Multilateral Alliances as Consequences of Globalization - Coursework Example

Global multilateral alliances Introduction Globalization has brought many changes in the business world. Outsourcing and offshoring of businesses is the by-products of globalization. It is impossible to do business using the domestic resources and depending on the domestic business climate alone, in the current globalized business environment. It is possible that something happening in the American continent may affect the Asians and Africans as well. For example, the recent global financial crisis started in America, but it affected almost the entire world because of the importance of American economy in shaping the world economy. Multilateral alliances are another contribution of globalization. Multilateral alliance is the alliances among multiple autonomous firms, which collaborate among themselves and compete against other groups of firms for both clients and members (Lazzarini, 2008, p.20). Internationalization of business forced organizations to engage in multilateral business alliances for mutual benefits. It is difficult for a firm to operate in another country without seeking assistance or alliance from a domestic firm in that country. Only the domestic firms will have better ides about the business climate, legal requirements, social and cultural setups, political and religious orientations etc which they will transfer to the other firm in alliance for mutual cooperation and benefits. Vivio (2004) has mentioned that strategic alliances have become a key source of competitive advantage for firms and have allowed them to cope with increasing organizational and technological complexities that have emerged in the global market. Moreover, these alliances create benefits and cost and to ensure a successful alliance firms employ alliance strategies (Vivio, 2004, p.3). This paper briefly analyses the multilateral business alliances. Necessity of Multilateral alliances Vivio (2004) has mentioned that strategic alliances allow firms to cope with increasing organizational and technological complexities that have emerged in the global market and such alliances are a source of competitive advantage (Vivio, 2004, p.2).It is impossible for a firm to compete effectively in the global market if it operate alone. For example, Maruti is an Indian automobile manufacturer holding the number one spot in the Indian market whereas Suzuki is one of the prominent automobile manufacturers in Japan. When Suzuki entered the Indian market they formed a multilateral alliance with Maruti to compete effectively in the market. The outcome is well known now. Maruti-Suzuki became the number one passenger car maker in India at present. No other major automobile manufactures were able to compete effectively with Maruti-Suzuki now. Strategic competitiveness is achieved when a firm successfully formulates and implements a value creating strategy (Hitt et al, 2010, p.4). TATA the major competitor of Maruti in Indian market has realized the above fact they also formed collaboration with Fiat recently in India in order to compete more effectively with Maruti. Taking cues from Maruti Suzuki, Tata and Fiat plan to launch multiple brands under their Joint Venture. This move has been inspired from Suzuki’s strategy to launch Wagon-R and Alto in the same segment as Zen and hence giving people wider choices. Following suit, Palio will be seen competing with Indica and the soon-to-be-launched Grande Punto, just like Linea will hustle along with Indigo (Tata-Fiat collaboration to follow the Maruti-Suzuki example to capture market, 2008) The above examples clearly show the importance of multilateral alliances in the current business environment. Multilateral collaboration helps the organizations in exchanging and developing new technologies suitable for the country of operation. For example, Suzuki and Fiat have the superior technology than Maruti and TATA. But Indian conditions and requirements are well known to Maruti and TATA than Suzuki and Fiat. So it is essential for Suzuki and Fiat to seek alliances with these Indian companies for their business growths in India. In order to establish in a country, organizations should have better knowledge about the legal, political, social, economical and religious aspects of the country. For example, India is a different country for Japan and Italy and the business concepts, organizational culture, behaviour, and environment in India should be entirely different from that of Japan and Italy. Suzuki and Fiat need to know the changes of India with respect to Japan and Italy in order to formulate right strategies for their business in Indian subcontinent. Multilateral alliances are essential for them to know all the peculiarities of Indian market. Human resource (HR) Management is one of the critical aspects in global business environment. HR department is responsible for the effective utilization of the manpower resources in an organization. Moreover, HR department is responsible for the proper training of the hired people. If the HRM strategies may not implemented properly, it is not possible for an organization to excel in their business endeavours in an overseas country. Multilateral alliances with Maruti and TATA will help Suzuki and Fiat like organizations to relieve from the headaches of HR management in Indian conditions. Another important aspect of multilateral alliance is that it is quiet possible that two organizations cooperate in one business segment while competing in another segment. Under such circumstances, the managers of both the firms will take extreme care while formulating their business strategies. For example, as mentioned earlier, Fiat has an alliance with TATA in selling and servicing their vehicles in Indian market. TATA has much superior supplier and service facility in India compared to Fiat and TATA agreed to sell and service the Fiat vehicles through their outlets in India because of their mutual business alliances across Europe for selling and servicing TATA vehicles there. It should be remembered that TATA is a key competitor for Fiat cars in India. But their competition would be on healthy grounds and it will not affect their alliances in India and abroad. Both the parties realised that it is important to keep such an alliance in order to get mutual benefits. Fiat would get benefit out or their Indian alliance with TATA whereas TATA get benefit from their European alliance with Fiat. Thus, both the parties will look for the overall benefits rather than the regional benefits while framing a multilateral alliance. The PowerPC alliance between Apple, IBM, and Motorola in the early 1990s is mentioned by Casseres, (2006) as another example for competition between firms in alliance. This alliance was intended to reduce operating-system rivalry between Apple and IBM as well as microprocessor rivalry between IBM and Motorola. But the U.S. Justice Department did not challenge this alliance, because in effect it aimed to create a stronger rival to the market leaders, Intel and Microsoft. At the level of the Apple-IBM Motorola alliance, competition was suppressed; but at the level of the battle between PowerPC and Wintel, competition was enhanced (Casseres, 2006, p.43) From both the examples mentioned above, it is clear that it is possible for firms to cooperate in one business segment while competing in other segments. Classification of Multilateral alliances Vivio, (2004) has classified multilateral alliances into different categories based on the nature and functioning of the alliances; Direct equity investment, Non-equity cooperative R&D agreements between firms in selected areas, Technology exchanges (mutual), Joint ventures, Research contracts, Customer-supplier agreements etc are some of them (Vivio, 2004) Direct equity investment This type of alliance is a kind of strategic investment made by one big firm in a smaller high technology firms. It is quiet possible that a large firm might have superior financial abilities and a small firm may have superior technology. Under such circumstances the large firm forms a strategic alliance with the small firm for the mutual benefit. For example, Sony Corporation is one of the biggest organizations in the world and Ericson is comparatively a smaller firm. When Sony decided to enter the mobile phone manufacturing market, they decided to establish a multilateral alliance with Ericson and currently Sony Ericson mobiles are popular in the market. Sony was able to assist Ericson financially for the R & D and the marketing activities of their mobile phones across the world. It is an accepted fact that Sony has superior supply network and Ericson with used this supply network effectively to sell their products across the world under the brand name Sony-Ericson. In direct equity investment alliance, both recognizes its own strength and weakness and the benefits of their relationship. The small firm wants only the financial and nonfinancial assistance, from the big firm and they will always like to retain their maximum independence. On the other hand, the big firm always look for more control over the small firm in this type of alliances. Non-equity cooperative R&D agreements between firms in selected areas These types of alliances are meant for a limited period of time for the development of a specific product or service. It is also referred as asymmetric new product development alliance. For example, (Kalaignanam et al, n. d) has mentioned that Microsoft has made a technological alliance of the above type with Wang Laboratories for the development and marketing of Windows NT versions of imaging and workflow server products (Kalaignanam et al, n. d, p.32). Even though Microsoft is believed to be the masters in the software industry, they are not so in the networking department. They forced to make an alliance with Wang Laboratories in order to develop their Windows NT versions more effectively. Microsoft - Wang Laboratories alliances were only for the development of the Windows NT product. Once the product was successfully developed, this alliance will automatically end. The larger firm, in this case Microsoft, will get greater material gains whereas the smaller firm, in this case Wang Laboratories, will get only a smaller portion of the material gain. At the same time the tie up with a larger firm will definitely improve the image of the smaller firms and they will be benefitted from such polished images, in their future endeavors of business. Technology exchanges This type of multilateral alliances is normally non equity-based agreements to share technology. For example, famous Indian tire manufacturing company MRF has technological alliances with with B.F. Goodrich Co., U.S.A.(MRF, n. d). Goodrich has nothing to do with the business activities or profit and loss of the MRF Company under this type of collaboration. They are providing only the technology to make high quality tires in Indian conditions. MRF ha all the other resources for excelling in the tire industry, but they lack the superiority in technology which they are hiring from Goodrich under this alliance. Such technological alliances will help MRF to reduce their Research and Development (R & D) costs and they can concentrate mainly on their business rather than developing new technologies. Joint ventures Joint ventures are one of the common ways of multilateral alliances visible everywhere. In this type of alliance, equity-based agreements between firms help them to establish a new firm. Joint ventures can occur at all the segments of business like, manufacturing, marketing, supply chain etc. For example, Wal-Mart even though was an international business giant; they made a multilateral alliance with Bharti Enterprises, India when they started their operation in India. Wal-Mart is known worldwide for its large retail stores with low prices on popular consumer products. However, that paradigm would not work in India due to strict government non-competing laws on foreign businesses. Therefore, a new wholesale business paradigm was designed to help Wal-Mart play into the non-retail sector of India's business economy (Fea, 2010) Considering the size or business volume, Bharti Enterprises is nothing in front of Wal-Mart. The only thing in which Bharti Enterprises have edge over Wal-Mart is their superior awareness about the Indian business climate, the much needed entity for doing business anywhere in the world. Wal-Mart being an international business player knows the importance of awareness of local business climate in leading the business to a success, made the multilateral alliance (Joint Venture) with Bharti Enterprises for their operation in India. Under this agreement, Wal-Mart will provide all the resources needed to do business in India and in return, Bharti Enterprises utilizes the supplied resources from Wal-Mart judiciously for the mutual benefit. Customer-supplier agreements Customer supplier agreement is another form of multilateral alliances. This type of alliances, include, production, development of products and other contractual services. Wipro Limited, one of the major players in IT industry, is one of the best examples of companies which engage in this type of alliances globally. Vivio, (2004) has mentioned that majority of Wipro’s alliances focus on non-R&D contractual services that are related to software installation, marketing, and technical support or joint development agreements that focus on developing new computer applications (Vivio, 2004, p.4). Earlier, Wipro was more interested in joint ventures in overseas countries. But later they realized that customer-supplier agreements like alliances are more effective and beneficial for them in international businesses compared the joint ventures. Wipro is trying to increase their business in India through domestic partnerships. The widespread network of Wipro in India will attract the American IT giants to take more interests in tying up their operations in India with Wipro. Wipro’s strategy is to force other companies to make ties with them. They never take active steps in making joint ventures with other companies. This strategy is aimed at increasing the bargaining power of Wipro in negotiations with the other companies. Other companies who come forward to make ties with Wipro will be forced to sacrifice some of their business interests in negotiations with Wipro because of their reluctance in making joint venture like equally benefitted business alliances. This strategy helped Wipro to make more out of an alliance. Advantages and disadvantages of multilateral alliances Improved Cash Flow, Reduced Overhead, Improved Access to Capital, Obtain Capital, Credibility, Access to Facilities and Technology, Access to Expertise, Ability to Keep the Company Small, More Products to Sell, Innovative Products, Creative People, Speed and Flexibility in Delivering New Products, Ability to Hedge Your Own R&D Effort, Less Costly than Buying a Company, Cost Savings, Product Distribution, Diversification into New Markets, Manufacturing Capability, Reduced Risk, Knowledge and Know-how, Avoid Need to Reinvent What Has Been Invented Elsewhere, The Shoring up of Weak Areas in the Company, Strengthened Relationships with Key Suppliers or Customers, Ability to Move Quickly, Ability to Stay Focused on Core Competence etc are the major benefits of multilateral alliances whereas Sharing of Future Profits, Foreclosure of Other Opportunities, Barriers to Future Financing, Opportunities, Distractions, Creating a Competitor or a Potential Competitor, Unexpected Disappointments and Headaches from Your Partner etc are some of the disadvantages (The Advantages and Disadvantages of Partnering and Alliances, n. d) Conclusions Multilateral alliances are common in the current business world. Even big business tycoons forced to make alliances with small firms for their international operations. Globalization has opened the doors widely for the business people and international business is a common thing nowadays. In order to successfully manage international business, an organization should have better knowledge about the business climate in the target country. Such business climates analysis can be made only with the help of a domestic partner in the target country. Multilateral alliances are occurring in many forms like Direct equity investment, Non-equity cooperative R&D agreements between firms in selected areas, Technology exchanges (mutual), Joint ventures, Research contracts, Customer-supplier agreements etc. Each alliance strategy has its own merits and demerits. It is quiet possible that a firm reap more profit out of an alliance. But in any case, it is difficult for an organization to enter another country without seeking assistance from a local firm in the target country. References 1. Casseres, B.G. (2006), How Alliances Reshape Competition, Retrieved on 01 May 2010 from http://www.alliancestrategy.com/PDFs/BGC%20ReshapeCompetition%20Handbook06.pdf 2. Fea C (2010), Follow Wal-Mart's Joint Venture Example, Retrieved on 01 May 2010 from http://ezinearticles.com/?Follow-Wal-Marts-Joint-Venture-Example&id=3662900 3. Hitt M.A., Michael A. Hitt (Author) › Visit Amazon's Michael A. Hitt Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central Ireland R. DR. Duane Ireland (Author) › Visit Amazon's R. Duane Ireland Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central 1. & Hoskisson R.E (2010), Strategic Management: Concepts and Cases: Competitiveness and Globalization, Publisher: South-Western College Pub; 9 edition (January 1, 2010) 4. Kalaignanam K, Shankar V, & Varadarajan R.P (n. d), Asymmetric New Product Development Alliance: Are the Gains Symmetric Across the Partners? Retrieved on 01 May 2010 from http://www.zibs.com/techreports/Asymmetric%20New%20Product%20Development%20Alliance.pdf 5. Lazzarini S.G. (2008), The Transition from Alliance Networks to Multilateral Alliances in the Global Airline Industry, Retrieved on 01 May 2010 from http://www.anpad.org.br/periodicos/arq_pdf/a_728.pdf 6. MRF, (n. d), Retrieved on 01 May 2010 from http://www.moneycontrol.com/company-facts/mrf/history/MRF 7. Tata-Fiat collaboration to follow the Maruti-Suzuki example to capture market (n.d), Retrieved on 1 May 2010 from http://www.driveinside.com/news/headlines/post-details.aspx?headlineid=5MLU3Y 8. The Advantages and Disadvantages of Partnering and Alliances (n. d), Retrieved on 01 May 2010 from http://www.corporate-partnering.com/info/strategic-alliances-advantages-and-disadvantages.htm 9. Vivio N. J. (2004),Alliance Strategies: Case Studies, Retrieved on 01 May 2010 from http://gstudynet.org/publications/OPS/papers/CSGOP-04-29.pdf Read More