Strategic alliances

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STRATEGIC ALLIANCE

EXECUTIVE SUMMARY

Today, organizations face global competition and will on the long run only be successful if they can successfully exploit their value delivery potential of the relationships; strategic alliances and partnerships. Organisations that work together for the purpose of mutual benefit is a concept that is gaining ground in business markets, as market leaders now understand that success from collaboration can be a viable competitive advantage. Organisations entering into alliances in the twenty-first century need to size up their prospective partners in order to ensure that they achieve more success than their predecessors. However, identifying the best partner is only the first step in increasing the probably of alliance success. Proper design and coordination are needed to facilitate the stability of an alliance and to achieve an effective working relationship between the partners. Trust and commitment between alliance partners is the ultimate goal. Only then can the true benefits of entering into an alliance be realised.

It is really important for a company that is interested in forming a strategic alliance that the partner chosen have the internal capacities needed for the performed activity. In other words, the competencies required to achieve the desired goal. In this sense, small differences in terms of management style and culture between the cooperating firms may end up becoming serious problems that make it difficult to create synergies. There are a large number of characteristics (honesty, positive disposition, efficacy, etc.) that can only be appreciated after several years in the relationship. It is convenient for a firm to work informally with another company before formalising the strategic alliance. This can help to assess levels of compatibility and its potential evolution, since it is with daily contact that we can discover the partner's habits and tendencies.

In this research, the challenges that have been faced by the members of strategic alliances and the reasons that cause failure will be analysed and examined by giving some examples from existing allinances. And also, some ways to find the solutions for these challenges will be given.

INTRODUCTION

In today's changing and developing business world, strategic alliances have become an important tool for the success many business ventures. According to Ohmae (1989, p 143), last 20 years have been marked an era of world`s development. Some of the evolutions of this period are the globalisation of markets, quick changes in technology, and the expansion of many domestic organizations` boundaries. As result of these rapid motions, strategic alliances have importantly become a competitive necessity. One of the reasons of this necessity is that a single firm is unlikely to have all the resources and capabilities to accomplish global competitiveness. Thus, cooperation between companies which has complementary resources is always important for survival and growth. (Dussauge, Garrette and Mitchell, 1998) According to Morossini (1999), strategic alliances are change for the firms to reduce risks and share resources, gain knowledge and technology, expand the existing product lines, and opportunity to enter new markets. Strategic alliances provide firms to expand their reach without having to maximise their risk or commit themselves beyond their core business. However, as mentioned above, although strategic alliances bring big opportunities and provide conveniences for many companies, at the same time, there are some challenges that can result with failure for the organizations. The percentage of failures of strategic alliances is changeable from a low 30 per cent (Cullen, 2007), to a high 70 per cent (Dacin et al, 2007). Apart from the expecting risks of entering into an alliance competition between partners is often pointed as the major reason for alliance failure (Dacin et al, 1997).

Throughout this paper, it will be examined, analysed and discussed that the most frequent sources of failure in forming strategic alliances and what can be done to mitigate these problems.

OBSTACLES THAT ALLIANS PARTNERS FACE

Obstacles that alliance partners face can be divided into ‘hard' and ‘soft' issues. Hard' factors involve the linking of different financial and control systems and settling legal disputes (The Economist, 1999). On the other hand, ‘soft' factors are related to people and human resource issues, which involve building effective working relationships and integrating disparate corporate cultures (Hitt et al, 1999). It is usually the insufficient attention to the ‘soft' issues that result in the failure of many strategic alliances. Pertinently, "culture permeates a company, and differences can poison any collaboration" (The Economist, 1999). The more culturally distant two firms are, the greater the differences in organisational and administrative practices, employee expectations, and the interpretation of strategic issues (Schneider and De Meyer, 1991, p 307). The problem is compounded with cross-border alliances, where language barriers create communication problems. Poor communication often leads to coordination problems, managerial conflict and distrust. Without trust, the cost of transferring managerial practices and technologies will be high, because safeguards against opportunistic behaviour are needed (Park and Ungson, 1997, p 279). Therefore, in order to avoid such problems, firms entering into an alliance need to be culturally compatible. Indeed, it has been suggested that cultural compatibility is the most important factor in ensuring the long-term success of an alliance (Lane and Beamish, 1990, p 87).

SOURCES OF FAILURE IN FORMING STRATEGIC ALLIANCES

There are always a series of challenges that have to be faced when forming a strategic alliance and the right people need to be recruited in order for the alliance to be a success. Some of these challenges are discussed below: (Tetenbaum, 2001)

Small differences in terms of management style and culture between the cooperating companies may end up becoming serious problems that will make it very difficult to create a synergy, therefore leading to a poor financial performance or even total dissolution of the alliance. It is essential for the human resources team to be aware of these differences in order for them to properly formulate and help with the implementation of the organizational strategy within the alliance.

In Strategic Alliances, Unexpected costs sometimes may occur by breaking the possibility of collobrating with competing firms, therefore possibly even denying the company various financing options. For instance, an alliance with Ericsson in the area of cellular communications could reduce the likelihood of contracts with Nokia, thereby putting the company at risk that if Ericsson is weakened, so will be all the companies that depend upon it. (Beavers J., 2007)

The number of the companies in an allience, in part, the result of the decrease in each share in cooperation. Many cooperations have faced difficulty in finding both the capital and the management resources necessary to remain competitive in their products and services, especially since reduced barriers to global expansion have increased competition and technology has innovated ways of doing business. For example, General Motors, according to Wagoner, has used alliances to retrench to the competitive strength of its core business, improving its products and services, regaining control over costs, and increasing productivity. (Beavers J., 2007)

Another example is that it may be learnt is that the strategic alliance between Ford and Volkswagen to manufacture, sell and service luxury vans in Portugal. Ford made a decision that it can manufacture, sell and service the vans directly without Volkswagen. Ford paid, leaving Volkswagen with virtually no return on its investment. Greater business due diligence by both partners to determine if they needed each other may have avoided that failure. (Beavers J., 2007)

The most critical period of a strategic alliance is the beginning part which is a period of maximum uncertainty and apprehension for the workers, along that the company has to find a reaction to their logical concerns, giving these employees something better than what they already have, therefore succeeding in establishing stability long enough to guarantee some permanent results. (Tetenbaum, 2001)

A strategic alliance usually brings about the introduction of a series of changes in the co-operating organisations' behaviour. These changes can be a sign a potential source of challenges and conflicts with the company's personnel which may lead to the failure of the collaboration, if they are not properly sorted out. (Tetenbaum, 2001)

Failure usually occurs when the alliance's business is viewed internally by one partner as competing with or not in the best interest of that partner's business. An example is can be given as it can be learnt that the alliance of IBM, Apple and Motorola to innovate a new PC chip against Intel and Microsoft. IBM was so embedded with Intel chips that the management of IBM's PC division viewed the alliance as a competitor. IBM eventually withdrew from the alliance. (Wakeam J., 2004)

Different cultures operate in different ways for example; US firms tend to evaluate performance on the basis of profit, market share, and specific financial benefits. Japanese companies tend to evaluate primarily on how an operation helps build its strategic position, particularly by improving its skills. (Wakeam J., 2004)

WHAT CAN BE DONE TO MITIGATE THESE PROBLEMS?

There are some factors and key point that need to be taken into account by organizations when joining into a strategic alliances or a strategic alliance is being formed. Organizations that fit these important points will always be successful. Some of these important factors can be specified as followings:

Organisations entering into alliances in the twenty-first century need to size up their prospective partners in order to ensure that they achieve more success than their predecessors. However, identifying the best partner is only the first step in increasing the probably of alliance success. Proper design and coordination are needed to facilitate the stability of an alliance and to achieve an effective working relationship between the partners. Trust and commitment between alliance partners is the ultimate goal. Only then can the true benefits of entering into an alliance be realised. (Saxton, 1997)

Executive managers will need to have "know-how"; however other competencies will be required to create a synergy. Ideally these competencies will be found in all the persons involved with the project. Some of the competencies required by the human resources management team when selecting the members of the strategic alliance are: flexibility, humbleness, integrity, patience, curiosity, and not afraid of making mistakes. It is important that HRM determine whether the right person can be found within the ranks of the company or whether external recruiting is the best choice. This decision is crucial for the future of the alliance.

CONCLUSION

In order for an alliance to work the human resources team must take the time to understand the challenges existing when putting two companies together and they have to be willing to unite two groups of managers that will have to plan for and build their new organization; they need to be sensitive to the human, organizational culture, and cultural issues that have to be addressed along the way. Most important, the human resource team needs to find and motivate executives that want to grow their businesses and create added value for their shareholders, customers, employees, and themselves.

What we can assume from the several researches that have been done is that, cooperation and effective management are major points for the success of the alliance. From the problems that appear within a strategic alliance, these related to the human resource management which participates in the alliance especially stand out. Therefore, using knowledge related asymmetries may be a way to protect a company's specific asset while gaining valuable knowledge from the alliance without attacking the partner company.

Another situation that has to be taken into consideration is that the appearance of cultural challenges does not mean that the strategic alliance will be dissolve. The human resources team has to put in place a training programme for cultural understanding to help employees cope with the differences. On the other hand, it is very important to include managers with multicultural skills within the alliance team to be able to sooth any possible tension.

Finally, we can observe that the top reason of creating an alliance with another firm is that the union promotes attainment of strategic goals more quickly and inexpensively than if the company acts on its own. Especially in this era of intense change, rapid technological advance and ever-increasing globalization, alliances enable organizations to gain flexibility, leverage competencies, shared resources, and create opportunities that otherwise are unthinkable. Even though reality shows us that the number of strategic alliances that have succeeded is very low.

REFERENCES:

* Beavers J., (2007), “Failed Strategic Alliances Teach Valuable Lessons”, accessed on 21st February 2010, available from: www.johnpbeavers.com/mergers/lessons.asp

* Cullen, J.B., (2007), “Multinational Management: A Strategic Approach”, South-Western College Publishing, Cincinnati.

* Dacin, M.T., Hitt, M.A. and Levitas, E., (2007), "Selecting Partners for Successful International Alliances: Examination of US and Korean Firms", Journal of World Businesses, Vol. 32, pp. 3-16.

* Dussauge, P., Garrette, B. and Mitchell, W., (1998), "Acquiring Partners' Capabilities: Outcomes of Scale and Link Alliances between Competitors", Managing Strategically in an Interconnected World, Chichester, pp. 1-12.

* Hitt, M., Ireland, R. and Hoskisson, R., (1999), “Strategic Management: Competitiveness and Globalisation”, 3rd edition, West Publishing Company, Minneapolis

* Lane, H.W. and Beamish, P.W., (1990), "Cross-Cultural Cooperative Behaviour in Joint Ventures in LDC", Management International Review, Vol. 30 (Special Issue), pp. 87-102.

* Morosini, P., (1999), “Managing Cultural Differences: Effective Strategy and Execution across Cultures in Global Corporate Alliances”, Elsevier Science, Oxford.

* Ohmae, K., (1989), "The Global Logic of Strategic Alliances", Harvard Business Review, March-April, pp. 143-154.

* Park, S.H. and Ungson, G.R. (1997), "The Effect of National Culture, Organisational Complementarity, and Economic Motivation on Joint Venture Dissolution", Academy of Management Journal, Vol. 40 No. 2, pp. 279-307.

* Saxton, T., (1997), "The Effect of Partner and Relationship Characteristics on Alliance Outcomes", Academy of Management Journal, Vol. 40 No. 2, pp. 443-461.

* Schneider, S.C. and De Meyer, A., (1991), "Interpreting and Responding to Strategic Issues: The Impact of National Culture", Strategic Management Journal, Vol. 12, pp. 307-320.

* Tetenbaum, T., (2001), "Beating the Odds of Merger and Acquisition Failure: Seven Key Practices that Improve the Chance for Integration and Synergies", Organisational Dynamics, pp 22-36.

* Wakeam J., (2004), “The Five Factors of a Strategic Alliance”, accessed on 22nd February, available from: www.iveybusinessjournal.com/view_article

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