Motivation for International Strategic Alliances

ABSTRACT

To establish traditional international business in the market, businessmen do apply different strategies and one of the most common and emerging strategies that are being used now is the international strategic alliance. To study the ‘motivation’ of international strategic alliance, it has been made to systematically define the term ‘motive’. This paper argues those studies of motivation of international strategic alliance, their advantages and disadvantages and how they are becoming beneficial in the global market place.

This paper is an initial step to understand the definition of motivation in terms of the international strategic alliance by using the firms that have used this strategy.

INTRODUCTION

An alliance can be defined as a business to business collaboration. In an alliance two or more companies agree to work together to achieve a common goal while not losing their individuality.

Strategic alliance helps the both parties to gain the complementary strengths. Companies form alliances for joint marketing, joint sales or distribution, joint production, design collaboration, technology licensing and research and development. Strategic alliances have different forms, Contractual (non-equity- based) alliances (Alliances which are based on contracts and which do not involve the sharing of equity), Equity-based alliances (Strategic alliances which involves the use of equity), Cross-shareholding (Both partners invest in each other). ( Peng Mike W. Global Strategic Management, Second Edition, page 219)

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One form of Equity-based strategic alliances is the joint venture. The formation of the alliance is rich and fragmented. One of the main reasons behind the collaboration is to gain the competitive advantages. According to Williamson “Intermediate asset specificity and low uncertainty are conditions that may lead to a preference for hybrid forms of governance structure over both arm’s length transactions and internalization” (Williamson, 1991).

Increasing the strategic alliances is one of the fastest trends in the business today and it is becoming an essential driver to grow for every industry. One of the main goals to form a relationship with other companies is strategic alliance where they combine the skills and expertise of the both companies and gain the cooperative venture. Then they enter the international market and share their costs.

MOTIVATION for STRATEGIC ALLIANCES in the INTERNATIONAL MARKET PLACE

The growing international marketing is becoming the norm in this time and these partnerships are leveraging the growth through alliances with international partners, where the both companies merge and gain the competitive advantage. They do it by licensing agreements, cross shareholder deals, cooperative arrangement and joint ventures. Rather than taking risks and wasting their time and investing a huge amount on of money for gaining this competitive advantage in business, they are entering the international markets by finding an appropriate alliance which is operating in the same market in another country. So they enter the market that they desire to enter and the main reason behind this is to share the knowledge, skills and expertise and also to gain the marketing advantage in the world. And it’s becoming another strategy to defeat the monopoly business in the global business within fraction of time, for example collaboration of Sony and Ericson.

In the view of traditional industry, firms are independent and emphasize on maximizing their own performance. As competition in the market shrinks the profits of firms, they do not rival always against one another. For instance, in 1983 Toyota and GM establish a horizontal alliance on a limited basis to accomplish different targets of manufacturing small cars in the US. The intention of Toyota was to gain knowledge of running business in the American market. On the other hand, Gm’s objective was to learn manufacturing small cars profitably.

Sometimes high entry barriers discourage individual companies. In that circumstance companies can build strategic alliances and networks to level this fence.

Firms convert the relationship with suppliers to a mutual assistance and knowledge sharing, previously which was based on hard-bargaining. This liaison is known as upstream vertical alliance. In this case companies do not consider suppliers as threats.

In the same way, now, downstream vertical alliances can bind the central firms, buyers and distributors together rather than treating them as possible threats.

The market potential pushes the firms on alternative products to establish strategic alliance and networks to materialize the commercial prospective of new products.

According to Resource-based consideration firms can get benefited from the alliance through value creation.

“First, alliances may reduce costs, risks and uncertainties.

Second, Alliances allow firms to tap complementary assets of partners.

Third, alliances facilitate opportunities to learn from partners.

Finally, “real option” an option is the right, but not obligation, to take some action in the future.”

Real option gives the opportunity to the firms when they are not sure whether they will do acquisition or merge. The companies just need to pay a tiny portion of their assets (known as deposit). Through this temporary alliance they will judge its future profitability. If they are not satisfied, they can easily leave. There is no obligation to go on with this alliance or take further actions.

Institutional based consideration includes two categories Formal Institutional based consideration and Informal Institutional based consideration.

According to Peng “Strategic alliances and networks function within formal regulatory and legal frameworks.” In some countries, Governments impose restriction on Whole Owned Subsidiaries. In that circumstance international firms have only one option, which is, to make an alliance with a local firm in order to enter that market.

Peng says “Informal institutions centre on collective norms supported by a normative and cognitive pillar.” When a firm decides to move on its own, it faces pressures and criticisms from peer, analysts, investors, and the media. In that situation firms make collaboration with other firms to enhance or protect its image in the market place.

The firms do choose the target market they want to enter. After choosing the target market they come up with a strategic plan which will suit in the international market. They use all resources of both companies to exploit the existing resources and explore the new opportunities; the main concern for this exploitation is to increase the productivity and efficiency using the current employed capital and assets thought standards.

When the both companies are big in size their integration level is also high which, vise versa, makes the higher level the degree of control. The difference between the integration and degree of control is making motivation for forming this strategic alliance.

The ADVANTAGES of STRATEGIC ALLIANCE

Many start-up companies do focus on emerging into the market and gaining a competitive advantage in the international market to beat the monopoly business around the world for the same products and nowadays it is becoming the most useful strategy to gain this competitive advantage. By which a firm can enter the target market faster and with less risk on the investment.

Businesses use strategic alliances to:

• scope and speed the business process
• achieve advantages of scale in international market
• increase market penetration among other companies
• increase the competitiveness in domestic and global markets
• enhance product development by sharing the skills, knowledge, technology
• develop new business opportunities through new products and services and make it more competitive in the world market
• expand market development fast
• increase exports
• diversify
• create new businesses
• gain completive advantage in cost
• diversification into new markets
• improve cash flow
• Ability to move quickly

The motivation of forming the international strategy varies from one country to another country.

The main focuses of the join venture of the companies are to represent the companies in the various countries. But as the days passed the definition has changed because of the activities which became more prevalent. Because the international market the alliance can impart to the company in a relative advantage in size or by the size which makes the process to go faster or in other words it provides compliments to the areas which they are lacking.

The motive behind increasing the international strategic alliance is not only gaining profit. The other factor which motive them are the

• competition among the competitors
• the fast changing market place
• industry convergence

For an example an alliance between Sony (which is Japanese company, it was an electronic consumer company) Ericson (a Swedish telecommunication company) both giant companies planned to get an advantage in production and development which will prove their marketing skills. So once the joint venture is done with a legal manner it is similar in nature to a partial acquisition in consideration for shares. Because this combination has created the transaction, combining the relative advantages of both parties and ties their future together. They stopped making their own phones. They started to share their expertise and they have a research & development teams in United States, Sweden, China, Japan, India, Germany, and the United Kingdom. The both companies were profitable on the first year but they had to face huge loss because of lack of investment and strategic plan. Once they have injected the money into their joint venture and came up with new idea which was to launch the built-in-digital camera and with high features they started to enter to the market back but it still were a huge loses for them. So having the same strategic plan this joint venture did not work. They were struggling for the first three years. But walkman phones made them successful and made the 4th position in the world again.

So here it proves that the giant companies do merge to gain competitive advantage but it is not always threat to the other companies which are already leading. It totally depends on the strategy they follow and implement.

The DISADVANTAGES of STRATEGIC ALLAINCE

Alliances are risky in term of cost, the reason is not due to cash being involved with another company and its not being in the company’s hands, but it is due to returns from which they will get.

• First of all the company is to go throw the join venture which involves the investment. When a proper set of contracts, various transfer prices and incentive schemes from the partners to the joint alliance resolve most conflicts, most of the joint venture manages to entirely avoid conflicts between its respective parties.
• Managing the managerial position of both companies and resolving the possible conflict from the both parties due to the location and other factors of international market,

Financial blocking is one of the major disadvantages in the international strategic alliance. Because most of the companies do not want to disclose their financing operations. For example, an alliance with SonyEricsson 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.

Alliance between competitors can be risky. Firms can access to the information, technology, business strategy, and database of each other. Therefore they acquire the knowledge of another company. One firm can plan to excel other firm by achieving the knowledge and skills of other firms’ business tricks. And then it can drop the other firm and may use the strategy against this firm.

Strategic partners are often led by the company which is stronger in the international market. But they should come up with something unique by merging the both companies rather than starting from a start-up. But this strategy dose actually work with the every company depending on the market and company, like SonyEricsson came up with mobile when they merge but it was a huge loss in the market . They started losing their shares rather then gaining it. And it affected the job market. So they later on came up with cyber shoot which was the turning point of their company and also the walking walkman, which was different product then they used to launch. Because their main focus was to make competitive cell phone. But by the cyber shoot they have entered the market and now they are one of the giant companies with 4th position rank in the world.

• Sharing profits is another disadvantage. The revenue is being divided and goes to different country which does not help the country to boom up. But it dose have a great impact on it
• The decision is to be made by the both parties so there are always barriers for future financing opportunities.
• The distraction is the main disadvantage. The top level management is to take decision on behave of the both countries so they are to keep all the time in mind thinking about their own country when ever they are making decision. The both parties do not think alike because of the distraction that they are around by the competitors.
• As two or more companies are joint in this alliance, the decision is to be taken jointly so there is always a headache from the other partner. Because of the way they want take the company may not agree. To keep this mutual decision, the companies are to go through all this unexpected disappointments.

Conclusion

The strategic alliance is one of the most implemented strategies in the global competitive market. And it is one of the mostly common used strategies which have an effect in the market to boom up the economy of a country. It has created the bond between the geographical territories. Where they can share their competitive advantages and bring out new polices and products for the consumers and increase the job market in this world. The advantages for this alliance is more then the disadvantages. So people are coming up of new policies where they can hide the disadvantages compared to the advantage. According to Pekar and Margulis “The fundamental purpose of an alliance is to facilitate collaboration and varying degrees of integration between companies without necessitating a merger or an acquisition, though it can often lead to a merger or acquisition.”

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