Strategic Alliance between two companies - Essay Example

Strategic Alliance between two companies The relationship between two companies or entities sharing the resources available to each in order to achieve a mutually beneficial end is known as strategic alliance. Among the various options available to a company, strategic alliance is one that involves sharing of resources and establishing a cooperative relationship with the other. The alliance has to be headed with an efficient executive leadership and supported by the lower management so as to achieve the highest levels of strategic management at a macro level. For example, two companies form a strategic alliance, where one is engaged in the manufacturing and distribution of a product in one country, yet wishes to extend its distribution networks to another. Consequently, the company sets up a strategic alliance with the latter that already has an established distribution network in the desired country of trade. This is a beneficial arrangement for both as the former company is able to expand its distribution network and the latter can improvise its existing product lines (Papageorgiou, Rotstein and Shah, 2001). Advantages The benefits that a company derives from a strategic alliance are the ability to hedge against uncertain and unprofitable situations, tap the potential of a new market, increase the knowledge base and obtain access to exclusive and critical information, which in turn strengthens its competitive position in the international market. A company is able to minimise on the transaction and distribution costs by way of engaging in strategic alliance. A strategic alliance also enables a company to be prompt and effective in pursuing an opportunity and to obtain resources that are absent. A company stabilises its resource base by leveraging the knowledge and resource base of the other. As a result, the company is able to gain easier access in the new markets and face lesser barriers to entry during an expansion plan. Strategic alliances, however, has to be formed in a very careful manner as these often fall through owing to mistrust between the two partners, especially when a large amount of competitive or exclusive information is involved. There are three types of synergies that arise from the strategic alliances established between companies. Modular synergy takes place when only the results are pooled to create greater profits and the resources are managed independently. Sequential Synergy is the case where the firms’ resources are sequentially interdependent, implying that a portion of the research is conducted by one firm and then the results are passed over to the partner firm for conducting further research. Reciprocal Synergy occurs when the firms combine and customise their resources in order to render those mutually reciprocal, thereby facilitating a mutual research by way of an iterative sharing of knowledge (Kale, et al., 2000). Joint Venture: A legal partnership is established between two or more companies, where both of them form a third new entity so as to achieve competitive advantage. By way of a joint venture, companies can incorporate not only simple governance, but an entirely new entity comprising a new board, an executive team and officers. Effectively, a completely new organisation is formed because of a Joint Venture. However, ownership remains with the founding members. The board of directors are represented by the founding organizations and are generally associated with the decision making process (Child, Faulkner and Tallman, 2005). For example, Uninor was formed owing to a joint venture between Unitech (India) and Telenor (France). A joint venture between KPIT and Cummins Infosystems had given birth to KPIT Cummins. Both the above examples depict a resulting new company that functions independently with a separate set of executives and staff members. Advantages The governments of various developing countries compete fiercely amongst themselves in order to attract foreign capital and the investors also seek potential countries to invest for capitalising on the cheap labour force and abundance of other resources available. Capital is a very mobile resource, unlike labour or other natural resources. Hence, MNCs can easily shift operations from one country to another, where the factor conditions are more favourable. Initially, the process of multinational expansion took place because the companies wanted to avail the natural resources of other countries like, minerals, petroleum, cotton and gems. Joint ventures help companies gain access to all above mentioned assets in a legal manner (Baum, Calabrese and Silverman, 2000; Chen and Ross, 2000). Mergers and Acquisitions The more popular form of partnerships is mergers and acquisitions. When two firms with nearly similar resources and who are separately owned and operated agree to conduct business in future as a single new company, the process is known as merger or “merger of equals”. When both the companies’ stocks are surrendered, a new stock is issued to replace the older ones. In case of acquisition, a company completely takes over another and establishes itself as the new owner. The former company, hereafter, ceases to exist and is replaced with the buyer’s stocks (Müller-Stewens, Kunisch and Binder, 2010). Oracle Corporation is a company that is well-known for its acquisitions. Instead of merging with other companies, Oracle acquires them through either hostile or friendly take-overs. Oracle has acquired BEA, PeopleSoft and Siebel in the past. Strategic Alliance as against Mergers and Acquisitions The advantages of a strategic alliance can also be derived from mergers and acquisitions as the latter helps the firms in pooling of resources, development of new products and entering into new markets. In most cases, mergers involve large financial investments, a complex negotiation process, irreversible commitments as well as lengthy managerial and structural adjustments. Besides gaining outright access to the required resources, acquisitions bring along bills and liabilities that the new owner has to pay off. Hence, an acquisition is often deemed more of a burden as opposed to an asset. In such situations, strategic alliance is considered a better option than mergers and acquisitions. Also, in some cases, government restrictions and competition laws prohibit acquisitions. In this context, alliance is regarded as a better and lucrative option than acquisition as the same advantages can be obtained without dealing with legal issues. The airline industry is a perfect example of one that operates on the principal of global integration. However, there are countries that do not allow foreign ownership of the home airlines. As a consequence, the next best alternative towards achieving economies of scale, integration of services, cutting of costs and pooling of other resources is strategic alliance. There are several airlines that have formed “alliance constellations” (Gulati, Nohria and Zaheer, 2000; Arino, 2003). Strategic Alliance as against Joint ventures Strategic alliance often takes the form of joint ventures and alliances and is generally formed in rapidly changing technology areas. The alliance may also take place between firms with a balanced core competency area and innovative capabilities operating in the industrialised countries. A more traditional type of joint venture is considered when a foreign firm establishes a relationship with the domestic firm of a developing country so as to take advantage of the resources available in the host country or to set up a manufacturing unit by using the labour force therein. This is often the case when Multinational Corporations (MNCs) build their production facilities at offshore locations as the labour wage in developed countries is higher than that of the developing countries. The host governments also in some cases offer considerable support to the foreign company in setting up business as these are considered conduits of foreign direct investments (FDIs). Unlike strategic alliances that play a significant role in the core functioning of MNCs, the role of joint ventures is not very central to the strategic developments of the same. Joint ventures are principally used in order to achieve economies of scale, ease the entry into a new market and tap in the potential of the same. Joint ventures allow the partners to pool in quantifiable resources for the purpose of sharing the predictable risks and profits. In case of strategic alliance, the lines that demarcate each partner’s contribution are often blurred and only when the alliance has been developed properly does the demarcation become distinct. Joint ventures are mostly bilateral agreements with a well-defined and mutual purpose. Strategic alliance, on the contrary, entail more partners in order to develop complex systems and solutions that would require the contribution of specialised resources. As a result, there is a greater pool of resources in case of strategic alliances. Nevertheless, the management of firms can become complex and unsteady, thereby demanding continuous readjustments and reallocations therein. Such continuous shifts in the management make the decision making procedure more complicated and delayed (Doz, Olk and Ring, 2000; Kogut, 1988). Case Study Toshiba is a leading company of Japan that is engaged in the manufacture of world class electronics and dominates the world trade in the same. Toshiba believes that it is not possible for a single company to dominate any business that involves the use of technologies. Hence, a major portion of the company’s corporate strategic planning involves establishing favourable relations and forming strategic alliances with several other companies dealing in different technologies. Such a corporate strategy has helped Toshiba to become one of the leading players in the industry. Toshiba had signed an agreement for co-producing filaments of light bulbs with General Electric (GE). Jack Welch, who was the CEO of GE in 1990s, was an admirer of Toshiba as the company promptly dealt with any post production issues in a very efficient manner. Since then, Toshiba had been forming partnerships, joint ventures and licensing agreements with various firms so as to increase its sales volume. Toshiba has partnered with certain famous companies in the industry such as, IBM, Apple computers, Ericsson, Microsoft and Motorola. The alliance with Apple computers was established in order to develop multimedia computer products. Toshiba’s strength lies in its manufacturing expertise, while Apple contributed towards development of the software technology. The Toshiba and Microsoft tie-up was also of a similar nature, where they were involved in the production of hand held computers or mini laptops. In order to pool in different expertises in the various segments of production, Toshiba, Siemens and IBM formed a collaboration to produce semi conductors. The strengths of the alliance lay in the etching by Toshiba, engineering by Siemens and lithography by IBM. However, terms of the alliance were limited to research and development that would aid the production process. The commercial aspects and marketing of the goods were carried out by each company separately. The alliance with Motorola has enabled Toshiba to become a world leader in the production of memory chips and that with IBM helped in the production of flash memory. Toshiba maintains good working relations with all its strategic alliance partners and the senior management is directly involved in monitoring and structuring of such alliances so as to effectively deal with issues that typically arise from the same. Conclusion It can be rightly concluded that in the present world, strategic alliances and joint ventures have become an absolute requirement for companies that desire to conduct business in different countries. The dynamic market system and the rising costs of expansion have rendered such alliances a necessity. The organisational problems associated with mergers and acquisitions can be easily overcome by way of forming alliances. Hence, alliances are a better way of sharing knowledge and developing new markets. The companies can no longer afford to make ad hoc decisions regarding alliance formation and management as organisational name and reputation is affected directly. Conducting future businesses often becomes a problem for firms that have earned a bad name in the market. Reference List Arino, A., 2003 Measures of Strategic Alliance Performance: An Analysis of Construct Validity, Journal of International Business Studies, 34, pp. 66-79. Baum, Joel A. C., Calabrese, T. and Brian S. Silverman., 2000. Don’t Go It Alone: Alliance Network Composition and Startups’ Performance in Canadian Biotechnology. Strategic Management Journal, 21, pp. 267-294. Chen, Z. and Ross. T.W., 2000. Strategic Alliances, Shared Facilities, and Entry Deterrence, RAND Journal of Economics, 31, pp. 326-344. Child, J., Faulkner, D. and Tallman, S., 2005. Cooperative strategy: Managing alliances, networks, and joint ventures. OUP Catalogue. Doz, Yves L., Olk, P.M. and Ring, P.S., 2000. Formation Processes of R&D Consortia: Which Path to Take? Where Does it Lead?, Strategic Management Journal, 21, pp. 239-266. Gulati, R., Nohria, N. and Zaheer. A., 2000. Strategic Networks’, Strategic Management Journal, 21, pp. 203-215. Kale, Prashant, Singh, H. and Perlmutter, H., 2000 Learning and Protection of Proprietary Assets in Strategic Alliances: Building Relational Capital, Strategic Management Journal, 21, pp. 217-237. Kogut, B., 1988. Joint ventures: Theoretical and empirical perspectives. Strategic management journal, 9(4), pp. 319-332. Müller-Stewens, G., Kunisch, S. and Binder, A., 2010. Mergers & Acquisitions. Germany: Schäffer-Poeschel Verlag. Papageorgiou, L. G., Rotstein, G. E., and Shah, N., 2001. Strategic supply chain optimization for the pharmaceutical industries. Industrial & Engineering Chemistry Research, 40(1), pp. 275-286. Read More