Strategic Alliance Trends - Essay Example

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Strategic Alliance Table of Contents STRATEGIC ALLIANCE 19 2 Introduction 4 Strategic Alliance Trends 5 Reasons for Strategic Alliances 7 For entering into new markets and growth 7 To decrease the financial risk and share the cost of research and development 8 Achieve competitive advantage in market 8 To obtain new technology and innovation 9 Forms of Strategic Alliances 9 Risks of Strategic Alliance 10 The clash of different culture and absence of chemistry between the parties 11 Lack of right co-ordination among the management teams of different companies 11 Differences in the operation systems and attitude of the partners 11 Lack of clear objectives and goals 12 Relational Risk 12 Strategic Alliance might create global competitor 12 Risk of performance 13 Other Risks 13 Success factors for Strategic Alliances 13 Commitment of the senior management team 13 Collecting the performance feedback frequently 14 Manage an effective and strong management team 14 Clearly identifying the goals and objectives of the alliance 14 Planning thoroughly 14 Selecting the right partner 14 Right communication between the alliance companies 15 Conclusion 15 References 17 Bibliography 19 Introduction Gallo is one of the largest producers of wine, but it is not involved in growing a single grape. Nike is one of the largest and most popular athletic footwear company, but it not manufacturing even a single shoe. Similarly, Boeing is one of the biggest aircraft manufacturing companies, but it does not manufacture not more than cockpits or wing bits. These companies have entered into strategic alliances with the suppliers to do the manufacturing activities for them. Strategic Alliance is an agreement between the firms for conducting the business activities together. Strategic alliance goes beyond just informal handshake agreements or partnership. It includes lengthy formal contract in which both the parties also exchange the equity and contribute capital to establish a joint venture firm or corporation Strategic alliance means merger of two companies. This is what is generally assumed, but companies are coming up for multi-strategic alliances nowadays. This might be because they are willing to utilize their strengths to controlling the market. For example, a strategic alliance of six companies was formed to develop General Magic Corporation for developing the communication software called Typescript. The companies involved in the strategic alliance are Apple, Motorola, Sony, AT&T, Philips and Matsushita (Longenecker, & TenaLoeza, 2010, p. 224). The large organizations not only form strategic alliance with big organizations but also with the small companies too. The alliances are formed in order to form joint ventures for using their skills and expertise to promote their competitive advantage. It links two business entities, without affecting the independent legal status of the firm or company (Kale, & Singh, 2009, p. 2). Strategic Alliance Trends The strategic alliances have become a superficial form of business practice, which has its primary focus on increasing the credibility of the business through association of one of more companies. It is also done for achieving the strategic objectives of the company, entering into new market, increasing the market share, increasing the delivery capacity of the company, reducing the cost of operation, and introducing innovative products or services in the market. The alliances of the companies nowadays contribute to 20-33 percent of their annual revenue. The companies get the advantage of handling larger order volumes; they get bigger customers and can offer high quality products or services to the customers. It can be seen that the strategic alliances between the companies are growing at a pace of 25 percent annually (Keasler, & Denning, n. d., p. 3). In an alliance, the different department of the whole organization get involved such as the sales, marketing, supply chain, delivery department, etc. SO it can be well assumed that the support of the internal resources is necessary for a perfect alliance. The control functions vary in different organisation. The responsibility for managing the relationship in an alliance is either controlled centrally or alliance groups are made to manage the areas in the organisation. The role that is dedicated to the management transit from centrally managed groups to strategic managed units. Companies have different criteria for stepping into alliances. For example, HP and Red Flag Software formed a joint venture to promote Linux. They setup their Linux Lab in Beijing and this was utilised for performing Research and development activities. Similarly, Siemens and Huawei Technologies formed $ 100 million joint venture to grab market share of China's 3G market. They developed equipments to support the 3G standards in China. Philips and BenQ formed a joint venture of $ 20 million to develop and manufacture optical storage products (Aswathappa, 2010, p. 383). The strategic alliance between the firms often takes place with mainly two motives, they are: Cost economizing motives: The cost economizing motive of the firms leads they to form strategic alliances. In such cases at least one firm has the responsibility to minimise the net cost of the firm. This is done by making agreements which are mainly customer-supplier based or vertical relationship within the value added chain in the short-term perspective. Profit optimizing motive: Profit maximisation is the strategic motive of the company, which compel them to form alliance with the other companies. It is often seen that companies themselves are not able to earn adequate profit, so they get into alliances to utilise the strong points of the other organisation. The strategic alliances are the partnership between two companies that work together to achieve significant objectives that are beneficial for both the companies. Companies form alliances to obtain technological advancement, strive against political risk or reduce financial drawbacks. It is believed that in future the growth of most of the organisations is depended on their strategic alliances. In a span of 5 years about 16 to 25 percent of the strategic alliance would be accounted from 40 percent of the revenue generation. This means $ 25 to $ 40 trillion would be generated from the alliances (Beamish, 1997, 258). The strategic alliances can be grouped in three categories, they are: equity alliances, non-equity alliances and joint ventures. In the non-equity alliance the firms decide to carry on their business functions together, but do not take any equity position in each other's company. So the non-equity agreements are managed through contacts. Similarly, the equity alliance involves cooperation of the firm by holding the equity of the partner's firm. For example General Motors important small cars from the company called Isuzu. In this case General Motor bought about 32.4 percent of the share in Inshu. In Joint ventures the firms are legally independent but come forward to create an independent firm in which the company invest money and share the profits accordingly. The biggest example of this is IBM. IBM has strategic alliances with over 400 companies around the world (Reece, Shah, & Tasner, 2010, 258). Reasons for Strategic Alliances The reasons for creating or getting into strategic alliances are stated as follows: For entering into new markets and growth It is studied that the main reason of forming strategic alliance is growth and entering into new markets. Companies nowadays are developing at a fast pace and they have no time to create or develop new market for themselves. So they get into alliance with a well-established company to utilise their manufacturing unit, supply chain or marketing segment to conduct business without any hindrance. The companies forming alliance with any existing company is very much prevalent in market in today’s scenario. It would be the best option for a company to get into partnership with an international company if it is willing to go for expansion in the global market. It would make the process lot easier and less stressful for any company. It has been seen that more than 50 percent of the companies get into strategic alliances, when they want to launch their products or services in the international markets. To decrease the financial risk and share the cost of research and development Many companies feel that there is great risk involved in the developing and producing a new product or service single-handedly. So in such cases the companies get into strategic alliances by agreeing to share the risk among them. A strategic alliance formed by Boeing Aerospatiale, Construcciones Aeronauticas of Spain, British Aerospace and Deutsche Aerospace to develop extremely high cost jet airplanes. Since the investment was huge and the initiative was risky, so the aerospace companies from different countries came forward to form an alliance. It also included sharing the financial risk of the project. Even the non-profit organisations who have limited resources can utilise the strategy of forming alliance to strengthen their position. For example four universities in Ohio formed strategic alliance to develop a business school for the benefit of the students. Achieve competitive advantage in market The small companies get attracted to strategic alliances because they can provide the right tool for doing competitive business. Many small companies require high quality technology to survive in the market. They realise that they cannot survive alone, so the small companies come together to forms strategic alliance. The small companies derive strategic alliance in the areas like marketing, distribution, research and development. The small firms create teams and compete against large firm through alliance. By forming alliances the small companies achieve big projects and deliver them skilfully. Companies have started believing that this is an era of collaboration. This can be obtained by allying into a group by sharing the resources and developing a strong framework to win the competition in the market. Since self-reliance is not affordable for many companies, so they get into alliance to strengthen their position in global market. To obtain new technology and innovation Providing excellent and most advanced technology is not every company’s cup of tea. At the same time it is very essential to acquire effective technology to compete in the present market. So companies team up to utilise each other’s best resources. Companies pool or borrow technological resources of the alliance companies to get an edge over the competitors. Technology is not only viewed as the major source of successful strategic alliance, but nowadays the host companies demand more than just transfer of technology from the subsidiary company. Another reason that can be considered for strategic business is to outsource the resources for the business functions that include marketing, production, sales or supply chain. It would also include other important functions that can reduce cost if resources are outsourced. Companies get into strategic alliance for best quality of technology, cheap labour cost or reduced production cost. For example company like BP Amoco PLC decided to outsource Pricewaterhouse Coopers LLP for handling their accounting functions. Forms of Strategic Alliances There are many types of strategic alliances. The strategic alliances are designed according to the convenience and objectives of the companies, willing to form the alliance. The different forms of strategic alliances are as follows: About 54 percent of the responsibility of promotion and marketing is done jointly. In the second type, about 42 percent of the selling and distribution is done on a joint basis. In the third type of alliance, about 26 percent of the production process is done jointly. In the four form of alliance, about 22 percent of the technology and licensing tasks are taken care of jointly by the alliances. In the fifth form, 19 percent of the research and development activities are conducted jointly. Lastly about 19 percent of the other outsourcing purposes are monitored jointed by all the alliance companies. The most important point is that, strategic alliances are formed for various activities ranging from simple licensing functions to conduct joint operation functions for distribution, value chain or other specific functions. There are many forms of complex and hybrid alliances too. Risks of Strategic Alliance It has been observed that the output expected from many strategic alliances has not given the expected results. Most of the earlier studies have focused more on the part of their success stories rather than the failures. It is necessary to determine the reasons of failure of 60 percent of the strategic alliances around the world. The major reasons for strategic alliances are stated below: The clash of different culture and absence of chemistry between the parties When companies go for forming alliance with any international company, cultural clash might occur. For example the companies in US evaluate the performance of the company through their profit, while companies in Japan evaluate their performance through their operation and strategic activity. The national cultural traits also influence the alliance and the relationship between the parties. Lack of right co-ordination among the management teams of different companies The subordinate of one company might take decisions which the top level management of the other company might not agree with. If the situation gets worse than the companies starts functioning on their own and start doing their own publicity in the market rather than promoting the alliance. These type of alliances end up through legal battles between the companies (Graham, Piercy, & Nicoulaud, 2008, p. 472). Differences in the operation systems and attitude of the partners Another problem that might arise among the companies is difference of attitude among the companies. If one company deliver their goods or services late, then the schedule of the other company gets hampered. When this type of problems occurs, companies functioning properly get angry and this might lead to split or take over. For example a strategic alliance was formed between the companies called Foote, Cone and Belding (FCB) and Publicis, in which Publicis was responsible for providing FCB the international exposure in North of South America. This alliance ended in a bitter legal case due to difference in the attitude of these companies. Lack of clear objectives and goals In today’s world many of the strategic alliances are formed for totally wrong reasons. They are formed in such a manner, that experts can easily predict their dark future. Companies enter into alliances to fight against stiff competition. This is considered to be a negative attitude on the part of the company. This also raises a doubt among the competitors that there must be some problem within the company due to which it is not able to function single-handedly. When the alliance companies do not have common goals or objectives, they cannot work together to make the venture a success. Relational Risk The relational risk involves determining the degree of commitment of the alliance companies in the venture. It is important that the companies should be optimistic and have an opportunistic behaviour towards the alliance. For example Liz Claiborne and Avon entered into a joint venture, but after Avon entered into another alliance with Parfums Stern, Liz Claiborne started regarding Avon as their direct competitor. This deteriorated the relation between the companies and eventually Avon left the joint venture, which was acquired by Liz Claiborne. Strategic Alliance might create global competitor In this case one of the partners can use the alliance to test the market and also launch a subsidiary all by itself for its own advantage, without the cooperation of the others. This often creates the likelihood of competition within the alliance. It threatens the main area of business. Risk of performance The performance risk is always there even when all the partners are fully dedicated to the alliance. The sources of the performance risk include the changes of policies of the government, environmental risks, market factors, stiff competition, fluctuations of demand, etc. Other Risks There may be many other functions for breakdown of strategic alliances which includes lack of trust among the companies, changes in the strategy, improper implementation of system, etc. The main reason for failure in strategic alliance is failure to meet the expectations (Hitt, Ireland, & Hoskisson, 2010, p. 255). Success factors for Strategic Alliances The success factors of forming a successful strategic alliance have always being a million dollar question for every manager, top level management team and CEOs. There are several factors on which the success of any strategic alliance depends, they are as follows: Commitment of the senior management team It is the senior management of the alliance companies who are responsible for taking the major decisions of the company. They should have proper co-ordination among themselves for effective and efficient management. This would benefit the alliance in turn. Collecting the performance feedback frequently Performance measurement is very necessary. If one company in an alliance are not performing well, then the performance of other companies are also affected. This is why performance should be monitored and evaluation of the lacking areas are must for the alliance. Manage an effective and strong management team Management team has the responsibility of controlling the human resource and assigning tasks to them. It is very important that a strong and efficient management team is formed, so that the operational activities remain in strong hands. Clearly identifying the goals and objectives of the alliance Before forming any strategic alliance, the companies must identify their goals and objectives. They must have clear visions regarding the purpose of their alliance. Alliances for just to show off power or status is not appreciated in the market. Planning thoroughly It is important to develop and plan a framework of the activities before starting the functions of any joint venture or partnership. Selecting the right partner It is important that the companies choose the right partner before forming an alliance. Incompatible companions cannot make good partners. So the vision, mission and culture of the partners should be similar in order to create a successful alliance. Right communication between the alliance companies The companies in an alliance must have proper communication among them. There should be no barriers between them which communicating important facts. Grapevine among the management should be avoided. Conclusion It is difficult to face the world of uncertainties all alone. Since new trends are sweeping across the business environment every day, companies are striving hard to find strategies to survive. Strategic alliances have become one of the major tools for surviving in the market and maintain an edge over the competitors. Companies are also attracted towards strategic alliance because they could also save cost through alliance. Indeed most of the company’s form strategic alliances for manufacturing the best quality products, technology, decrease the production cost and cheap labour. Relationship in an alliance pays off, if the companies have done proper homework regarding their goals, objectives and expectations (Ulijn, 2010, p. 204). Companies must not get into alliance just because they want to use the name and fame of any well-known company, but the options of growth and development should be analysed before entering into any form of alliance. This is the main reason why companies fail to form a successful strategic alliance. So the companies should be clear about the best options available to them. They should also be sure and clear about their motives of entering into an alliance. The partners for strategic alliance should be always selected on the basis of their expertise and his/ her cultural fit with the organisation. The management of the companies should be always monitoring the new organisation formed. It can be concluded that, the problems of globalisation would not be leaving the business environment, but properly managed alliance can bring about some change. It can act as the best mechanism for the companies and help the companies to fight with the challenges together (Elmuti, & Kathawala, 2001, p. 11). References Aswathappa, K. (2010). International Business. (4th ed.). New Delhi: Tata McGraw-Hill Education. Beamish, P. W. (1997). Cooperative Strategies: Asian Pacific Perspectives. California: Lexington Books. Elmuti, D. & Kathawala, Y. (2001). An overview of Strategic Alliances. Retrieved from: http://www.ux1.eiu.edu/~cfyak/Articles/An%20overview%20of%20strategic%20alliances.pdf. Graham, H., Piercy, N. F. & Nicoulaud, B. (2008). Marketing Strategy and Competitive Positioning. New Delhi: Pearson Education India. Hitt, M. A., Ireland, R. D. & Hoskisson, R. E. (2010). Strategic Management: Competitiveness and Globalization, Concepts. Connecticut: Cengage Learning. Kale, P. & Singh, H. (2009). Managing Strategic Alliances: What Do We KnowNow, and Where Do We Go From Here? Retrieved from: http://mdc.ltindia.com/librarym/mm_files/Managing%20Strategic%20Alliances%20What%20Do%20We%20Know%20Now,%20and%20Where%20Do%20We%20Go%20From%20Here.pdf. Keasler, T. R. & Denning, K. C. (no date). A Re-examination of Corporate Strategic Alliances: New Market Responses. Retrieved from: http://fma2.org/Texas/CompPapers/ARe-examinationofCorporateStrategicAlliancesNewMarketResponses.pdf. Longenecker, G. 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