An Overview of Strategic Alliances - Term Paper Example

?Business, Research Paper Table of Contents Business, Research Paper Table of Contents 2 Introduction 3 Business level co-operative strategy 3 Cross border strategic alliance 4 Vertical complementary strategic alliance 5 Overcoming entry barriers 6 Uncertainty reducing strategy 6 Complementary resources and capabilities 8 Conclusion 9 References 10 Introduction The era of globalization has opened up a new chapter in the history of business organizations. The absence of trade restrictions has led to business organizations expanding their footprints beyond geographical and political boundaries to reach out to new market with considerable potential. The saturation of the traditional markets in Europe and US and emergence of new markets in Asia have also led to considerable expansion plans. In this regard supply chain management has a key role to play in the success of companies with aspects like outsourcing being on the rise. The present study would analyze the aspect of vertical integration versus strategic alliances as a possible supply chain management strategy of firms engaged in the aerospace and defense industry competing in the international markets in a globalised market environment. Business level co-operative strategy In general terms, strategic alliances can be defined as co-operative agreement and arrangements between the two or more partners, and hence, the co-operative relationship management is one of the prime requirements in strategic alliances. The strategies aims to meet this requirement are known as the business level co-operative strategies. Co-operation is one of the basic attributes of the strategic alliances and the partners must have a clear understanding of this attribute for framing a set of business level co-operative strategy. Kwok and Hampson have identified the very specific parameters to measure and frame the co-operative strategies in case of strategic alliances. Firstly, the level of co-operation should be out of any kind of mutual desire or need. Secondly, partner must co-operate for sharing risk. Thirdly, partners’ co-operation should determine a strong foundation for business growth. Finally, the co-operation must aim to minimize “the likelihood of opportunistic behavior” (Kwok and Hampson, p.5). Cross border strategic alliance The need for greater consolidation within the highly capital intensive aerospace and defense industry segment has paved the way for greater alliance and collaboration among various organizations for an effective supply chain management. The need to develop high end research has also promulgated the need to have greater strategic alliances with international partners. For example the NATO partners are actively trying to enter into greater collaborations and strategic alliances with the US and European companies in a bid to improve upon the efficiency of the companies (Lorell et.al, “Implications of European Consolidation and Increased Aerospace Globalization”). Strategic alliances also help in developing a greater synergistic association between the companies and the civil sector. The example of the modern air fighter Euro fighter Typhoon is a good example in which five European nations namely Germany, UK, Spain and Italian companies went into a strategic alliance to create a world class fighter aircraft. Another such example involves the case of EUROFLAG consortium in which five European national companies have entered into a strategic alliance to manufacture fifth generation fighter aircrafts. However the aspect of cross border alliances also involve certain hindrances mainly in the form of government contracts and regulations, arms policies and export rules of different nations, disparities in the requirements and finally the absence of multinational legal structure across various nations etc that can have serious implications on the development of cross border strategic alliances between players in the aerospace and defense industry (Commission of the European Communities, “Cross Border Industrial Integration”). Vertical complementary strategic alliance A vertical strategic alliance is one in which companies tend to share their resources and abilities in various stages of the value chain. This form of an alliance involves a supplier supplying parts and equipments only to a single company. This form of a strategic alliance can be very beneficial in the aerospace and defense industry where differentiation is the key for survival in the market. For example the Boeing 777 alliance is a classic example of this form of strategic partnership. However this form of strategic partnership also involves certain issues such as over dependence on a single supplier. The single supplier may eventually hold the most vital part that ultimately dissociates a product from the rest of its kind in the market. However this form of alliance can lead to over dependence and would increase the bargaining power of the suppliers (Phadtare, p.106). However this strategy scores over vertical alliance as strategic alliances are generally long term and also involves fewer risks as compared to a vertical integration strategy. It also helps in better differentiation of products and greater focus on the core business areas such as innovation and research and development. Strategic alliances like outsourcing can also help generate greater benefits and cost reductions. In case of aerospace and defense industries this is very essential as the companies can engage themselves in core areas like innovation and research and can outsource processes that do not create much values to partners at a lower cost resulting in cost savings and also minimizing the risks of high cost of entry while going in for a vertical integration. Strategic alliances in the defense and aerospace industry can also help in fostering better relationships between suppliers and other stakeholders (Hill & Jones, p.304-306). An example in this regard is the development of the Brahmos supersonic cruise missile by a strategic alliance between Defense Research and Development Organization (DRDO) of India and NPO Mahinostroyenia of Russia (Brahmos Aerospace, “Joint Venture”). A strategic alliance has helped generate better outcomes in this case as compared to vertical integration as it has led to greater responsibility and sharing of ideas that would not have been possible in case of a vertical integration by either of the players individually. Overcoming entry barriers The aerospace and defense industry is a very high capital intensive industry and the entry of a new player is very difficult as it involves huge lot of expertise as well as access to huge capital. Strategic alliances as well as vertical integration can have certain entry barriers. On one hand strategic alliances especially in the aerospace and defense industry can have several barriers like government legislations preventing alliance with certain players from non friendly nations. At the organizational levels it also involves integration of management culture and an ability to combine and keeping the individual strengths intact. However these can be overcome by careful planning. On the other hand vertical integration involving mergers and acquisitions requires a high capital expenditure with considerable risks like access to key components. Vertical integration across nations has entry barriers like government regulations. However strategic alliance scores over vertical integration over its aspect of less financial capital required and a risk sharing between the partners that leads to greater advantages. It also opens up new markets for both the players that may not have been feasible if approached in an individual manner thereby reducing the impact of entry barriers as compared the effect of the same in case of vertical integration (Todd & Humble, p.10-13). Uncertainty reducing strategy As per the discussions and analysis in the previous sections, it is more viable to stick with the strategic alliances strategy rather than going for the vertical integration in case of managing an effective global supply chain in aerospace and defense industry. In the prevailing global scenario, the supply chain in aerospace and defense is no more limited by warehousing the spare parts and the manufacturing line. The existing market players like Lokheed Martin, Dassault Aviation, Boeing etc are not only trying to emphasize on manufacturing line but their focuses have also been diverted significantly towards the major tasks in supply chain management like product data management, inventory optimization, procurement, and partner management. These tasks have become major criterions for competition and strategic alliances are more viable and effective in managing supply chain rather than through vertical integration (Sims, p.211). Strategic alliances strategies are mean to offer sustainable competitive advantages like low cost, better technical expertise, higher quality products but there are also a number of uncertainties are associated with this strategy. Some of the major uncertainties and risks are like clash of culture between partners, unclear or mismatch of goals and objectives, lack of confidence, performance risk etc. In order to achieve the best possible result from the strategic alliances, it become quite necessary to understand the major uncertainties which are prominent in aerospace and defense industry and frame a set of plausible strategies. Elmuti and Kathawala have identified some of the most necessary requirement before going for strategic alliances to reduce the uncertainties. Some of them are listed below. Detailed planning through clear commitment and agreement Proper selection of partner Higher level of two-way communication between partners Primary goals, objective and roles of each involved partner should be communicated and shared Analysis of performance and feedback on a regular basis Commitment of the top level managements of both partners (Elmuti and Kathawala, p.205-217) Complementary resources and capabilities Complementary resources and capabilities is a major area in business level cooperative strategies. The strategies alliances offer opportunities to avail the advantages in market by ensuring complementary resources and capabilities. The complementary resources and capabilities can also be termed as the most important value added advantages that the two partners can enjoy; for example, the two partners may have capabilities in different technical expertise and they use both of these technical expertises in order to strike the market. In aerospace and defense industry, technology is the most critical factor for gaining competitive advantage. In order to gain the complementary resources and capabilities, the firms in aerospace and defense industry can go for vertical and horizontal alliances. In case of vertical alliances the aerospace manufacturing firms can develop strategic alliances with their suppliers who offer major components. In case of horizontal alliances, the aerospace firms can develop strategic partnership with their competitors and both of them can use each others’ resources and capabilities for better R&D, cost efficiency and higher quality level (Phadtare, p.106). Conclusion The study of the topic provides a considerable and clear cut advantage in the favor of strategic alliance as an alternative to vertical integration as a part of supply chain management for aerospace and defense companies in the era of globalization and high competition. Entering into strategic alliance between players from different nations can on one hand increase their efficiency and also minimize the risk of both the companies. It also leads to greater consolidation in the industry that makes it a competitive advantage as well as sets the background for generating economies of scale and scope that generates efficiency profitability as well as creates entry barriers for the other players thus generating sustainable competitive advantage in the globalised commercial market. References Brahmos Aerospace. Joint Venture. 2009. Joint Venture. October 11, 2011 < http://www.brahmos.com/content.php?id=1>. Commission of the European Communities. Cross Border Industrial Integration. 1996. The Challenges Facing The European Defense-Related Industry, A contribution for action at European Level. October 11, 2011 < http://ec.europa.eu/internal_market/publicprocurement/docs/defence/com96-10_en.pdf>. Elmuti, D and Kathawala, Y. 2001. An Overview of Strategic Alliances. October 11, 2011 . Hill, C. & Jones, G. Strategic Management Theory: An Integrated Approach. Cengage Learning, 2009. Kwok, T. L. and Hampson, K. D. 1997. Strategic Alliances between Contractors and Subcontractors - A Tender Evaluation Criterion for the Public Works Sector. October 11, 2011 . Lorell et.al. Implications of European Consolidation and Increased Aerospace Globalization. 2002. Going Global? October 11, 2011 < http://www.rand.org/pubs/monograph_reports/2005/MR1537.pdf >. Phadtare, M. T. Strategic Management Concepts and Cases. PHI Learning Pvt. Ltd, 2011. Phadtare, M.T. Strategic Management Concepts and Cases. PHI Learning Pvt. Ltd. 2011. Sims, R. R. Changing the way we manage change. Greenwood Publishing Group, 2002. Todd, D. & Humble, R. World aerospace: a statistical handbook. Routledge, 1987. Read More