Strategic Alliances in the Automobile Industry - Their Impact on Brand Value - Case Study Example

STRATEGIC ALLIANCES IN THE AUTOMOBILE INDUSTRY: THEIR IMPACT ON BRAND VALUE Introduction: This study will cover a discussion on the nature of strategic alliances in the auteomobile industry as part of strategic management as well as their role and importance relation to brand value. The term strategic alliances refers to cooperative agreements between potential or actual competitors. Strategic alliances can range from short-term contractual arrangements in which two companies agree to cooperate on a particular task or project, such as developing a new product, to formal joint ventures in which two or more firms have equity stakes. An alternative description (Davis 1999) states that it is any form of cooperative linkage entered into for strategic reasons, which can be short-term or long-term, which may include research and development partnerships, cross-manufacturing agreements, and joint marketing. The linkage may or may not result in setting up a separate legal entity such as a joint venture. Firms set up strategic alliances in order to gain competitive advantage, and may prefer it over outright acquisition because they are unable to for lack of financing or by reason of national barriers. Hill (2001) noted that one of the advantages of a strategic alliance is that it enables a firm to gain access to a foreign market. Another reason is that it allows firms to share in the fixed costs as well as the associated risks of developing new products and processes, as the required investment and the level of risk may be too huge for one company to undertake. A third reason is that it can bring together the skills and assets that neither company can develop on its own and would thereby gain through the complementarity of their resources and capabilities. Finally, a strategic alliance can help a firm establish technological standards from which it can derive benefit. Some disadvantages may attach to such cooperative arrangements. Often cited is the fact that it gives competitors a low-cost path towards new technology and markets. If the alliance is not managed to result in mutual and equitable advantage, the one partner can gain over the other. A case in point that is often alleged is that of Japanese firms-partners keeping higher paying and high value-added jobs in Japan while gaining the engineering and production process skills that are basic to the success of U.S. companies. Americans may lose their competitive advantage if they give the Japanese access to new inventions and advanced technology and if they provide sales and distribution networks in the United States for the resulting products. Such an inequitable sharing of benefits can provide a cause for tension between the partners. It has been observed that the failure rate of strategic alliances are quite high (Hill 2001). A study of some 49 international alliances found that two-thirds of the number encounter serious managerial and financial difficulties within two years of their formation, and that a third of these latter problematic partnerships turn out to be ultimate failures (Hill, 2001). Two Cases of Failed Alliance: In the automobile industry, one may cite two instances of failed strategic alliances, that between Renault and Volvo, and another between General Motors and the Daewoo Group of South Korea (Hill 2001). While the purpose of the following narrative is not to discredit the soundness of the concept or workability of such form of cooperation, one may view these examples as object lessons on how these alliance should be better managed and the need for such partnerships to be taken seriously. Case study 1 The Renault-Volvo case. After 20 years of industrial cooperation, Volvo and Renault agreed in 1990 to forge a strategic alliance. The objectives were, firstly, to exploit the considerable potential synergies in joint product development, purchasing, and manufacturing, and, secondly, to create the capability by the two firms to mutually complement and compete successfully in the global marketplace. While the alliance worked well in the beginning, a move by the Renault executives to push for a merger was met with resistance by the Volvo group, the latter breaking off from the cooperative arrangement. This created problems in the partnership, resulting in the departure of Volvos senior executives. Commentators subsequently observed that the quality of the relationship had not extended or filtered far down enough in the organization, and that the aspirations of the state-owned French company were never fully communicated or discussed. Also, real cultural differences were not addressed, while joint decision making left much to be desired. Subsequently, Volvo merged with Ford, and Renault failed to develop its capacity to compete globally. Ford, on the other hand, had had a good track record and reputation as an alliance partner, proven by the success of its partnership in the case of Jaguar and Aston Martin, in developing brands. Case study 2 In 1984 General Motors and the Daewoo Group of South Korea agreed to put up $100 million each to establish a joint venture, to be based in South Korea, which was to produce a subcompact car, the Pontiac Le Mans. The South Korean counterpart were to handle the day-to-day management and operations of the business, with GM providing limited managerial and technical advice. The rationale of GM in joining this arrangement was that it was uneconomical to produce a subcompact car in the United States because of high labor cost compared to South Korean labor. There was something to be gained mutually as South Korea could also use the technology from the GM German subsidiary Opel on which the subcompact car brand was based. The South Koreans would gain access to the superior engineering skills of GM and an entry into the sizable US market. GM was to import up to 100,000 units per year from Daewoo Motor. Three years afterwards, South Korea shifted from dictatorship in democracy and Daewoo workers, demanding higher wages rates, repeatedly declared strikes to force management to raise wages, which then were doubled. Because now productivity and product quality were low compared to the German plant, pressure on profitability mounted. Daewoo now gained a reputation for poor quality and US sales fell to 37,000 in 1991, down 81 per cent form their 1988 high, and even domestic sales in South Korea plummeted nearly 50 per cent that year. On the other hand, Daewoo had its own list of complaints: 1) the South Korean chairman Kim Woo-chong complained that he was treated shabbily by the GM executives, 2) GM rejected his proposal to sell 7,000 cars to Eastern Europe, a territory of the GM subsidiary Opel, 3) GM refused to sell a newly designed car to the US, and 4) GMs marketing efforts, Mr. Kim, alleged were poor. Despite the handwriting on the wall, Daewoo asked for another $100 million to be put up for expansion purposes; this was vetoed by GM on the grounds that there was need to improve quality first. In a blunt proposal to Daewoo, GM offered to buy out Daewoos stake in the joint venture, or the latter would buy GMs stake. Surprisingly, in November 1992, Daewoo agreed to pay GM $170 million for its 50 per cent stake in the Daewoo Motor Company. Postscript: In 2002 General Motors and Fiat bought bankrupt Daewoo. Strategic Alliances in the Automobile Industry. The above illustrative cases demonstrate the difficulty of making a success of strategic alliances, which essentially are underpinned by many variables, being forged by actual or potential competitors, that unless managed jointly competently can lapse into entropy and failure. However, some strategic alliances, though in the minority, have been reported to be successful. The US automobile industry have 3 big players: General Motors, Ford Motor Company, and DaimlerChrysler. In addition, some Jaspanese companies have made inroads into the United States industrial scene: among them, Toyota Motor, Nissan, and Honda Motors. Other companies come from South Korea (Hyundai) and Europe (Volkswagen). The evolution of the car industry has a long history, but of more relevance to us is perhaps the period after the first OPEC oil price increases ins 1973. American manufacturers, used to big, gas-guzzling cars, were caught unprepared, but he Japanese had the small, gas-efficient cars. In the second half of the 1970s, many American cars of faulty parts or construction were recalled, and Chrysler nearly went bankrupt until Lee Iacocca obtained federal loan guarantees in order to enable Chrysler to continue operations and nursed Chrysler back to good financial health. Japanese car makers, after doing well in the global market, faced a saturated market for its small cars and shifted strategy to making luxruy cars in the 1980s. In 1987 Chrysler bought American Motors and was also able to pay back its loans. During the 1980s Japanese and German companies set up factories in the United States. Today the big 3 automakers manufacture less than 2/3 of the total number of cars sold in the country, although General Motors still dominates. The Automobile Companies. A. General Motors is the worlds biggest automaker with $181.1 billion in 2007 sales and $38.7 billion inn profits, and has the brands names Buick, Cadillac, Chevrolet, GMC, Pontiac, Saab, and Saturn. It has also other units that produce the brands Holden, Opel, and Vauxhall. With Fiat, it owns South Koreas GM Daewoo Auto and Technology, and is in the midst of restructuring its North American operations.(US History Encyclopedia: Automobile Industry). GM has strategic alliances with America Online as of 2001, with Club Mom in 2000, with Universo Online in Latin America in 2001. In 1999 it established a strategic alliance and capital relationship with Fuji Heavy Industries, purchasing 20 per cent of the latters shares, becoming the top shareholder in 2000. It achieved various synergistic benefits, and the cooperation in the past 6 year resulted in achievements in global procurement, technology exchanges, and others. However, both companies decided that beneficial mutually large projects were not likely to occur in the future, and so they decided to dissolve the strategic alliance in 2005. They also decided to stop the development of as cross-over vehicle between FHI and Saab Automobile AB. In 2000 GM had finalized a strategic alliance with Fiat S. p.a. of Italy for the European and Latin American markets. GM would have 20 per cent capital stake in Fiat Auto Holdings B.V.. a new holding company that controls Fiat Groups automobile and light commercial vehicle operations except for Ferrari and Maserati B. Ford Motor had sales of $172,5 billion in 2007 and a net income of $2.7 billion. It is the second largest automaker in the world. The pioneer of the mass production assembly lines in early 1900s, its vehicle brands include Ford, Lincoln, and Mercury. It has successfully marketed the re-designed Ford Mustang and F-Series pickup. It has, since 1999, a 33 per cent stake in Mazda and controls the Volvo brand. In 2000, Ford bought Jaguar, Aston-Martin, and Land Rover . It is planning to sell the Land Rover and the Jaguar to the India-based Tata Motor. In the late 1990sFord Motor Company announced the intent to form a strategic alliance with The Boeing Company and Northwestern University to research nanotechnology the first such alliance of its kind in the automotive industry. In 1998 Ford Motor Company and Mobil Corporation entered into a broad based strategic alliance to speed the development and integration of breakthrough fuel and vehicle technologies. In November 5, 2007 Ford entered into separate strategic alliances with Chinas Nanjing University of Aeronautics and Astronautics and Shanghai Jiaotong University to carry out a full range cooperation with them on scientific research and talent training. C. DaimlerChrysler had revenues of $145 billion in 2007 and a net income of $5.8 billion. Its parent company is Cerberus Capital Management which owns 80.1 per cent of the companys equity. The firm had been one of the worlds biggest automotive companies from 1998 when a $38 billion merger between German auto giant Daimler Benz and U.S car maker Chrysler, until August 2007 when DaimlerChrysler (DCX), finding its partner to be a drag to its profitability, sold its stake to Cerberus Capital Management. Only the Mercedes Benz division did well during the period when the merger was in effect. D. Toyota Motor Corporation, Japans #1 car maker, had sales of $202.8 billion for the year ending March 2008, and profits of $13.9 billion. The company makes a hybrid-powered (gas and electric) sedan -- the Prius -- that is being snapped up in US and European markets. Its gas-powered cars, pickups, minivans, and SUVs include such models as Camry, Corolla, 4Runner, Land Cruiser, Sienna, the luxury Lexus line, the Scion brand, and a full-sized pickup truck, the V-8 Tundra. Toyota also makes forklifts and manufactured housing, and offers consumer financial services. Once a dark horse in the global automotive game, Toyota had already passed Chrysler and Ford and was closing in on General Motors at the end of 2007. E. Nissan Motor, Japans #2 auto manufacturer after Toyota , had sales of $88.7 billion and net income of $3.9 billion in FY ending March 2009, is enjoying one of the car industrys most dramatic turnarounds in recent memory. Nissans models include Maxima and Sentra cars, Altima and Infiniti upscale sedans, Frontier pickups, the 350Z sports car, and Xterra and Pathfinder SUVs. In 1999 French automaker Renault took a 37% stake in Nissan, and installed president and CEO Carlos Ghosn who has since returned the company to profitability. Renault now owns almost 45% of Nissan. F. Honda Motors is Japans #3 automaker (after Toyota and Nissan) and the worlds largest motorcycle producer, had sales of $94.2 billion and net profits of $5.0 billion end of March 2008. The companys car models include the Accord, CR-V, Civic, Element, and Ridgeline, as well as gasoline-electric hybrid versions of the Civic and Accord. Hondas line of motorcycles includes everything from scooters to superbikes. The company also makes a line of ATVs and personal watercraft. Hondas power products division makes commercial and residential-use machinery (lawn mowers, snowblowers), portable generators, and outboard motors. G. Hyundai. In 1998, after a shake-up in the Korean auto industry caused by overambitious expansion and the Asian financial crisis, Hyundai acquired rival Kia Motors. In 2000, the company established a strategic alliance with DaimlerChrysler and severed its partnership with the Hyundai Group. In 2001, the Daimler-Hyundai Truck Corporation was formed. In 2004, however, DaimlerChrysler divested its interest in the company by selling its 10.5 percent stake for $900 million. Hyundai has invested in manufacturing plants in the North America, China, India, and Turkey as well as research and development centers in Europe, North America, and Japan. In 2004, Hyundai Motor Company had $57.2 billion in sales in South Korea making it the countrys second largest corporation. No worldwide figures are available. WAYS TO MAKE STRATEGIC ALLIANCES SUCCEED Having seen how the majority of strategic alliances fail, it is imperative for company executives to study how this important tool for gaining competitive advantage can be utilized in order to be successful. According to Hill (2001), there are three main factors that determine the success of an alliance: namely, partner selection, alliance structure, and alliance management. A right ally has 3 important characteristics: Firstly, the partner helps the company achieve its strategic goals, in terms of market access, sharing of the costs and risks of new product development, or gaining access to critical core competencies - that is, the partner must have capabilities that the firm lacks and considers of value. Secondly, the partner must share a common vision regarding the purpose of the alliance, because if both firms pursue radically different agendas, the alliance is not likely to succeed. Thirdly, a good partner is unlikely to be opportunistic, or be taking advantage of the alliance for its own ends, such as the appropriation of the other firms technological knowledge while giving little in return. A firm on the lookout for a partner in a strategic partner must collect as much data and information about the candidate or potential allies from both public sources and third parties. Then to ensure that the get to know each other well and the chemistry is right between the two parties, the senior and middle managers of both must have face-to-face meetings as part of the preconditions for going to the next step. To protect a firm from opportunism, there are four safeguards that have to be considered. Firstly, alliances can be so designed as to make it difficult, if not impossible, for the partner to transfer technology not meant to be transferred. Secondly, contractual safeguards can be written into the alliance agreement, Thirdly, it can be agreed in advance what skills and technologies can be exchanged in order to ensure that gains are equitable, Fourthly, each party must make a credible commitment to make the alliance succeed. A 50-50 joint venture with significant commitment of resources, people and equipment is s a way of ensuring success. Managing the alliance can be another area that can determine whether a strategic alliance can succeed. Both partners must be sensitive to cultural differences, as managerial styles can differ on account of this fact. Some tolerance or understanding of cultural differences is essential. Another is to building trust as well as learning from each other. Meetings between the managers of both partners are not convened solely to deal with official business pertaining to the alliance but also in order to enhance interpersonal relationships and develop harmony and mutual trust. This kind of relationship was achieved in the strategic alliance between Ford and Mazda where executives interacted informally and in this manner promoted more effective teamwork in solving problems in more formal contexts. Another important consideration is the need to learn from the other partner in order for results to be mutually beneficial. The case of GM and Toyota can be cited as an example. The strategic alliance between the two firms took the form of a joint venture formed in 1985 that built New United Motor Manufacturing. While the Toyota people learned about US supply and transportation networks, which they soon applied to their separate operations in Toyotas newly opened plant in Kentucky, the U.S. side failed to profit as much as they only had a new product Chevrolet Nova. Whatever knowledge GM acquired was not put to good use because instead of requiring application of new learnings, the executives who worked with the Japanese were dispersed to the different operating units of the firm. The lesson from the experience is that executives should be instructed specifically to cause the diffusion of the new knowledge to others within the organization to educate their colleagues (Hill 2001). The General Motors as Model General Motors is the biggest car manufacturer in the world, and much of its successes were achieved through the clever use of a global network of partnerships and strategic alliances. Among the incursions of GM into the world of cooperative relationships are the following: 1. In 1999 GM bought 20 per cent of Subaru; had strategic alliance with Fuji Heavy Industries (dissolved in 2005). Increased holdings in Isuzu to 49 per cent and Subaru to 20 per cent 2. In 2000; GM bought Saab, 20 per cent of Fiat, 3. In 2002 GM, together with Fiat taking 20 per cent stake, bought the bankrupt South Korean firm Daewoo Auto & Technology. 4. Strategic alliances with the following: ClubMom, Inc., America Online, and Universo Online in Latin America. When GM enters into strategic relationships with partners, its objectives consist of the following: a) To capitalize on shared efficiencies, b) To reduce development costs, c) To reduce product proliferation, d) To carry out high-risk R&D investments, and e) To focus on individual market requirements. Together with Ford, it is the most active among automobile firms in forging partnerships with other companies. Focus on Bentley Motors. Bentley Motors, with current manufacturing facilities in Crewe, England, was established in 1919 at New Street Mewes, London, to produce car engines and chassis. Production facilities later moved to Cricklewood, London, then to Derby when it was purchased by Rolls-Royce in 1931. The present location is the home of Bentley branded vehicles since 1946 and the manufacturer of Rolls-Royce branded products until 2002 when the last Rolls Royce car rolled off the line at Crewe. More than 100,000 Bentley and Rolls-Royces have produced at this site.( Bentley Motors) Turning out only engines and chassis in its early years, it was only in 1946 - 27 years after its founding - that the company produced a complete car. Bentley takes pride in the durability, power and handcrafted elegance of its cars. Cars equipped with Bentley engines and chassis competed and won the Le Mans from 1924 to 1930 and then recently in 2003. No website data are given about the current production level except the latest figure for 2005 which was 8,500 units, from 1000 units in 2003 and 6,300 units in 2004. The acquisition by Volkswagen AG of Bentley Motor in 1998 provided the impetus for the a $500 million investment program to improve factory facilities and laid the foundation for future product development programs. The company has regional offices in the UK, USA, Japan, Singapore, China and the Middle East and has 173 dealers worldwide. Major changes besides the Volkswagen acquisition are hard to find. A strategic alliance with Naim Audio was announced in February 2008. Naim Audio obtained an exclusive partnership - a vertical form of strategic alliance - with Bentley, to supply the latter with the "finest in-car entertainment system." The sound system delivers what it calls the "worlds ultimate in-car audio experience - allowing for an as-live audio entertainment that is as pure as the Bentley driving experience itself." Also this year Bentley chose the empolis Content Life Cycle Suite (e:CLS) as a platform for the Bentley new authoring environment, to manage all technical information that Bentley distributes to its 155 worldwide dealers, including training information and service information. Empoliss sister company Arvato Services implements the BAS system at Bentley and , and integrates BAS within the existing after-sales system within the Volkswagen Group.(cite. . . . Other significant recent changes in the company involved the creation of a web portal for genuine parts and the export of completely built units of the Azure and the Continental GTC brands to India. The brand image that the Bentley owners seek to achieve for the firm is that of producer of high-end, high-priced luxury cars characterized by durability, optimum passenger comfort, and aesthetic elegance. The company rests on its reputation for producing top-quality, dependable cars for the wealthy. The strategic partnership with Naim Audio seeks to enhance one aspect of customer comfort and enjoyment, and the other one, with e:CLS was for improving the communications system of the firm to augment operational efficiency. Brand Value No authoritative definition of Brand Value, or how it is quantitatively derived, has been found. However, one source describes brand value as a brands worth in terms of "income, whether actual or potential, reputation, prestige, and market value. It is considered an asset in the sense that when a company that possesses high brand value is sold, it is worth more on that basis than on any other consideration.(citation) Another description: It is "reliability in some known process, implying that a customers experience with the product/service is more important than its technical characteristics" (citation) A closely related concept is that of brand equity. Brand equity is the assortment of qualities that differentiates a brand from other brands. A brand that has brand equity gains a sustainable competitive advantage in the market over other brands. From this definition, brand value may be the what brand equity translates into in terms of a companys worth. Whatever ambiguity one may find in the concept of brand value, its application in the automobile industry can be inferred from the price and volume relationships. A brand such as Toyota has a high brand value for many people who demand quality, appearance, dependability and reasonable price. The market mechanism is a relatively good measure of brand value, because a consumers assessment of what a cars value relates to certain characteristics he or she want a car to have when it is used or when it is experienced. A high-priced car such as a Bentley, a Rolls-Royce, or a Mercedes Benz may also possess high brand value for the members of that market segment that prizes comfort, handcrafted elegance, a feeling of opulence and pride, and so on. Like many other things in life that depends on personal judgment and experience, the consideration of value is more often than not highly subjective and relative. This writer believes that the demand for a brand over a long term period is the most reliable and most nearly objective measure of brand value. Research and development, the application of technological innovation, consistent quality control, and superior management can ensure the achievement and maintenance of high brand value. Strategic alliances, while sought by firms to obtain cost synergies and savings, enhance technological sophistication, and secure competitive advantage, can in the process likewise improve brand value. The gains from the partnership can be applied to the companys own individual (non-partnership) operations and this can make the firm more strategically equipped and capable to compete and advance in the marketplace. 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Viewed June 30, 2008 http://www.dieselnet.com/news/1998/03ford.php 5 March 1998 US History Encyclopedia: Automobile Industry. Viewed June 30, 2008 http://asia.vault.com/companies/company_main.jsp?co_page=1&product_id=697&parrefer=2000&gclid=CMbor6vnlJQCFSMYagodrQxWuA Ford Motor Company has announced. . .. Viewed June 30, 2008 http://www.azonano.com/news.asp?newsID=1524 Ford Motor Company and Mobil Corporation, 5 March 1998. Viewed June 30, 2008 http://www.dieselnet.com/news/1998/03ford.php 5 March 1998 Definition: Strategic alliance. Viewed June 30, 2008 http://www.answers.com/%22strategic+alliance%22?cat=biz-fin Read More