The Difficulties Of Measuring Strategic Performance Alliances Commerce Essay

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Strategic alliances can be effective ways to diffuse new technologies rapidly, to enter a new market, to bypass governmental restrictions expeditiously and to learn quickly from the leading firms in a given field. However, strategic alliances are not simple or easy to create, develop and support. Strategic alliances projects often fail because of tactical errors made by management. By using a well managed strategic alliances agreement, companies can gain in markets that would otherwise be uneconomical. Considerable time and energy must be put by all involved in order to create a successful alliance. It is essential that companies should enter into strategic alliances agreements with a comprehensive plan outlining detailed expectations, requirements and expected benefits. Strategic alliance and other forms of interfirm cooperation have grown respectfully after 1980's. Today alliances are regarded as a means to achieving fundamental strategic objectives such as a strong market position, significant knowledge acquisition and major cost reductions. "The greatest change in corporate culture and the way business in being conducted, may be the accelerating growth of relationships based not on ownership, but on partnership" (Drucker, 1996). "The number of strategic alliance has doubled in past ten years and is expected to grow even more in future" (Booz, Allen and Hamilton, 1997).

Alliances Performance and Evolution

Alliance Performance and Evolution are interrelated or interdependent to each other. Many alliances achieve certain levels of satisfactory performance for their partners and are capable of evolving over time. But many alliances are considered to fail and relatively few evolve during their initial period. It is mere important to measure the performance of alliances as it is related to what the partners want the alliances to achieve. The important qualities for the successful alliance evolution are the development of trust between the partners, the extent of bonding and the ability to achieve flexible adjustment. Theoretically and practically, if performance is poor then evolution will take long time.

Determining measure alliance Performance:

The performance assessment is essential to determine individual compensation levels, intervention by the parent and understand partner's view of the alliance (Anderson, 1990). In many cases, alliances terminate because they fail to result in desired levels of performance or fail to help one or more parent or partner firms to improve the performance. Some alliances terminate after a short period of time just because they achieve the purpose before expected time or they might get opportunity for acquisition or merger. Here we have model for examining the alliance performance which is as fig1. Model for examining Alliance Performance

a) Environmental Characteristics:

These are the characteristics which mainly deprive of actors and forces outside the firm which in turn affect the working of an organisation (Kotler, 2001). As in global market, competition and challenges are increasing which makes compulsory to form an alliance. The uncertainties in the environment of an organisation have some effects such as:

i) demand for taking business to international standards,

ii) improved technology,

iii) low prediction of customer's demand and supply of products.

b) Firm Characteristics:

Organizations choose to make an alliance for firm hold or to gain monopoly in the competitive market by providing different resources and allow each other to share cost and risks, marketing and logistics etc. Moreover the shared resources enhance the know-how, capital and strengthen power of an organization against any setback. Alliances can improve market power of an organization if alliance partner is a customer itself for the product manufactured or distribution and supply or buying power can be shared. The basis of characteristics is as follows:

i) the larger the number of competitors and higher the need for additional resources, the more is the need for alliance formation.

ii) Organizations educating learning as a part of corporate culture are expected more to form strategic alliance.

c) Strategic Alliance Formation

The two most important factors determining formation of strategic alliance are:

i) Partner Match

ii) Strategic Orientation

i) Partner Match

In most of the circumstances formation of an alliance is between organizations that share similar management style and corporate culture. Goal performance and system performance have been found to be effective part of the inter-organizational dyads. Thus we can say that, higher the level of match among the partners more positive will be an alliance.

ii) Strategic Orientation

The following factor shows the eagerness of the firm to form an alliance and thus, adopt modern strategies. Strategic alliances are formed based on how to deal with environmental issues, how to triumph over lack of resources and in particular, how to handle organizations relationship.

d) Strategic Alliance Relationship Attributes

The academics say that collaboration, communication, commitment, conflict declaration and trust are important factors of relationship between strategic alliances (Cravens 1993;Cobianchi 1994;Spekman 1998). The presence of such factors helps to show eagerness and mutual understanding between the partners to work as survival of the fittest.

i) Trust

The organizations that make an alliance need to trust each other in order to execute higher profits, customer satisfaction and long term-relationship (Kumar 1996). Records suggest that most favourable factor influencing performance of an alliance is the extent of trust among the partners (Bleeke 1993; Smith 1997). It is also regarded as "cornerstone of the strategic partnership success" (Spekman 1996).

ii) Communication

It considered as "building" factor for a successful alliance. Communication enhances the quality of alliance by making partners understand the objectives, responsibilities and goals. To conclude, communication is such an aspect for successful relationship between partners of an alliance that an alliance seems to be more comfortable and appropriate if the quality of communication exhibit higher levels.

iii) Commitment

The commitment factor recommends future direction according to which partners try to build a relationship that can help to avoid problems. Also both the partners can accomplish their targets individually or jointly. Committed partners are more liable to have proper cooperation, communication and flexibility in accepting conflict issues.

iv) Collaboration

This factor is considered to be as key element of the strategic alliance relationship. The more is the collaborative relationship, higher will be the degree of flexibility, adaptability to manage unexpected situations, conflicts and better will be the results.

v) Conflict resolution

Conflicts arise due to some misunderstandings, communication gap, proper commitment, lack of trust or may be if one partner is trying to take advantage of the other. Unexpected conflict within the alliance would affect the efficiency of performance of an alliance (Bucklin 1993).

e) Two perspectives

At the time of measuring alliances performance it is important to distinguish between:

i) System performance: the extent to which an alliance performs well as an ongoing business unit i.e. learning, developing new skills and gaining experience etc.

ii) Goal performance: the extent to which the objectives that are agreed at the time of formation of an alliance of the partners are practiced in real.

Difficulty in measuring performance of an alliance

According to Theory:

The idea from Dyer and Gulati (1998) is that to establish the importance of relationships and trust within an alliance network to persistence and performance, are tied to capability evolution within specific alliance frameworks(as one shown above in fig1), but these are difficult constructs to measure exactly.It is not easy to define the exact scope of performance, which could be directly influenced by SAs. Evaluating the effect of SAs in terms of simple criteria may create spurious relationships because SAs are driven by various motives and objectives such as reducing uncertainty, stabilizing production, lower costs, quicker adaptation to market, technological and environmental shifts, and changes in consumer behaviors (Kono, 1984; Contractor and Lorange, 1988; Gulati, 1993; Hagedoorn and Schakenrad, 1990; Harrigan, 1988a: Kogut, 1988; Parkhe, 1993; Pisano, 1990). The partners must pass two phases for successful alliance; achieve strategic objectives and regain the financial cost of capital (Bleeke and Ernst, 1993). It is difficult to measure performance of strategic alliance and judge it, especially qualitative type of performance. The difficulty in measuring goal performance is that alliances are formed due to various reasons and assessing their performance on basis of parent companies objectives or referring it to sole indicator is not appropriate. Moreover, when one partner's objectives do not match the criteria doesn't mean that alliance is unsuccessful; it may be successful according to another partner's point of view. However, both the perspectives; system performance and goal performance have influence over different meanings of an alliance performance. The records of experimental findings in performance of cooperative strategies suggest that measurement is possible but has to be considered carefully. Basically, the assessment of the performance of strategic alliance is complex if goals and objectives are not narrow and clear and vice-versa.

Importance of Evolution of alliances to alliance Performance:

Evolution is to learn gradually while working together which deliberately improves performance of an alliance. The evolution of alliances may choose different directions and result in different outcomes. According to US companies, who have alliances outside their region suggest that generally there are two critical phases in the existence of strategic alliance; first appears after two-three years of an alliance where trust and bonding between corporations becomes strong or they terminate, second comes after about five-six years of an alliance where one partner chooses to take over the other after buying more stake among them or the purpose of an alliance is completed. The evolution of an alliance depends upon the development of personal relationships between those involved in the cooperation.

Process of Alliance Evolution

Evolution can have different outcomes some of them are as follows:

i) Evolution to failure:

The following concept of evolution consist of two types of alliances i.e. alliances of complementary equals and alliances of the weak. Alliances of complementary equals are more stable and last longer as it involves equally strong partners for example Renault & Nissan. The partners share their expertise for the best output and for the mutual benefit from their cooperation. Another example of such kind is Rover & Honda where both the partners focused on finding ways to enhance the value of their alliance as well as their individualism. Alliances of the weak are the case among two or more companies of low potential make an alliance to develop their market knowledge and expertise. In such cases, the weak becomes weaker and alliance ultimately fails, followed by acquisition or dissolution by third party. Example for this kind is International Airline Industry.

ii) Evolution to divorce:

Such kinds of alliance are quite unstable as it involves two or more direct competitors. The already existing competition leads to break up of alliance as they fail to achieve their set objectives and goals. Also because of already existing competition their might arise functional conflicts. The extreme resultant of such kind finishes in acquisition by one partner or merger. Example is the General Electric and Rolls-Royce that broke in 1986 because of direct competitive aero engine.

iii) Evolution to sale:

In such cases alliances are again between two or more strong and compatible partners and the partners broke because of rising tensions, conflicts or one partner tries to take advantage in terms of know-how etc. This can also happen incase, when one weak company makes an alliance with a stronger to enhance and strengthen its core. This is called bootstrap alliance where partners from developing countries form an alliance with strong foreign companies to enhance their expertise, know-how and R&D etc to internationalise their business. But when evolution to sale occurs partners might survive beyond the average term of policy of corporate alliance.

Following Case Studies illustrate the chosen task

1. Rover/Honda Alliance:

Rover/Honda was formed in 1979, where Rover was known as a car producer with quality and poor labour record and willing to learn lean management styles and new model in mid-range cars. Honda on its part was keen to enter into European market having low-cost, speedy and low-risk car models with well-developed network of suppliers. Also Honda had an eye on Rover's manufacturing unit for understanding European taste and style of car models. Since, these were not the main objectives and goal of both the partners but it grew through the deepening of the relationship. Some more factors were involved in the performance of this alliance such as flexibility, commitment, communication, trust and collaboration etc but were not easy to measure because all factors were in role to a limited extent; for example collaboration was limited to production processes, design, supplier sourcing and technology. In terms of marketing and sales both the companies competed and kept each other away from all exchange of informal information. In addition, Evolution of alliances in case of Rover/Honda had a vital role in regards to performance of an alliance. Both being big players of the automobile industry were always willing to learn from each other; for example, initially Rover had license for limited manufacture of Triumph Acclaim from Honda. Later, Honda gave a new car design i.e. Rover 200 with all assembling and fittings of Rover itself. At the same time, Rover agreed to manufacture cars for Honda as it was lacking European styles of cars. Few years later in 1986, alliance launched Rover 800 and Honda Legend. Three years later, Rover200/400 and Honda Concerto were launched with some similar features. This showed development of alliance with joint production and 20% of share exchange. Thus, alliance evolved from a verge of divorce to shared designing, production and R&D, nevertheless maintaining their individual brands.

2. Case of American Firm Ace:

In this case the seven firms formed a joint venture for manufacture of industrial machine tools, in the year 1946 where two firms were from the USA and five of European countries. Among them, one was the American firm called as ACE, wanted to enter European market with its own features and products and other firms were looking for supplier for tools that were produced in Europe itself under license from second American partner. The alliance was performing well in its initial years and evolved for a period of thirty-two years. The alliance passed through main phases namely entrepreneurship, collectivity and formalization. The first phase was slow comparatively and didn't have proper focus on development. Somehow, initial phase lasted for 10 years. Then second phase was about twelve years long which focused on the redesign of the American partner's product in European market and improvements in the areas which they lacked. The joint venture experienced high profitability during this phase. On the other hand, there was some conflict with the parent company regarding the product. The equity stake of ACE was increased to 75 percent when this phase was near to complete his half of milestone. This increase directed towards willingness to build better control and think about to invest further. Then at the last phase of evolution CEO of the joint venture took retirement and the person who took over him didn't had same level of commitment and enthusiasm. Later, the control was switched over to parent company and product line was reduced to some extent. Finally, after ten years, majority of the stake in the joint venture was acquired by the parent company. Thus, Evolution once again marked an era of presence as it played a vital role in making weak joint venture into long relationship of thirty-two years, which showed no sign of development in first ten years.

Conclusion

The whole theory with the help of case studies gave a clear understanding of agreement on alliance objectives and goals and appropriate way to achieve them. Performance in strategic alliances is a difficult to measure as primarily goals and objectives of alliances are often unclear. With two or more parent firms with their individual aims, managers find that their stakeholders have inadequate knowledge about compatibility and assessment scales. Sometimes, alliances may be specific and short-term therefore it is better to distinguish between goal performance and alliance performance criteria to measure performance of an alliance. But, still sometimes the performance can be assessed easily if the strategic alliances are not complex in nature. Regarding evolution, the way alliances show the willingness to participate in each others activities with flexible adjustment helps to evolve for a longer period of time. The firms or organizations collaborated in maintaining balance, thus leading to better development. The partners gave attention to bonding techniques such as exhibiting high levels of communication and formal exchange of information. One more important aspect is to develop a culture which is a combination of the partner's culture. The process of applying organizational learning and resolving conflicts helped in meeting together of all unexpected or expected external challenges successfully. The different combinations of alliance strategies and learning capabilities result in different patterns of alliance evolution. To sum up, both; the balance of power of each partner and mutual interdependence level of sharing enhance the positivity of evolution of alliances.

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