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Entering into strategic alliances with potential competitors

Alliances were generally formed among primeval people as to fight for a common purpose together. In today’s business world alliances have become very common. The past few decades witnessed a huge boost in the development of international strategic alliances and in the studies dedicated to understanding alliances (Inkpen, 2003). Alliance is an approach for companies to quick-start sales through accessing new markets and results, decrease costs through strategic associations matching core competencies, leverage fixed assets through shared services and accelerate working capital turns through supply chain and financial alliances, and lower efficient tax rates (Kuglin and Hook, 2002). Strategic alliances are joint organizational engagements that utilize resources and governance structures from more than one active organization (Inkpen, 2003). In this essay the focus is on the companies that gain from entering into strategic alliances with potential competitors and the reasons behind the same. In the course of this essay, an effort has been made to understand the meaning of strategic alliance and why alliances are formed. Furthermore, it is described why strategic alliances are preferred over other alternatives.

According to Spekman and Mohr (1994), strategic alliance is defined as a long-term mutual agreement between autonomous firms that share compatible objectives, attempt for mutual benefits, and recognize a high level of interdependence (Beamish and Killing 1997). According to Inkpen (2003), to understand the aims of the firms for forming international alliances, it is important to understand the strategic objectives for the formation of alliances and the reason why an alliance is preferred over other alternatives in an organization. The first and the most important strategic goal of alliance partners is to achieve economies of scale by pooling of resources to produce value in a way that any of the firms could not achieve independently. The value of each of the firms may not be the same but both partners should benefit from the alliance in order to go ahead with it. For example when GM opted for its NUMMI joint venture with Toyota, its strategic objectives might have been access to the USA market of high quality small cars and access to the manufacturing technology of Toyota. On the other hand, the goals of Toyota might have been the opportunity to comprehend the North American manufacturing environment. Another objective for strategic alliances is to minimize risk and encourage stability as neither partner abide by bearing the full cost of the joint venture and hence large and risky projects can be considered. A third objective of strategic alliance could be legitimacy. Legitimacy mainly comes into action when firms try to penetrate into international markets. Another objective is the accessibility to another firm’s knowledge or skills to execute an activity where two firms are not similar (Inkpen, 2003).

It is vital to realize why strategic alliances are preferred to other alternatives of entry to the market such as acquisitions and mergers. Strategic alliance may be ideal to its substitutes when the risks and costs connected with starting a new business unit are more than the company is prepared to assume on its own. Strategic alliance could be the favoured when the company can boost the prospects of successfully establishing a new business by learning up with another company that has skills and assets that compliments the firm. Strategic alliances range from short-term informal to long-term formal cooperative agreements between companies. Alliances can ease entry into markets, when the partners are willing to distribute the fixed costs and risks associated with new products and procedures, and assist the transfer of complementary expertise and assets between companies (Hill and Jones, 2008). According to Williamson (1975), who developed transaction cost economies, suggested that firms choose alternative arrangements that minimize the amount of production and transaction expenses. Strategic alliances may be found in industries undergoing rapid structural change, such as IT industry or telecommunications industry. This is because a strategic alliance can rapidly achieve the competitive position than through replication or internal development and is very cost effective than acquisition and mergers as well (Culpan, 2002; Inkpen, 2003).

International strategic alliances are mutual agreements between companies from different countries that are in fact or potential competitors. Strategic alliances run the range from formal joint ventures, in which two or more companies have an equity stake, to short-term contractual agreements, in which two companies may agree to assist on a particular problem such as developing a new product. There are four possible reasons or objectives why companies enter into strategic alliances with competitors. Firstly, strategic alliances with competitors are the most appropriate way to enter into a foreign market. For example, during Motorola initially found it very difficult to gain access to the Japanese cellular telephone market because of trade barriers in the mid-1980s. In 1987, Motorola went into an alliance with Toshiba to build microprocessors. With the help of this deal Toshiba helped Motorola in marketing appointing some of its best managers. Motorola got access to the Japanese market and could successfully get radio frequencies assigned for its mobile communications systems with government approval as a result of the alliance. Secondly, strategic alliances permit firms to distribute the fixed costs and the associated risks of developing new products or procedures. Major industries today are so competitive that no firm has a guarantee of success when it enters a new market or develops a new product. Cooperative agreements can be used to either reduce or control an individual’s firm’s risks. For example, Boeing, the world’s most successful commercial aircraft manufacturer, formed a strategic alliance with three Japanese firms – Fuji, Mitsubishi and Kawasaki to develop the Boeing 777. Designing and developing a wide body jet costs billions of dollars, which no one firm can risk and Boeing sought to minimise the risk through strategic alliance. Thirdly, an alliance is a way to bring forward complementary abilities and resources that neither company could easily grow on its own. For example, in 2003, Microsoft and Toshiba established an alliance aimed at developing embedded microprocessors, essentially tiny computers that can perform a variety of entertainment functions in an automobile, for example run a backseat DVD player or a wireless Internet connection. Microsoft brings its software engineering skills to the alliance, while Toshiba brings its skills in developing microprocessors. Fourthly, it can make sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm. For example, in 1999 Palm Computer, the leading maker of personal digital assistants (PDAs), entered into an alliance with Sony under which Sony agreed to license and use Palm’s operating system in Sony PDAs. The motivation for the alliance was in part to help establish Palm’s operating system as the industry standard for PDAs, as opposed to a rival Windows-based operating system from Microsoft (Hill and Jones, 2009; Aswathappa, 2008).

Despite of the benefits that the firms can achieve forming alliances with competitors there are disadvantages as well. The drawbacks could be that strategic alliances could give the competitors low-cost technological know-how and access to markets. Critics have given the examples of the alliances between US and Japanese firms which gave away the technological know-how of the US companies to the Japanese firms. Though profits earned this way was short-term, US firms had to pay for the alliances as this resulted in leaving them with no competitive advantage in the global marketplace. Strategic alliances have risks which the critics rightly points out. Critics also say that a firm has to be extra careful regarding its alliances otherwise it might give away more than it receives (Hill and Jones, 2008, 2009; Aswathappa, 2008)

Having described the benefit and this essay comes to an end with the reasons for which companies go for strategic alliances, it could be said that the success of strategic alliances depends on three factors. They are partner selection, alliance structure and the manner in which the alliance is managed (Hill and Jones, 2009). A right partner helps the company achieve strategic goals. In other words, the partner must have capabilities that the company lacks and that it values. A good partner should share the firm’s vision for the purpose of the alliance otherwise the relationship will not be harmonious. Finally, a good partner should have reputation for fair play, like IBM (Hill and Jones, 2009). The structure of the alliance also has a bearing on the success and duration of the alliance. Issues such as percentage of ownership, mix of financing, technology and machinery to be contributed by each partner figure prominently. The alliance should be designed in such a way that it should not be easy to transfer technology or know-how that was not part of the agreement. Contractual safeguards should be included in the alliance to guard against risk of opportunism by a partner. Lastly, the management of the alliance should be based on mutual trust. Such trust can be achieved by building interpersonal relationships between the managers/workforce of the partners. A major determinant of success of an alliance is the ability of partners to learn from each other (Hitt et. al, 2008).

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