabilities and more importantly the weakness in labour management of the Daewoo group was not compensated for by the technology transfer by GM (Chan & Wong, 1994). The GM-Daewoo example clearly portrays that the lack of mutual trust and commitment caused the alliance to fail. Daewoo’s lack of commitment while managing labour processes and opportunistic behaviour (compromising on quality standards) following the technology transfer created lack of trust and thus plagued their partnership.
Strategic Alliances: A Modern Trojan Horse?
The automotive industry is a highly competitive one, to stay on top of the game the companies within the sector are always looking for ways to stay ahead of competition. One of the ways in which firms are achieving this is by creating strategic alliances. By examining different aspects of cooperation within the automotive industry we have established that the motivation for most of these alliances is to push for innovation whilst reducing the amount of risk involved. Even though many of the alliances we have mentioned have been successes, but there may be huge scopes for failure when trying to form these alliances. One of the reasons of alliance failures as outlined in the GM and Daewoo case above is due to the lack of trust. A successful alliance exhibit trust between the partners therefore unsuccessful alliances exhibit a lack of trust (Koza and Lewin 1998).Very often there is the need to exchange knowledge whilst cooperating in an alliance. Hence, if there is lack of trust the knowledge transferred may not be of value and could lead to failure of the alliance. Another cause of failure is the failure to create fit. ‘Alliance success depends on an effective and efficient alignment (in other words, fit) between the partners involved. There is a need to focus on the issue of collective alignment, instead of on the individual strategy formulation and organisational design of the partners.’ (Douma et al. 2000).
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Bibliography
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Camuffo, A. & Volpato, G. Partnering in the global auto industry: the Fiat-GM strategic alliance. International Journal of Automotive Technology and Management, Vol. 2 335-351
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Treece, J., Miller, K., and Melcher, R. (1992), “The Partners”, Business Week, 10 February, pp. 102-107.
IBM Global Business Services (2006), Driving Innovation: 5 Opportunities for the Automotive Industry
Websites
Nissan and Suzuki to expand collaboration
GM Fuel Cell Partnerships and Alliances
DaimlerChrysler and Hyundai to continue strategic alliance
www.automobile.com
Global Alliance for Hybrid Development: Cooperation between BMW, DaimlerChrysler and General Motors
Reports
Renault 2006 Annual Report
Nissan 2006 Annual Report
Nissan Sustainability Report 2006
Notes
Eng, T.Y., B2B Marketing, Lecture Notes
Accroding to the research conducted by Baghat et al (2002) knowledge transfer in international alliances is more effective when transacting organizations are located in national contexts that do not differ significantly on cultural dimensions, so that cultural compatibility among partners can be considered one of the main factor, even if not the only one, affecting the international alliances stability and their effectiveness.
Individualism describes the tendencies to orient actions towards independence, competition and one-self interests. Collectivism describes tendencies to perceive oneself as an independent member of a group, so they tend to act cooperatively in their group interest (Hofstede. 1980).
Ford and Mazda have had a 13 year marriage in which they worked jointly on ten current auto models, usually with Ford doing most of the styling and Mazda making key engineering contributions.
