The Criteria of Effectiveness of a Co-Operative Strategy - Term Paper Example

Effective co-operative strategies - Research indicates that a high proportion of strategic alliances fail. In this context, critically explore the main determinants of the design and delivery of effective co-operative strategies – the case of Noveon - Avebe 1. Introduction The development of business activities worldwide is continuous. In fact, most organizations prefer to expand their activities within the international market in order to increase their customer base and their profits; however, in order for the above targets to be achieved it is necessary that firms proceed to strategic alliances usually with firms that are already well established in the market. Even when a firm chooses to operate locally the option of strategic alliances can be chosen in order for this firm to be able to complete its various projects keeping its competitiveness within the local market. Current paper focuses on the examination of the role of strategic alliances within the modern business environment as well as the identification of the reasons why several strategic alliances fail. The criteria of effectiveness of a co-operative strategy will be also analyzed proposing potential strategic options for the success of a relevant business project. The consequences and the various aspects of strategic alliances will be discussed in reference with two specific firms: Avebe (established in Netherlands) and Noveon (located in North America); these two firms managed to develop a strategic alliance, in 1995, in order to increase their profitability; however the relevant project was not appropriately designed and prepared and it had to be dissolved in 1999. The reasons of the failure of the above cooperation are analytically examined and evaluated at the level that they could help to understand the progress and the demands of strategic alliances between firms that operate in the modern market. 2. Main aspects of strategic alliances in modern business environment Aiming to improve their performance within both their local and the international market firms use to review periodically their strategic plans making sure that they respond to the trends of the market and the customers’ preferences. Strategic alliances have been found to be an effective strategic tool supporting business activities worldwide. It should be noticed that in accordance with a study made by Das et al. (1999, 50) ‘the number of alliances has been growing at a rate of 25 percent per year since 1985’. The most important term that needs to be met in order for strategic alliances to be effective is that the latter are appropriately designed taking into account the current firms’ strengths, their weaknesses and their targets (as developed within the context of a particular strategic alliance). In any case it should be noticed that strategic alliances can hide many risks; for this reason the establishment of such a business scheme should be appropriately prepared taking into consideration the fact that any failure would lead to severe financial losses for both the firms involved (Dyer et al., 2001, 38). Many efforts have be made in the literature and the empirical research towards the identification of the most common reasons of strategic alliances’ failure; the relevant conclusions are both direct and indirect; in other words, there are studies where the reasons of failure of strategic alliances are clearly states while in other (studies) the criteria for the success of strategic alliances are highlighted – it can be assumed that when these criteria are not met then a specific strategic alliance is very likely to be led to a failure. In order to understand the various aspects of strategic alliances within the international market, it is necessary to review the particular characteristics of these alliances as they are developed within the modern market. In this context, it should be noticed that strategic alliances have been most commonly regarded as strategic cooperations between firms that operate in various industrial sectors. Most commonly the firms participated in the relevant scheme operate in the same industry; however, there is also the case of strategic alliance between firms of different industries (targeting a wider group of consumers internationally). In accordance with Parise et al. (2001, 908) ‘strategic alliances are no longer a strategic option but a necessity in many markets and industries; yet, managers are finding it increasingly difficult to capture value from alliances’. Flood (1999, 152) also noticed that ‘such cooperative business arrangements are becoming increasingly common’. In other words, despite the fact that strategic alliances have been expanded in all markets worldwide, managers in modern firms do not seem to have the necessary skills (at least at a high percentage) in order to respond to the needs of such a project. For this reason, it has been highlighted before that a strategic alliance should not be attempted unless all relevant issues are carefully reviewed making sure that the persons (employees including the managers) involved in the effort have all the appropriate competencies to respond to the demands of the specific business initiative. From another point of view, it has been stated that ‘strategic alliances must be seen as a form with a content that is strategic; in order to test the strategic nature of alliances or try to make sense of their patterns, it is essential that one understands the substance of corporate strategy and locate alliances within it’ (Ritsumeikan University, 2004, 17). Strategic alliances cannot be developed unless they are aligned with the characteristics and the targets of the firms involved taking into consideration the fact that a strategic alliance is not a common business effort; it is rather a demanding project that has to be carefully prepared as the risk of failure is high and the consequences of failure are severe – the most common consequence of such a failure is the financial loss of both the firms involved in the project. The strategic alliance is not a simple form of business cooperation; the success of the relevant project usually requires the close cooperation of both the firms (or of all the firms) engaged in the strategic alliance meaning that all profits and losses are going to be equally divided (for each one of the firm that participates in a specific strategic alliance). In any case the development of strategic alliances has many chances to be successful leading to the increase of the firm’s profitability. For this reason it is stated that ‘by creating formal partnerships, companies can quickly acquire product development capabilities and marketing expertise that would otherwise require years of effort and considerable expense’ (Penton Media, 2004, 5). The essence of strategic alliances as described above is that within a strategic alliance all expenses are shared by the firms participating in the alliance; in this way it is very likely that each of the firms involved will be able to participate more actively in commercial projects that would otherwise be inappropriate (in terms of their cost) for the particular firm. On the other hand, the development of strategic alliances also requires a specific amount of money that will be invested in the relevant project; a review of the existed strategies of all the firms involved will be required; apart from this requirement additional expenses may be required for the alignment of technology – knowledge process and transferring among the firms involved in the specific initiative. The marketing of the strategic alliance will be also necessary; in case of firms that operate in the international market the cost of promoting the specific strategic-cooperation around the world is expected to be high; in the context of firms that operate only locally, their strategic cooperation would be made known to the public using a cost-limited marketing strategy. The use of the Internet in both the above cases could be decrease the cost of marketing both in the short and the long term. As for the effectiveness of the whole project, this could be ensured through the application of the appropriate strategies as suggested in the literature and the empirical research. In accordance with Zollo et al. (2002) the effectiveness of strategic co-operations would be ensured through the use of appropriately customized techniques at all the stages of the relevant project. The example of the interorganizational routines is mentioned by the above researchers in order to show that strategic alliances have many chances to be successfully implemented but it is necessary that specific modes of behaviour between the two firms (referring to a strategic alliance developed between two firms) are established. More specifically, it is noticed by Zollo et al. (2002, 701) that ‘partner-specific, technology-specific, and general experience accumulation at the partnering-firm level influence the extent to which alliances result in knowledge accumulation, create new growth opportunities, and enable partnering firms to achieve their strategic objectives’. In other words, the success of any strategic alliance is highly depended on the preparation made in advance, i.e. whether a complete review of past business policies has been completed, whether the reasons for the failure of business plans have been identified and whether the strategic plans of the firm for the future are in accordance with the firm’s strengths (referring especially to the funds available for the realization of the various business projects). The issue of dependency of a firm’s operational activities on the social and cultural trends of the particular geographical region (where the firm is established) should be also taken into consideration. The specific issue was examined by Mehta et al. (2006) who made a research using data from firms located in different geographical regions (in U.S.A., China, Finland and Poland). The results of their study showed that the practices followed in strategic alliances developed in the above countries present many similarities but they also present significant differences. In other words, the success of strategic alliances is depended on the appropriate customization of the particular cultural and social characteristics of each region (referring to the region at which each of the firms is located) to the strategic plans developed within the context of a specific strategic alliance. If the social principles, the culture and the ethics of each firm are not taken into consideration when designing and developing a specific strategic alliance, then it is very likely that this alliance will be soon led to a failure. Other strategic approaches towards the development of successful strategic alliances have been proposed in the literature and the empirical research. In any case the choice of the strategy involved in a specific strategic alliance scheme will be in accordance with the characteristics of the firms involved (referring to their size and their position in the market), the trends of the market and the targets set by the firm’s managers both in the short and the long term. With a special reference to the firms that enter the Internet through a venture capital scheme, Chang (2004) notices that these firms are very likely to be successfully adapted at the initial public offering market; indeed the study of the relevant area led to the following conclusions: ‘three factors positively influenced a startups time to IPO: the better the reputations of participating venture capital firms and strategic alliance partners were, the more money a startup raised, and the larger was the size of a startups network of strategic alliances’ (Chang, 2004, 721). In accordance with the above, a strategic alliance has more chances to be successfully implemented if the firms participated in the effort are well known within the market, i.e. when its brand name is powerful. In this case, the prospects for the success of the specific strategic alliance are many. In fact, in modern market the development of strategic alliances between firms that are already known in the market is quite common leading to the following development of both the firms internationally. Another issue that should be noticed is the fact that the success of a strategic alliance does not seem to be affected significantly by the size of the firms involved (referring to the development of cooperation between the firms participating in a specific alliance, not the response of the public towards the above alliance). However, the firms’ managers should ensure that the cooperation between the firms is highly promoted and well developed emphasizing to the successful transfer of knowledge between the organizations that participate in the strategic alliance. The examination of the above issue (effectiveness of strategic alliances between firms of different size) by Rothkegel et al. (2006) led to the conclusion that ‘in order to increase the likelihood of successful collaboration, the alliance partners must understand the importance of building trust and a shared alliance purpose, and both of these must be communicated effectively at executive and operational levels’ (Rothkegel et al., 2006, 50). In other words, strategic alliances can lead to significant development but only under the terms that the firms’ staff has the necessary skills to respond to the needs of the particular scheme and that the cooperation is well established between all the firms’ organizational departments. 3. Effective cooperative strategies - the case of Avebe - Noveon alliance The examination of the various aspects of strategic alliance between Avebe and Noveon can reveal the reasons for the failure to which this strategic cooperation was finally led. In accordance with the information provided through the case study the strategic alliance between Avebe and Noveon was ‘related to joint product development and distribution of a high performance thickener for textile printing applications, based on a combination of Noveon’s synthetic polymer and Avebe’s modified starches’ (case study, pg. 2). In other words, the role of each one of the firms within the specific strategic cooperation was precisely defined. It seems that the strategic cooperation between the two firms did not target the completion of specific legal requirements (see Oliver, 1990, pg. 243). Rather specific production needs were to be covered aiming at the increase of both the firms’ profitability. Of course the potential ‘reduction of competitive uncertainty’ (Olivery, 1990, 251) – named also as resource dependency theory – would be also the reason for the development of the specific strategic alliance. The strategic alliance between the two firms was based on their specific needs in order to increase their market share. More specifically, Avebe that did not operate in the ‘reactive dye printing’ (case study, pg. 4) needed the support of Noveon, a firm that was a global power in the production of chemicals for various industrial activities (including that of Avebe). For this reason, the development of strategic alliance between the two firms was considered to be an expected one if considering their role and their position in the international market. Under these terms, their cooperation would be also expected to be successful at least for a significant – initial – period. As noticed above, the strategic alliance between the two firms started in 1995 and was quite successful – in the beginning of the project. Indeed, the cooperation between the firms’ employees was noticeable (case study, pg. 6) and the specific strategic alliance was expected to last for quite a long. However, problems in the communication appeared when designing the firms’ marketing strategy; the failure of the firms’ marketing policies – as described in the case study, pg. 8 – led to severe crisis the specific strategic alliance. On the other hand, the acquisition by Noveon of Diamalt – a competitor of Avebe – led soon the strategic alliance to an end. The development of Diamalt was supported by Noveon and the managers of Avebe considered that there was no particular interest for the firm to continue its cooperation with Noveon. 4. Conclusion In accordance with all the issues developed above, the success of strategic alliances depends on a series of criteria. Even if a strategic alliance performs well at the initial stages of the project, it is very likely that after a while the specific alliance is ended because of the intervention of various facts. The most characteristic example is that of Noveon and Avebe; the two firms established a well designed strategic alliance which had significant prospects for the future; however the lack of communication when designing the marketing policies as well as the development of specific initiatives (acquisition of Diamalt by Noveon) led the above strategic alliance to a failure. No case of internal resistance (see also Kotter et al., 1979, 107) existed in the case of Noveon and Avebe; neither problems regarding the alignment of their culture (O’Reilly, 1999, 12). Rather, the fact that one of the firms (Noveon) proceeded to specific initiatives without discussing the specific plan with the other party (see Bamford et al., 2004, 92) could be considered as the main reason for the failure of the specific strategic alliance. [words: 2710, total, including quotes] [quotes: 206 words] References Bamford, J., Ernst, D., Fubini, D. (2004) Launching a world class joint venture. 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