Importance of Strategic Alliances in International Business - Assignment Example

 Global management 1. Explain the importance of strategic alliances in international business and the reasons why companies choose this growth strategy International businesses will often seek strategic alliances in order to gain access to technologies, finances, and human capital talent held by the allied partner. As one example, international businesses must operate in diverse cultures that differ significantly from the home country and the partner does not always maintain adequate knowledge about foreign culture to be able to develop appropriate products or services that will be adopted by the new international target markets. Seeking strategic alliances with a partner that currently operates in this foreign country can give the business significant advantages through consultation with management and support staff in the partnered business to help the other partner understand how to effectively market or promote products using cultural connotations localised for the new international markets. As one example, the allied partner might maintain a vast database of knowledge about market preferences and consumer characteristics relevant to the host country that is not currently present in the other partner’s technology support networks. Through the alliance, the company will gain access to this critical data about consumer lifestyle and decision-making associated with purchase intention. Rather than having to go through the process of experiential learning, which might sometimes take months or even years to understand these important consumer characteristics, the alliance provides instant knowledge transfer that can be disseminated throughout the first partner’s organisation. Essentially, sharing this technological database creates instant synergies that can be observed by making rapid brand connections when attempting to launch a new innovation that, without the alliance, might not be sufficient to meet with host culture needs and attitudes. Arnold and Fernie (2000) describe Wal-Mart’s experiences in establishing strategic alliances in order to gain culturally-related knowledge to better serve foreign consumers in the new market environment. When entering Canada, initial market research indicated that both consumers and the labour force did not maintain the same cultural attitudes as the home country (United States) and therefore the business was not prepared with the appropriate marketing strategies or internal organizational culture development necessary to achieve gains in this new country of operations. By seeking alliances with Canadian companies in the retail industry, Wal-Mart learned through consultation with human capital expertise that Canadian consumers and the labour market were much less enthusiastic in the organisational model and, therefore, attempting to establish an internal culture similar to the collectivist philosophy in the United States would be highly irrelevant (Arnold and Fernie 2000). Instead, Wal-Mart executives learned through the allied partner that the most appropriate methodology of business development would be closely aligned with Wal-Mart’s experiences in Britain as Canada shared many of these more socially-reserved characteristics. This particular alliance strategy in Canada provided Wal-Mart with instant knowledge that prepared the organisation to take a much more reserves stance when dealing with customers (using less enthusiastic selling strategies) that gave Wal-Mart a positive brand reputation upon entry in this country. Without the alliance, Wal-Mart may have easily attempted to simply transfer existing organisational culture principles and marketing strategies into Canada which would have left the organisation struggling to gain market share by failing to make important sociological connections with both consumers and internal support staff and management. Buckley and Casson (1996) also argue that strategic alliances have the ability to remove uncertainty and risk upon entering a new international market. One fundamental concern for businesses seeking internationalisation is the risks associated with political trends in the new foreign market. Businesses, alone, do not always maintain adequate knowledge of what drives political systems (to include corruption, taxation structures, or even sociological attitudes) and therefore are unprepared for resistance stemming from political leadership in the host country. By seeking out alliances, a business can explore the pre-existing experiences by the allied partner when working with political leadership in a new country which produces better knowledge. Additionally, the knowledge disseminated from the allied partner could also bring the first partner more advantages, assuming that the second allied partner has already established a very positive sociological relationship with the local or national government. By introducing the allied partner as a trusted resource, it could translate into many political advantages by instilling immediate trust in the second partner built on years of relationship development achieved by the first partner with experience operating in the foreign market. Yet another example of where a strategic alliance is a desired strategy is in the high-cost fashion industry, an industry that is regularly plagued with counterfeiting in an effort to sell knock-off products at a much lower price than the established name brand. A strategic alliance for a company such as Christian Dior, as one example, could give the business much more advantages in reducing the risk of counterfeiting when the allied partner has already established channels or relationships with local authorities designed to identify and prosecute counterfeiting entities. The alliance could, theoretically, share GPS technologies to locate stolen garments, improve relationship development with local policing agencies, or any other opportunistic method of ensuring that knock-off products do not pose profit risk to the business upon entry into a new foreign market. Such an alliance could even share capital resources devoted to consumer promotions about the poor quality of counterfeit products (as one example) therefore reducing the absorbed costs of tackling a disincentive strategy to ensure that high resource consumers are not attracted to knock-off fashion products. In this type of strategic alliance scenario, cost advantages would be a significant synergy achieved whilst also improving risk management through shared interventions. Finally, the alliance provides opportunities to let each partner focus specifically on the competencies and talents that are properly aligned with their most critical, existing advantages. Most companies have a core value or core operational component that distinguishes them from competition in a similar market. When entering a new foreign market, the business must consider a diverse and multi-faceted set of change principles and operational strategies in order to adapt to the host country preferences and sales environments. The alliance can take the burden of having to manage this complex set of business priorities by allowing each partner to develop the talent and resources associated with their core advantages, thus not burdening their business model with too many changes too quickly that cannot always be effectively managed using existing financial and human capital resources. Sometimes it is simply unrealistic to believe that a business will be able to maximise efficiencies in operations, marketing, sales strategy development, technological support team development, and even human resources using existing talent. Therefore, the alliance provides a new basket of support capital, both human and financial, so that it can remain focused on core competencies that have previously led to competitive advantages. The length of the strategic alliance was irrelevant to justifying the rationalisation to seek strategic alliances, as not all markets will provide rapid return on investment and theory dictates that it will take considerable time to gain the knowledge necessary to tackle the new market without the cooperation of the alliance partner. If the business involved in the alliance, from the start, imposes timeline milestones on the alliance, it will be forsaking opportunities to gain more valuable knowledge learned through empirical market experience. Though strategic alliance partners want control over the agreement, duration of the agreement should not be considered an appropriate strategy since market characteristics and practical experience could dictate the necessity for a much longer alliance arrangement until the business is absolutely ready to manage operations and business relationship development on its own. 2. Evaluate the relevance of cross-cultural theories in explaining how to manage companies in different countries. Provide real examples to support your arguments. There are many fundamental differences between the cultures of a home country and the new international market that will impact product development, marketing strategies and even internal organisational culture development that must be considered if the global business is to achieve market success. Leng and Botelho (2010) describe the phenomenon of power distance, a cultural characteristic describing the level to which those with less power in a society are willing to tolerate disparities between higher power-holding members of society. The level to which power distance is tolerated will determine both strategies for organisational culture development as well as labour relationships in human resources in order to motivate employees and establish a cohesive and unified culture necessary to achieve competitive advantages. As one example, when Hilton Hotels decided to enter the Singaporean market after decades of experience serving American tourists, the hotel needed to develop an internal management system that would be aligned with host country cultural characteristics in order to ensure that excellence and quality were achieved outcomes to maintain its positive brand reputation. The Singaporean culture is highly collectivist, meaning that the labour pool strongly values group membership and finds personal identity associated with group opinion and attitude (Hofstede 2001; Hofstede and Hofstede 2010). Hilton could not, in this situation, establish reward systems (as one example) that were effective in the U.S. culture where individual accomplishment met with appropriate remuneration packages for achieving top performance. Instead, the business needed to develop an organisational culture model whereby group and team affiliation served as the foundation for reward in order to motivate the desired level of service needed to maintain its competitive edge and brand stability. Singaporean culture also scores very highly in power distance, meaning that they accept disparity between authority figures and subordinate workers (Boyd 2009). Management at the Hilton Hotels had grown accustomed to creating shared-decision making whereby control was disseminated upwards and employees were allowed to express their own creative solutions in order to provide a more effective service delivery model and improve business competitiveness. In Singapore, these values are not part of the cultural heritage of the labour pool, therefore Hilton had to establish a more controlling and autocratic management system in order to ensure compliance to important service philosophies and regulations. Labourers in Singapore would have minimal respect for a manager that exhibited participative leadership, rather they would respect a management team that is aggressive and decisive which is aligned with long-standing cultural characteristics. Religion, as another cultural difference between host country and home country cultures, can be a significant influencer when determining new product offerings and overall business strategy development. One relevant example of where religion impacted business strategy was when McDonald’s, the multi-national fast food powerhouse, entered Pakistan. In Pakistan, it is absolutely unacceptable to its majority Islamic citizens to consume pork and some beef products. Therefore, McDonald’s had to change its procurement strategies and product development efforts to provide Pakistani citizens with an appropriate menu aligned with their religious beliefs. For a company with a well-established international supply chain network, adaption to local customs and values meant allocating more capital and market research to determine what type of products would be acceptable for this specific faith that dominates Pakistani lifestyle and culture. Without conducting this consumer research and altering supply from international vendors to local vendors, McDonald’s would have been easily driven out of this new market by disgruntled, religious consumers and found no significant increase in international revenues upon entry. Furthermore, McDonald’s also develop partitioned areas in the restaurant that were designed to separate men from women during the dining experience (Crilly 2012), as Pakistan is a highly patriarchical society where women have little freedom of expression. This is not common practice in any of the other international locations where McDonald’s operates and this particular case study illustrates how the business must adapt its operational strategies to fit the customs of the local consumer market. If these partitions had not been created, it could have sent the message that the organisation is not concerned with the male-dominated attitudes of local culture whereby consumers reject McDonald’s for attempting to impose unwanted Western values on its citizenry. This would certainly translate into lost revenues and perhaps even a need for market exit and abandonment costs incurred in the process. No better is the example of cultural influence on business strategy more present than in the case of Unilever’s inability to gain homogenous market response to its artificial spread launched in many European markets with distinctly varied cultural beliefs in healthy foods consumption. Because Unilever could not develop a standardised promotional philosophy for unique market values and consumption preferences, the business was unable to effectively gain market attention. There was universalism present in Unilever’s organisational culture which was reflected when marketing experts seemed baffled by lack of market response in certain countries where the artificial spread was launched. If the business culture had been aligned more effectively with an attitude associated with particularism, it would have had much more diversified promotional strategies in place rather than attempting to homogenise marketing strategies for unique market characteristics. 3. Successful global companies are able to balance needs for global efficiency and local responsiveness”. Discuss Truly global companies often rely on their brand reputations that have been established through years of B2B and B2C relationship development in order to sustain profitability and meet with international market expectations and preferences. When operating in many different markets, the business will desire to maintain its global standing and character whilst also adjusting operations and strategies to meet with local market needs. This is not always an easy process when local culture or practices differ radically from home country needs. One method of maintaining this balance includes expatriate assignment so that management can maintain the values, operations and principles of the global business whilst also working with local talent managers and labourers to give the business a localised advantage. Harzing (2001) describes the responsibilities of an expatriate manager as one that is able to maintain the parent company’s centralisation strategies (including procurement, communications, and even marketing) whilst also being able to bridge the gap between local culture and labourers. In a new foreign environment, managers and employees that are recruited from the local labour pool maintain limited (if any) knowledge of the long-standing global philosophies of the business. Therefore, they are only going to be adaptable to local business practices and host culture customs. Sending expatriate managers to the new host country ensures that the business establishes effective channels of communications between the global headquarters and the local subsidiary, thus ensuring effective knowledge transfer and also establishing global policies and procedures that can be aligned with host country characteristics. As one example, consider a global company, such as Tesco, that must provide products and services that are customised to local country needs, however at the same time Tesco must maintain its global emphasis on quality that it has built over years of dedicated consumer following in many international locations where it operates. As it relates to procurement, the business wants to achieve cost reductions where possible in the supply network that is part of its global focus on establishing a leaner and more efficient supply network. Copacino (1996) iterates that it is necessary to establish strategic alliances along the supply network in order to maximise efficiency and also exploit the resources and talents of many vendors. An expatriate leader understands how to develop business-to-business relationship development and build supplier alliances that produce advantages related to cost, something local managers are unfamiliar with. By sending expatriate managers, they are able to maintain the global focus on procurement cost reductions whilst also teaching the host country managers how to effectively create a vendor relationship management model to ensure efficiencies in local supply when products must be adapted to meet local consumer attitudes and needs. If each subsidiary, as it relates to procurement, were allowed to select their own suppliers, it would defeat the parent company’s intention of maximising efficiency and cost recognition that has given the business important competitive advantages. Some global businesses, also, rely on their organisational culture development as a key, sustainable competitive advantage. One example of this is General Electric, an organisation that is renowned for its dedicated and cohesive culture focused on excellence and innovation through team work and knowledge management systems. Bannon (2001) describes how General Electric utilises this dedicated global culture to improve time-to-market for new product innovation launches by developing a knowledge management framework where tacit and explicit knowledge-holders are able to collectively disseminate information so that all workers can be considered knowledge experts in multiple domains of work and operational practice. GE is positioned on the market according to quality that is founded on these core values associated with cultural mission and vision. Therefore, it is critical that the reputation earned by this company is sustained, even though local subsidiaries must develop innovative products that are aligned with business and consumer markets in unique operating territories. General Electric represents an excellent example where maintaining global business philosophy is critical without negating the local needs of its many diverse buyer segments. Even though there are local customs in the labour pool that will drive human resources policy development to customise such things as reward systems, global managers must reinforce that importance of maintaining its global focus on both quality and corporate social responsibility to ensure it maintains its reputational standing internationally. The establishment of joint ventures also can illustrate maintaining a global focus whilst also catering to local, customised needs. Even though the business has found success by maintaining a global business philosophy, sometimes the organisation simply does not maintain the necessary, internal knowledge of local cultures to successfully blend global strategies with local cultural needs in the new market. In order to adapt to local market needs, it could impose costs that are significantly higher than what has been achieved through established global procurement strategies or distribution processes. Joint ventures allow the global business to share resources, perhaps with a company competing in a new foreign market, to piggyback on existing distribution networks to achieve cost advantages. The business, in this case, would not have to change its global procurement strategy, rather it would be achieving a lower-cost methodology associated with transportation and inventory warehousing costs (holding costs) that give the business its regular and expected global cost advantages. Without sharing these resources, it is possible that the global business would have to establish its own warehousing hub in a foreign market which would raise its operating costs for new facilities management or even impose new costs for new technologies necessary to sustain local customisation practices. The joint venture produces the appropriate synergies that are important to some global businesses as it relates to cost reduction whilst still allowing the company to align investment and expenditures with the expectations of the parent company operating in the home country. In the event that consumer pricing is an issue that leads to competitive advantage, the joint venture and its ability to absorb some costs of establishing new procurement networks would avoid having to raise local product prices, thereby sustaining its reputation as a pricing leader necessary in certain international markets. This is a critical dimension of competitive strategy for a global company that relies on pricing advantages, such as Wal-Mart’s philosophy of everyday low prices, which give the business global consumer appeal. The joint venture ensures that pricing remains aligned with global marketing mix strategies which outperform competitors unable to avoid higher prices to offset rising procurement costs or operational costs. In this case, the business would still be able to cater to local needs due to the cost absorption occurring through the joint venture alliance and never deviating from global pricing strategies. The appropriateness of an equity alliance would not serve to justify the underpinned rationale for pursuing strategic alliances such as what was illustrated in the case of Citibank. There were cultural connotations associated with fairness and humane business practices where Chinese consumers believed Citi was aggressively trying to gain dominance in management control over local businesses. Equity alliances provide a long-term commitment that is contractual, thus much more difficult to terminate in the event that cultural beliefs and values conflict the alliance process. The Citi case illustrates that non-equity alliances impose much less risk when pursuing strategic alliances, giving the partner much more control over the alliance agreement where exit barriers are reduced in the event of failures occurring due to foreign culture influence. References Arnold, S.J. and Fernie, J. (2000). Wal-Mart in Europe: Prospects for the UK, International Marketing Review, 17(4/5), pp.416-432. Bannon, L. (2001, November). New playbook: Taking cues from GE, Mattel’s CEO wants toy maker to grow up. The Wall Street Journal, p.A1. Boyd, M. (2009). Hofstede’s cultural attitudes research – cultural dimensions, Global Human Resource Management, p.4 [online] Available at: http://www.boydassociates.net/Stonehill/Global/hofstede-plus.pdf (accessed 30 January 2013). Buckley, P. and Casson, M. (1996). An economic model of international joint venture strategy, Journal of International Business Studies, Special Issue, pp.849-876. Copacino, W.C. (1996). Seven supply chain principles, TraBc Management, 35(1), p.60. Crilly, R. (2012). Pakistan McDonald’s in trouble for enforcing its own moral code, The Telegraph. [online] Available at: http://www.businessinsider.com/pakistan-mcdonalds-in-trouble-for-enforcing-its-own-moral-code-2012-9 (accessed 29 January 2013). Harzing, A.W. (2001). Of bears, bees and spiders: The role of expatriates in controlling foreign subsidiaries, Journal of World Business, 26(Spring), pp.366-379. Hofstede, G. (2001). Culture’s Consequences: Comparing values, behaviours, institutions and organisations across nations, 2nd ed. Thousand Oaks: Sage Publications. Hofstede, G., Hofstede, G.J. and Minkov, M. (2010). Cultures and Organisations: Software of the Mind, 3rd ed. UK: McGraw-Hill. Leng, C. and Botelho, D. (2010). How does national culture impact on consumers’ decision-making styles? A cross-cultural study in Brazil, the United States and Japan, Curitiba Brazilian Administration Review, 7(3), pp.260-275. 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