What are the main problems encountered during the formation of alliances - Essay Example

? "What are the main problems encountered during the formation of alliances? Assess the importance of effective partner selection in this process. Name: Instructor: Course: Date: Executive Summary Global strategic alliances entail collaborative agreements by competing or potentially competing firms. Strategic alliances have been viewed as an effective way of withstanding competition as they improve a firm’s technical capacity, financial position and help diversify risk. These factors jointly represent a better placed company that is in a position to compete in the overly competitive global market. Unfortunately, global strategic alliances do not always present the envisioned merits. In any case, they present greater resource challenges. This is often the case when a firm selects the wrong partner. The wrong choice of an alliance partner diminishes the chances of an alliance’s success. Besides the choice of the wrong partner, other factors lead to the collapse or failure of strategic alliances. These reasons include opportunism, cultural differences, lack of commitment by one of the partners, lack of trust, relational risk, and lack of clear objectives amongst others. Globally, there has been a wide preference of global alliances; unfortunately, most of these never achieve the envisioned goals and objectives. In fact, statistics indicate that close to two thirds of alliances fail within the first two years of constitution. Even though the cases of productive strategic alliances are scarce, there exist firms that have benefited from these arrangements. The most common benefits are diversification of risk, competitive advantage, synergy, and ease of market entry. Increased globalization and heightening technology application has augmented the importance of strategic alliances. When firms are faced with market uncertainties and have set up wide resources and capabilities, alliances have been a preferable and momentous option (Culpan, 2002.p.65). In an international context, alliances play an even greater role because they frequently might be the only option for entering a foreign market, especially emerging markets such as China, where major companies have yet to establish wide networks. Yoshino and Rangan, as cited by Culpan (2002) argue that strategic alliances have been born out of an increasing need for businesses to withstand and overcome competition (Culpan, 2002.p.65). Emergence of technology and globalization has rendered the simplistic generic strategies applied in U.S. markets ineffective. Modern day firms must embark on a path of frequent innovation to remain at par with the ever changing market dynamics and preferably, forge ahead of equally effective and innovation conscious rivals. As a result, firms have to alter tradition approaches to market domination they must be flexible in their market approaches. Most of the areas requiring flexibility are technology, marketing, distribution channels, and plant economics and heightening constraints on resources. To effectuate inter-firm partnership and utilize it as a strategy, business heads must alter their traditional thinking regarding competition and realign themselves to mutual ways of running businesses in the global economy, as resources and strengths of organizations are so varied that no particular firm has all the essential ingredients to come up with effective global strategies (Hiriyappa, 2010). Business leaders are converging on the idea that congregating the capabilities of others firms across the globe to compete efficiently is not only sensible but also necessary. It is clear that strategic alliances have attracted widespread attention and are frequently being viewed as one of the few alternatives to withstanding and outwitting widespread competition. In this sense, global alliances are considered as accommodating contracts between firms from dissimilar countries that are real or possible competitors (Hill & Jones, 2010.p.273). Strategic alliances run come in different arrangements; they can either be official joint ventures, where two firms own shares in each other, to intermittent engagements, where two companies may consent to collaborate on a specific or common concern such as in research or creation of a new product (Hill & Jones, 2010.p.273). Alternate definitions of strategic alliances are business arrangements in which two or more firms or entities join together to establish some sort of operation (Ajami, 2006).p.27). Formation of alliances A host of academics utilize the organic growth theory to elucidate organizational growth/expansion. The same model has been utilized in the study of strategic alliances. In this sense, alliance formation is considered as a process. Nevertheless, even if these parts are explained differently, as per variant authors, viewpoints and analysis, and in line with the nature of the research conducted by these authors the key steps appear to be the same. At the common level of explaining strategic alliances as a progression, the latter can be categorized into two main steps, pre-formation and post-formation phase (Doz & Gary, 1998). The pre-formation stage represents the first steps that companies ought to make before they collaborate through an alliance. Such steps comprise the basis behind the envisioned alliances, selecting partners, coming up with the suitable alliance type or structure (Lewis, 2000). The post formation stage stars after the alliance is constituted, and involves administration and evaluation of the alliance. This study identifies that the collapse of an alliance is largely contributed to by the failure to exhaustively consider critical factors at the pre-formation stage. These missed clues on probable mismatch and an imperfect congruence of firms is a major contributor to subsequent failure of alliances. Though the precise factors responsible for the failure of most alliances will be discussed in subsequent considerations it is critical at this juncture to identify why a greater emphasis will be laid on the pre-formation phase. This does not ignore the influence or the importance of the post-formation phase, however, the study takes the position that the post-formation phase is simply an evaluation and check process. If the conceived alliance had loopholes then it would be impossible to carry out any evaluation or ensure checks. Even when these are possible they would not offer a means of reprieve as a long-term success of a shakily founded alliance would hardly be possible. This is because it would be impossible to realize the envisioned goals and objectives of the alliance and in any case the earlier the firms act independently the better. Importance of Strategic Alliances There are definite merits to alliances and these constitute a major reason why most firms prefer them as opposed to operating on an individual basis. At times, the benefits derived are specific to the firms based on the nature of operations. However, there are some general potential benefits that are linked with alliances these include; Ease of market entry, the advent of technology has eased internationalization of businesses and this has helped most businesses access foreign businesses. Joining new markets presents multiple chances for a new firm such as economies of scale and widens their marketing scope. However, even with these potential benefits the costs of joining these markets is often prohibitive and most firms maybe unable to raise the required capital independently (Doz & Gary, 1998). For such businesses, getting into a strategic alliance with an international firm may alleviate this initial challenge. Besides, an alliance with such a firm allows it to rapidly grow in the new market while maintaining a cap on cost. Entering into an alliance with an international firm helps a firm beat other major constraints in the new market; these may include retrogressive government regulations and fierce competition. Shared risk is another merit derived from alliances; a cooperative alliance is a preferable option when there are imminent uncertainties in the market or in introducing new products. Market instability can also be a reason to join an alliance to spread the risks. Fierce competition resulting from globalization and market liberalization has made it difficult for new companies, or new products to sell unchallenged. In any case, these situations expose the concerned firms to major risks and forming alliances may help reduce or control the ensuing risks (Evans, 2012). The other common merit for strategic alliances is shared knowledge and expertise. Most firms throughout the globe often enhance their knowledge on specific areas and build expertise in the very fields. This makes it difficult to come across a firm that is competent in all competitive fields. In these cases, an alliance can be a viable approach to help improve an organization’s competency in the areas of competence that it is lacking in. The expertise and knowledge can vary from technical knowledge on production processes, learning to overcome government regulations to accessing affordable resources (Doz & Gary, 1998). This merit helps an organization in its learning process thus ensuring its growth process. Lastly, firms join strategic alliances for synergy and competitive advantage. As opposed to entering a market separately being in a strategic alliance helps spread risks and acts against market uncertainty as may be presented by development of new products, entry of a new market or while undertaking research activities (Evans, 2012). Firms are able to jointly withstand competition as they leverage each other’s competencies ensuring synergy which would be difficult to attain when a firm seeks to solely enter a market. Failures of strategic alliances Even with the increase in studies enumerating the requirements and means of establishing strong, lasting and strategic alliances most firms still find their alliances collapsing along the way. The failure of alliances is not unique by any means nor is the reasons behind the alliance failures. Regardless of the rise in their reputation, international strategic alliances are frequently considered as intrinsically unsteady organizational structures (Das, 2011.p.254). Alliances engage momentous resources in terms of synchronization, integration of goals with an autonomous entity, and creating competitors. These interlinked costs are a frequent reason as to why most alliances appear to be transitional as opposed to concrete organizational forms and consequently hardly ever can they be looked at as a long-term approach of creating a long-term competitive advantage (Evans et al 2012.p.212). The number of failed alliances is an astronomical one and is linked to alliance arrangements, such failures translate to significant losses for parties entering into these alliances. This alarming failure rate has been quoted in a wide array of studies. In a majority of these studies, the researchers approximate that some two-thirds of overall alliances often end up in severe management or pecuniary trouble within the first two years, translating to an increased rate of alliance failure. There are many heavily publicized alliance failures such as Chrysler and Daimler which led to the disintegration of the two automobile manufacturers and subsequent struggle of Chrysler culminating it the company’s threat of liquidation in 2009. However, even with such level of publicity, the fundamental causes for collapse are not fully understood. In spite of the obvious unsteadiness demonstrated by a lot of alliances in the aggressive industries, there are certainly approaches to guarantee a longer life and an acceptable level of stability for alliances. Even though there are, unquestionably, multiple intricate rationales behind alliance failures, most of which will be discussed here, many scholars and managers are of the opinion that poor preliminary choice of firms to form an alliance with is a major variable. Evans et al (2012) states that the primary imperative in choosing a firm to collaborate with is to ascertain that the planned partner embodies a good strategic fit that is the shortcomings of one firm are balanced by the potency of the other firm and vice versa. For instance, one partner may have an extensive network in one market while the other may have extensive dealerships in a different market. A good example of a strategic fit is the alliance (turned acquisition) between Chrysler, an American company, and Fiat, an Italian company. The alliance of the two companies largely works as Chrysler has an extensive network in the U.S. market and Fiat has extensive dealership in the European market, amongst other complimentary factors. Besides the establishment of a strategic fit between two firms, most firms also fail to determine whether a proposed alliance would be practical once the alliance assumes operations level (Das, 2011.p.100). In determining operational compatibility, a criterion, the four Cs, capability, compatibility, commitment, and control are recommended as a means of determining whether any two firms would complement each other. The capability principle determines whether the potential firm has the capacity to productively discharge their corresponding responsibilities in the alliance. The association between British Airways and US Airways largely failed because US Airways did not have the capacity or was not committed to the terns of the partnership which required that it proffer a broad US route network that British Airways envisioned (Elmuti & Kathalawa, 2001.p.209). Compatibility, this condition determines the capability of the partners to cooperate efficiently. It thence alludes to the organizational cultures of the respective firms as well as the ability of the company’s staff to cordially relate including the senior executives. Commitment, the commitment principle determines the enthusiasm of partners to consign capital, endeavor and knowledge to an alliance (Gibbs & Humphries, 2009.p.84). In a worst case scenario, a firm may only dedicate the least possible effort only necessary to keep the alliance going while cunningly looking at the partnering firm to drive forward the alliance yet it continually benefits from the initial terms even when the rest of the responsibilities are passed on. Lastly, control, the control standard regards the suitability of the set up for the management of the alliance engagements. In particular cases a single partner can possibly be dominant thus depressing the ambitions of the other partner, and in some other cases one of the partners may dominate driving the alliance’s operations and guaranteeing its efficiency due to superior technical knowledge or market position. Therefore, the choice of a wrong partner, which is largely a result of a firm’s failure to carry out extensive analysis of the partner, leads to eminent failure of an alliance. However, as a safeguard, the four C’s criterion provides a framework through which firms can improve the chances of an alliance’s survival and in the process avoid huge costs that comes with failed alliances (Hitt et al 2011.p.265). All the same, choice of wrong partner is not the only reason for failed alliances, other reasons which are discussed below may also contribute to such failure. Clash of cultures or incompatibility Cultural clashes are common in MNC alliances and are the most cited reason for most of these cross-border alliances. The most common cultural problems include a chauvinism, language and egos as well as different approaches and attitudes to businesses. The most pronounced problems occur when firms originate from two completely different cultures such as a Western company forming an alliance with an Asian company (Inkpen & Ramaswamy, 2006.p.92). At times, language may present a challenge in these alliances; however, this can be easily overcome. Perhaps the greatest challenge is assimilating the business cultures, for instance a U.S. based company will tend to look at the alliance’s performance on basis of profitability, market growth and return on investments, this is not the case with a Japanese company. The latter will evaluate performance based on how the alliance helps improve the businesses strategic position by impacting on existent skills (Steinhilber, 2008.p.102). Lack of trust Alliances are formed with a view of sharing risks. At times, one firm may succeed in a particular aspect emanating from the alliance and the other may fail or fail to register commensurate success. In most cases, the failing or dismally performing company will point an accusing finger at the partnering company. Once the blame game and haggling starts it is impossible to cultivate trust even when such course of action fails to solve the existent problems ((Elmuti & Kathalawa, 2001.p.209). Imminently, the tension will escalate to a level that none of the companies is willing to continue being in the alliance as distrust has also grown. Failure will result from the breach of the three forms of trust, responsibility, equality and reliability. Lack of clear goals and objectives Scholars identify that the increased number of alliances point to two facts, increased understanding of the need for alliances and an emerging need by firms to share risk. Unfortunately, the latter forces most firms to enter into alliances without adequate analysis of the partners meaning they enter alliances for the wrong reason (Inkpen & Ramaswamy, 2006.p.92). Besides, risks, most firms will enter into alliances citing only the merits such as minimizing competition. Unfortunately, the positives do not always materialize or they pave way for other consequences. For instances formation of an alliance to beat competition maybe absorbed by other companies which may join hands as well or improve their market oriented strategies. Under these circumstances, the results of the alliances end up not being as envisioned, mainly because the alliance partners did not envision difficulties or prioritized the wrong things. Overall, such an alliance is not expected to last and the very failure to formulate proper goals and orient the firm objectively ends up being a problem for the alliances. On the other hand, some alliances maybe formed to correct internal problems. In such cases, the management of the management inept company envisions that an alliance will be a quick fix (Elmuti & Kathalawa, 2001.p.209). In this scenario, the company is already destined to fail and only drags another into the wanting situation leading to imminent failure. Relational risk Relational risk represents the likelihood that a partner in an alliance lacks commitment and their probable opportunistic conduct could dent the prospects of the alliance. Relational risks results when firms are preoccupied with meeting their objective goals at the expense of the alliance (Inkpen & Ramaswamy, 2006.p.89). Opportunistic behavior in this case maybe represented by distorting information that would help the alliance’s course, appropriating a partner’s wealth and dismal performance leading to poor products or services. These activities seriously jeopardize the alliance’s standing. This factor points to the importance of relational risk in strategic alliances. Case study-Failed alliances Volvo-Renault Volvo and Renault had historically cooperated, a relationship that went back to the 1970s when both companies initiated a cross-supply agreement which entailed exchanging of gasoline engines for gearboxes. This initial relationship had worked superbly well for the benefit of both companies. Having formed a basis for a successful venture, Volvo formerly initiated a request for a strategic alliance between the firms. The strategic alliance was driven by two main business objectives; they wanted to realize full potential by sharing production platforms, procurements and manufacturing, and secondly they wanted to create a competitive advantage in the increasingly competitive automobile industry (Rakowski & Patz, 2009.p.11). The strategic alliances started well, however, after a few years of operation the alliance failed. The main reasons that led to the alliance’s failure were misalignment of operating and senior executives, differences in leadership approaches, differences in organizational cultures, path dependence and alliance re-contracting. Volvo-Renault alliance has not been the only one to have failed over the years. Multiple others such as the Daimler-Chrysler alliance also failed. Though the partners have been different the cycle has been the same. This has continuously borrowed the question of why the incidence of failed alliances is as high. An objective look at the reasons for failure points to the same reasons which include; partners’ failure to merge cultures, production processes, and a difference in management styles. Going forward, it is expected that future alliances will focus on the particular reasons why preceding alliances have failed (Rakowski & Patz, 2009.p.11). A thorough examination would offer critical lessons and most importantly help the different firms plan carefully and come up with an alliance structure that enumerates exactly how the common failures can be avoided or absorbed. Such a move, helped by adequate analysis with the help of frameworks such as the 4Cs would improve the situation of alliances while positioning the partner firms’ improve competitiveness and value creation. Making Alliances work Looking closely at the reasons why alliances fail, it is easier to see how they can succeed. The success of an alliance appears to be a function of three major factors, identification of the right partner selection, formulation of an appropriate alliance structure, and approach to organization management (Hill & Gareth, 2010.p.275). Partner selection One of the fundamental factors in ensuring a strategic alliance functions is landing the proper partner. A proper partner has three major features. First a proper partner aids the firm attain strategic objectives, such as achieving market access, cost and risk sharing, product development, and accessing core competencies (Hill & Gareth, 2010.p.276). In other words, a proper partner must have complimentary values. Second, a proper partner must contribute favorably to the goals and objectives of the alliance. If two partners approach an alliance with drastically diverse aims, the probability of collapse is amplified. Lastly, a proper partner is not likely to attempt abusing the alliance to meet its own objectives that is to annex the company’s technical know-how while availing little or no financial reward for the benefits derived (Inkpen & Ramaswamy, 2006.p.98). Importance of effective partner selection Selection of the right partner was identified as the strongest variable in every strategic alliance. In this sense, ending up with the wrong partner dooms an alliance for failure. It does not matter the soundness of the alliance structure or the resources available a wrong partner simply means that the firms’ goals cannot be reconciled to deliver optimal success for the partners. However, the choice of a right partner effectuates the relationships and helps in problem resolution and process synchronization such that the resulting partnership is capable of delivering value for associating firms. To start with, choosing a right partner allows the firms to leverage on each other’s strengths delivering greater value and improving their competitive position achieving synergy. Secondly, selecting the right partner allows a firm to diversify the risks faced in its strategic and operational activities (Richter, & Pahl, 2009.p.32). This is because an appropriate alliance presents greater resources and better technical prowess allowing the respective firms to absorb the market risks. Lastly, selecting the right partner enhances a firm’s competitiveness and production capacity. This is because the firms can act on common interests and invest in R&D enabling development of proper and more suitable goods that improve the firm’s competitive positions. Additionally, the right partner presents alternative competencies meaning they may allow the development of new marketing channels or improve production. Either way, the overall position of the alliance is an improve one as opposed to the situation of individual firms. Case Study of a successful strategic alliance –Through proper partner selection The cases of successful strategic alliances are not easy to come by, however, there are some that epitomize the fundamental nature of selecting the right partner, an example of these include such alliances as Renault-Nissan and HP and Microsoft. In this case, we examine the Renault-Nissan alliance. The Renault-Nissan alliance was established in 1999 and presented the first industrial and commercial alliances of its type in the automobile industry and largely in other industries as well, it involved Renault, French company and Nissan, a Japanese company (Richter, & Pahl, 2009.p.24). This alliance is one of the most quoted while referencing successful alliances denoting just how effective it has been in delivering the envisioned objectives. The alliance terms (structure) established a cross-shareholding system where each firm would own share in the other. This helped develop a shared objective as maximizing the market share or the value of the other means an increase in the value owned. The structure established that the two companies would share technical knowledge and utilize each other’s marketing channels and dealerships (Richter, & Pahl, 2009.p.24). Nissan was also to specialize in the development of gasoline engines while Renault focused in the production of diesel engines. The success of this arrangement is evident as the combined automobile sales in 1999 were 4.9 million units a figure which had increased to more than 8.03 million units in 2011. Further, the alliance improved the individual company’s profile as they are jointly the third largest automobile producers and sellers (Doz & Gary, 1998). Conclusion Indeed, strategic alliances are a sure way of overcoming the dynamic forces of technology and globalization and allowing firms to compete and synergize. Unfortunately, strategic alliances are not easy to constitute as seen throughout this study. In fact the very failures in constitution are the reasons these alliances collapse amidst other reasons exhaustively discussed throughout the study. It is clear that the selection of a partner remains the most fundamental aspect in the success of an alliance. In fact, this study has objectively demonstrated that every firm seeking to leap the benefits of strategic alliances such as ease of market entry, spreading risks, access to technical knowledge and synergy must place adequate focus on the partner. The most basic conclusion is that strategic alliances can indeed be effective; however, their success is hedged on the right partner, a proper alliance structure and proper management of the alliance. 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