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Strategic Alliances are becoming very popular in present scenario. In business environment these days alliances are becoming essential building blocks for companies to achieve more effective and efficient market place. This kind of cooperative arrangement helps organizations to achieve goals and objectives better through cooperation rather than competition. Seeing the importance of strategic alliances it is very important for the partners to form effective business relationship which helps in achieving cooperative objectives. Formation of alliances may encounter several problems that can affect further business relationships.
This essay is divided into 4 parts. First part defines strategic alliances and steps in their formation. Second part identifies major problems in alliance formation with the help of academic theories and case studies. Third part discusses the importance of partner selection and gives examples of successful partner selection. Finally, the essay is concluded by giving recommendations and suggestions in overcoming problems in alliance formation and partner selection.
Strategic alliance is basically an agreement between two or more firms or companies reaching on the objective of common interest. Strategic alliance is a trading partnership that enhances the effectiveness of the competitive strategies of the participating firms by providing for the mutually beneficial trade of technologies, skill, or products based upon them. These alliances can range from informal agreement to formal contract depends on the length of contract in which partners are involved in transfer of capital, technologies, and personnel. Alliances between partners consist of basically three necessary characteristics: 1
The two or more companies remain independent even after forming an alliance to pursue their objectives.
The companies involved in the alliance share the common benefit, competitive advantage and manage the performance of task.
The partner firms get involved in achieving common objective by contributing on a regular basis in one or more key areas of alliance, e.g. technology, product, personnel, etc.
Trust is another characteristic that can evolves and develop between partners during the operation of an alliance which comes from the selection of right partner.
Stages in Alliance formation
Strategic alliance can be effective tool for companies to enter into new market, to develop new and rapid technology, to learning from leading partners and obtain assigned objectives. It is a best way for companies to overcome any kind of problems and hurdles and other restrictions. Formation of alliances help in various ways introduction of new strategies by the companies, enhancing trust between partners, managing and control the integrity of staff from various organizational cultures and solving various problems related with business in the company. However, formation of alliance is not so easy to create and operate. A single wrong decision may lead to failure for alliance. Many big alliances were failed due to wrong planning. It is necessary for all companies entering into alliances to have comprehensive plans in the formation of strategic alliances for its success. There are various stages involved in the formation of strategic alliance which companies should consider before going for alliances:
1). Purpose of alliance:
There are various factors which are driving the companies to enter into alliances which are globalization of market, rapid change in technology, increased in competition, high cost of R&D etc. There are many purposes of companies in order to fulfil them firms enter into alliances. Out of various corporative purposes there are eight purposes (Figure.1) on which companies are focusing for alliance formation.
Purpose of Business Alliance
Protection against external threats
Close performance gap
Enhance core competence
Increase asset utilization
Figure 1. Purpose of Alliance
Four out of eight strategies- Growth opportunities, strategic intent, protection against external threats and diversification considers as strategic because these purpose impact on the competitiveness and future position of alliances. These four purpose reflects the future of alliance. Other four purpose namely- resource efficiency, increase asset utilization, enhance core competence and close performance gap deal with the operational purpose. These purposes impact on the efficiency of the company's operation and also help in managing the current position.
2). Motives and objectives of Alliance:
After deciding the purpose of alliance second come motive and objectives of alliance formation. Both drive the same meaning in terms of literature but here they serve different meaning. Motive is a crucial part. It describes various reasons for which companies are going for alliances formation and how they achieve the desired objective. Motive for alliance formation can consist of cost advantages, decreasing risk and uncertainty, organizational learning, managing industry structure and timing. Objective of alliance deals with the outcome of the process. Objective can be short term or long terms depending on the need of the companies. Short term objective of companies forming an alliance consist of acquiring new technologies, developing new or retaining same technology in future and helping to achieve long objectives. Long term objective of alliances deals with becoming more profitable and successful in future, entering into new market or deals with introduction of new product in the market.
3). Partner Selection:
Partner selection plays a very important and vital role in the formation of alliance between the companies. Successful alliance required joining of companies having similar goals and objective and competent enough to cope with each other for the future growth of alliance.
Note: Please refer to the third part of this essay for more information about the importance of partner selection and relevant theories.
4). Types of alliances:
Strategic Alliances are basically identifies into two types:
Alliances between non-competing firms
Alliances between competing firms
These both alliances are further divided into four types which are: Cartels, Competitive alliances, Co-operatives and Collaborative.
This type of alliance is basically comes under competing firms involves in the operation purpose. This alliance operate in the businesses like diamond, petroleum, semi conductor chips producers dealing in field of product supply, price fixing or sharing common infrastructure.
This kind of alliance is generally between the companies or firms who are very strong rivals and basically competitors. This kind of alliance serves the strategic purpose and specially designed for the companies dealing in global or regional geographical area. The companies in this kind of alliances enjoy the competitive advantage. Competitive alliance serves the need of partner by offering products, technologies, personnel, skills etc. Some of the examples of competitive alliances are: GM and Toyota who are assembling automobiles; Siemens and Philips developing semiconductors etc.
This alliance is applicable for non-competing firms focusing on operational purpose. For the efficiency of operations companies under this kind of alliances share cost and facilities with customers or suppliers. In co-operative alliance firms involved in co-development or distribution of goods and services. In these alliances companies combines some of their resources and capabilities to create a competitive advantage. Some of the well developed companies which are in co-operative alliances are Wal-mart and Procter & Gamble marketing programme, Citi bank credit card and American airlines frequent flyer program, IBM and Sear co-operation to market prodigy etc.
Collaborative alliances are common in non-competing companies involves in strategic objectives. The main purpose of this kind of alliances is in the collaboration of activities like joint marketing efforts, entering new market, and developments of new technologies or new product between the companies. This kind of alliance is a fusion of objective and efforts of partners to achieve the common goal. Collaborative alliance is more applicable for the companies or partners in which external uncertainty and trust is high. The most famous type of collaborative alliance is joint venture.
5). Decision making and coordination between management:
It has been told that many of the alliances are failed due to the poor decision making by the management. This happen due to the lack of coordination of between management teams in alliances. For the success of alliance it is important that all members should agree on the specific decision, policy, rule etc. in the formation of alliance. It should be decide at the time of formation about the members responsible for making decision in the business. It happen sometime that companies being into alliance go for some major project on its own by applying their own marketing strategy for products without considering the other firm.
Problems Encountered in the Alliances Formation
Strategic alliances are becoming more popular in present scenario in order for the growth of company and the global economy. Formation of alliance is very crucial part for the success of alliances. In many studies mainly it has been discussed about the success factors of alliances and giving less importance on the problem encountered in the formation of alliance. All partners in the alliances having a danger of failing of alliance which may happen due to some problem arise in the formation of alliances. Some of the major problems encountered in the formation of alliances are:
1). Difference in culture and attitude
One of the biggest problems encountered by the partners in the alliance is the difference in culture. In the alliance formation international firms come into contact with each other with difference in culture which involves languages, egos, attitude for doing business. One the major problem face by partner in culture mismatch is the language barrier. It is necessary for the partners to apply common language in business to come over the communication barrier. There is difference in operation in different cultures like US and Japan having different ways of operation. US basically find out firm's performance on the basis of profit, market share whereas Japanese evaluate their profit on the basis on how operations will take place. For further discussion of cultural mismatch following case study has been taken.
The Rover/Honda Alliance
Rover Honda alliance was formed in 1979, Rover was good in producing quality car and having reputation in market but was having poor labour relation. In order to run the business efficiently it became very important for Rover to introduce new model for its mid range. They also require learning quality management process which can be come from Japanese companies. For this purpose Rover goes with alliances with Honda and in return Honda received the opportunity to enter into European market very fast and with low cost and risk. Honda received the huge network of suppliers and got chance to learn European style. This all leads to the formation of alliance which was for the strategic purpose and falls under competing type of alliance.
But as both companies didn't gave much emphasis on the cultural differences at the time of formation at initial stage if formation of alliance which lead to face problem in later part. There was very gap between two companies. According to Rover spoke man out of 10 years it took 6 year to understand the business style of Honda.
2). Lack of Trust
Lack of trust is one the other major problem encountered in the formation of alliance. Companies involved in alliances always in danger doing business with other companies due to lack of trust. This lack of trust basically comes from the lack of commitment in alliance. Initially this problem cannot be observed by the partners but it can affect the further business relation of partners which result in the fail of alliance. Trust is kind of aspect which can be built with time. Small involvement of idea sometime causes for loosing trust between partners. Building trust is the most important and difficult task for the successful alliance. Though you cannot trust person at the first instance still special consideration should be giving to trust at the time of alliance formation. If in the initial stage special consideration is giving on trusting the partners, it reduces the uncertainty and risk in the alliance.
In order to understand how lack of trust can affect the alliance Suzuki-Maruti case has been taken:
This alliance was formed on October 2, 1982 when both companies signed the joint venture contract to manufacture a modern and fuel efficient car. In this contract Suzuki got opportunity to improve and give modification in the technologies and agreed to transfer design, development to India for the production of Maruti 800cc. Suzuki-Maruti alliances comes under collaborative alliance. Alliances starts with 74% equity with Maruti and 26 stakes with Suzuki but when India opens door for globalization venture became on 50-50 partnership. Alliances are resulted good until the entry of competitors in India which arises the new expansion plan with 15 billion rupees. Suzuki requested for raising the equity shares which gave wrong clue for Indian government that Suzuki want to take over them. This causes the lack of trust of Maruti on Suzuki. According to the alliances agreement partners decided to choose the Chairman and managing director in every five year. If chairman is chosen from Suzuki than managing director must be from Maruti and vice versa. But unfortunately Maruti didn't follow the rule which causes the lack of trust of Suzuki on Maruti. This makes Suzuki to stop the transfer of technologies from to Maruti, development of new model etc. This problem finally got solved by the negotiation between both firms in Indian court.
3) Lack of Coordination between management
Next problem faced at the time of alliance formation is lack of coordination between management. It has been told that many of the alliances are failed due to the poor decision making by the management. This happen due to the lack of coordination of between management teams in alliances. In business practice it happens that members in alliance are not agreed on the specific decision. It happen sometime that companies being into alliance go for some major project on its own by applying their own marketing strategy for products without considering the other firm. In the formation of alliance it has been agreed to decide on the commitments of top managements, but due to the poor management it may sometime affect the alliances in long term and results in failure. The case study of Queensland Minerals Ltd. explains more about how if partners not consider management coordination at the time of formation of alliance it will affects the alliances in future.
Queensland Minerals Limited
Queensland Mineral Limited is basically owned with 50-50 equity share by Amcon Corporation and Victoria Heavy Industries (VHI). Both companies are capable enough in own respective field and one of the biggest natural resource companies. At the time of venture it has been agreed that Boards of Director for Queensland Mineral must be 4 equally from both parent companies. And out of which VHI is responsible for managing the staff. Apart from that Amcon is responsible for sound financial practice and is more efficient than VHI. Further problem started with the management process in the alliance as Amcon wants to expand Queensland Mineral Ltd. Whereas VHI did not want the expansion. As there was no proper coordination between management of both companies this result in the change of management structure. As Amcon was not having any role in managing staff and VHI was poor to managing staff to recruit good engineers. So finally come up the result to make 50-50 management structure.
4). Operational risk
This kind of problem arises in the later part of alliances but in order to come over this problem and for the successful alliance partners should monitor the operational risk. This kind of problem encounter by partners when they are involved in different trade practices. The main aim of alliances is to pursue the business to achieve the common goal. But when partners involves in business for the self interest like delay in production of good or not delivering goods on time may affect the other partner. This kind of problem when arises in alliance always results to either breakup of alliance or take over. For example: Goodyear has a Joint production alliance with Japan's Sumi-tomo. These two companies produce tyres for each other in different area, one in Asia and other in North America. They remain competitor in many markets. Being a competitor's alliance will be in danger side and have more chances of failure because competitor will always remain competitors even if they have alliance.
5). Performance risk
Performance risk is also one of the problems encountered at time of formation of alliances. It basically consists of chance of failure of alliance whether if companies fulfil all the aspects for successful alliance formation. This performance risk may evolve from various environmental conditions like introduction of new policies by government, war, market condition like recession or demand and supply gap. The risk in performance of alliance may rely on either short-term orientation partner view alliance as transactional in nature which helps in resulting quick and tangible. On the other hand long term orientation has its own value in alliance. In this partner view the alliance as least semi permanent which means the condition which comes in future should be adapted as it is by partners. In order to come out of this problem partners should settle a reasonable, concrete objective at each stage of formation of alliance.
Case study of Vodaphone and China Mobile alliance explains more about performance risk.
Vodaphone and China Alliance
These companies formed alliance on January 9, 2002. They made this alliance of R&D of wireless data services. These companies doing good in the alliance and serving good to each other. These companies consider all the possible forward-looking statement with known and unknown risks and uncertainty. These companies carefully consider the performance risk that there is a chance of unexpected thing arises like unexpected events which may break alliance. In the annual report on year ended 31 December 2000, the registration filed by the China mobile where they describes some of uncertainty and risk in future. If any of risk, uncertainty or assumptions were wrong it affects the future results and may differ from the expected. Still they were doing well in the alliance. This kind of alliance comes under competitive alliance type where both company serves the strategic purpose.
6). Relational Risk
Relational risk deals with the chance that partners may lack commitment of the alliance and the partners are more intend to fulfil the self interest rather than common alliance interest. Relational risk is very important and unique to strategic alliance and single-firm strategic moves are not subject to such risk. At he formation of alliance companies should agreed no certain points on to overcome relational risk. Like if any decision is taken on marketing of product or new product development, the firms should not serve their own interests rather they need to cooperate with each other. If partners ignore the relational risk at the time of formation of alliance it may come up as a huge and problematic risk in future of alliance. For example:
In 1993 U S West invested $2.5 billion in Time Warner Entertainment which a part of Time Warner Inc. This alliance went into problem in later part when Time Warner Entertainment signed various other contracts with other telecommunication industries like AT & T. This will affect the U S West as these companies were come from its own local competitors. These all proposals are vetoed by U S West.
7). Risk of partner selection
The last but not the least and consider to be very important problem or risk faced in alliances is partner selection. This is not a easy decision to take on selection as there are various criteria for choosing good partner. It happens in the past and present scenario that most of the alliances fails just because due to the chosen of wrong partner. It may happen when alliances were formed between competitors, between weak and strong firms. Before forming and alliance partners should go for strong equal equity and very high level of trust an commitment is requires in the selection of partners. When partners are selecting a partner at the time of alliance the partner should be both resource fit and strategic fit and serve the need of alliance.
Importance of Partner Selection
Selection of partners in the alliance considers to be the most important part. When partners enter into any alliance they have certain expectations and objectives. So it is very crucial for the management of companies to identify and understand the effective partner selection criteria before going for any alliance. It is a very complex decision to take. Basically poor decision taken on the partner selection may lead to fail of alliances.