Role of Strategic Alliances in Internationalization Process - Coursework Example

Role of Strategic Alliances in Internationalization Process Name: Course: Institution: Tutor: Role of Strategic Alliances in Internationalization Process Executive Summary The past few decades have witnessed acceleration of globalization and increased activity of foreign investments. Besides the traditional forms of export and foreign direct investment, it has become common for firms to use cross-border acquisitions and mergers to form strategic alliances in order to assert market positions in the international arena. This paper reviews the role of cross-border alliances in the internationalization process and the factors that contribute to failure or success of the valuable alliances. The paper has reviewed a case study of a failed cross border alliance and another case of a successful alliance. The paper finds that cross-border alliances fail because firms fail to develop common strategic infrastructures for harnessing the synergies offered by the partnerships. If successful, cross border alliances are a sure way to gain a commanding market share. The paper recommends that firms in strategic alliances should execute strategies jointly and develop appropriate mechanism for communicating and sharing important information with each other. Table of Contents Name: 1 Course: 1 Institution: 1 Tutor: 1 Executive Summary 2 Table of Contents 3 Introduction 4 Importance of Cross-Border Strategic Alliances in the Internationalization Process 5 Common Pitfalls in Strategic Alliances 7 Successful International Strategic Alliance: Case Study of the Mazda-Ford Alliance 9 Failed Case of International Strategic Alliance: Daimler-Chrysler Alliance 10 Conclusions/Recommendations 13 Introduction OECD has defined cross-border alliances (also called international strategic alliances) as a form of strategic partnership formed between two or more firms from different countries for the sole purpose of pursuing mutual interests through sharing resources and capabilities (OECD 2000, 34). The individual firms that enter into strategic alliance do not operate in direct competition but have similar products and services, which are directed towards same target market. Cross-border alliances are inevitable in the modern business world and provide flexibility to companies. The alliances help firms seal gaps between present and future resource requirement. Formation of strategic cross-border alliances brings competitive advantages to business in terms of risk reduction, increased access to new technologies and low cost resources. In the last few years, there has been a steady explosion of strategic alliances across industries. Some of these alliances include: i. In an effort to establish a leading market presence in Japan and Europe, Nasqad entered into agreements with SSI Technologies to develop an internet-based marketing system. The joint venture led to successful launch of Nasqad Europe and Nasqad Japan (OECD 2000, 34). ii. The Star Alliance is the largest partnership in the air travel industry in the world. The alliance’s reach extends to more than 130 countries and more than 800 destinations. iii. In 2001, Coca Cola and Procter and Gamble (P&G) announced a multi-billion joint venture deal to use Coca Coal’s extensive distribution system to market P&G’s products and reduce distribution time (OECD 2000, 37). iv. Technology giant Hewlett-Packard and NTT DoCoMo signed a strategic partnership deal to conduct joint research and develop programs for fourth generation cell phones. The partnership brought together DoCoMo’s broadband technology and HP’s well established network infrastructure. Several other technology companies have formed strategic alliances to take advantage of the partner’s more established distribution channels, distribution systems, brand reputation and reduced market competition. Other companies enter into alliances because of reasons such as cost reduction, geographic expansion and supply-chain synergies. Importance of Cross-Border Strategic Alliances in the Internationalization Process In the international competition-paced world of business, strategic alliances are a way to gain access to partner firm’s strategic resources including technologies, people, capital and market. Ahuja has asserted in his article that teaming up with others not only adds complementary production and marketing capabilities, but also gives opportunities for partnering firms to expand more rapidly and efficiently (Ahuja 2000, 320). It is for this reason that newly established and fast growing companies rely on alliances to extend operational and technical resources. This way, they save time and boost market presence by not having to develop their own strategies from the scratch. Hence firms get the freedom to concentrate on innovation and other core aspects. Firms have recognized that both cooperation and competition are necessary to ensure optimal and innovation- led survival and growth. Strategic alliances in the international scale are one of the most powerful and innovative mechanisms that combines competition and co-operation for industrial restructuring in the global stage. Unlike other forms of internationalization such as foreign direct investment, cross-border strategic alliances provide companies with the necessary strategic flexibility to respond to the threat of new competitors and changing market conditions (Ahuja 2000, 323). While these alliances are motivated by a wide range of factors, they achieve similar objectives and help increase the partnering firms’ organizational and financial performance (Ahuja 2000, 328). In high technology industries such as telecommunication and pharmaceuticals, high research costs coupled with time lags to commercialization are key factors behind formation of strategic partnerships. Cross border alliances have proved successful, influential and valuable in the telecommunication and related industries where they have been directed to development of new products and production standards. In the automobile manufacturing industries, strategic alliances have helped firms achieve economies of scale in production and distribution of products. In service-oriented industries such as airlines, strategic alliances have led to sharing of sales and distribution outlets. In all these cases, international strategic alliances have been motivated by the economic opportunities of the global markets and the need to reduce the high costs of keeping up with fast-changing business technologies (Schumacher 2006, 267). Despite the many benefits associated with cross border-alliances, such collaborations can have negative efficiency impacts on collaborating firms and on other firms, as well as consumers and the society in general. In many cases, cross border alliances involve substantial amount of risks because their successful implementation is beyond the control of any single party and the objectives of partners may not be compatible (Ahuja 2000, 331). Unsuccessful alliances can be wastage of finances, management efforts, skills and foregone technological opportunities. Failure of an alliance may mean that smaller partners are swept aside and may not be able to regain their former positions. Losses to consumers may occur if the alliance fails to promote its products in the global markets. Kauser and Shaw (2004, 33) has cautioned that the increasing scale, pace and complexity of strategic alliances at the international level raises concerns for policy makers. Efficiency gains in strategic alliances derive from synergy effects among firms that are able to operate at arm’s length (Schumacher 2006, 263). Numerous research studies point to the positive effects of strategic alliances in terms of profitability and firm performance as well as social welfare. However, there are possibilities of anti-competitive effects in case strategic alliances bring together leading competitors in the market. In addition, firm-level benefits may vary among firms in the alliance since larger partners will naturally derive more of the profits than the smaller partners. A range of barriers such as resource and information gaps may hinder smaller firms from participating in the alliance in the same capacity as larger firms. There is, thus, need for researches to reflect on whether strategic alliances are viable from both the enterprise and social perspectives, and what policies should be implemented to realize the possible gains and minimize social costs (Lajara, Lillo, and Sempere 2003, 82). Common Pitfalls in Strategic Alliances Cross-border alliances are often vulnerable to numerous pitfalls some of which lead to dissolution of the alliances in the long run. Some of these pitfalls are discussed below: i. Majority of firms which enter into strategic alliances fail to develop appropriate strategy objectives for addressing gaps in marketing strategies. As a consequence, the alliances end up underperforming (Lajara, Lillo, and Sempere 2003, 82). ii. Some organizations fail to develop explicit and joint strategies with their partners. As a result, the firm with commanding direction leads the alliance while the other partner follows the leading partner’s strategy and fails to realize the full benefits of the strategy. iii. More often than not, more attention is paid to the financial aspects of the alliance at the expense of strategy and implementation. This compromises the ability of the alliance to compete successfully (Lajara, Lillo, and Sempere 2003, 85). iv. Lack of on-going commitment to the alliance by either partner may derail successful implementation of the partnership process. Example includes failure to mobilize the right amount of resources. v. Lack of meaningful metrics for determining success is a common challenge in cross alliances. vi. Partners in a cross border alliance relationship may lose confidence in each other’s capabilities and in managing multiple relationships. This occurs when there are various alliances in various parts of an organization. For instance, one of the partners can be a supplier of the other partner and this may complicate the relationship. Despite the above pitfalls, organizations will have to continue forming alliances or risk perishing due to competition and scarcity of resources. The risks posed by the above pitfalls can be mitigated by developing organizational competence guidelines in the strategic alliances. Bamford, Ernst and Fubini (2004, 47) have noted that failure by partnering firms to explore legal and financial implications jointly before forming an alliance is a serious impediment to successful implementation of cross border alliances. Evaluation of legal implications is important as it not only ensures protection of the fundamental integrity of the partnership but also helps work out crucial obligations and entitlements such as trademarks, copyrights, taxes, patents and exchange and anti-trust controls. It is also important for the partnering firms to be aware of the host country’s economic and political stability, as this will have compelling impact on the success of the alliance. The joint venture should be able to assess the host country’s current and future investment climate and make an analysis of future growth trends. Maintaining good relationship between the partners will ensure plenty of opportunities for the partners to continue working together (Bamford, Ernst and Fubini 2004, 51). Successful International Strategic Alliance: Case Study of the Mazda-Ford Alliance Japan’s Mazda Motor Corporation and America’s Ford Motor Company have in the past established one of the best and most successful cross-border alliances in the automobile industry. The alliance was launched at a time when Mazda was experiencing financial problems and Ford came in as a rescue. The alliance has lasted for several years during which period, the two partners have conducted joint ventures in the development of world-famous automobile models. Ford developed interests in forming an alliance with Mazda in the 1960s. At that time, Mazda was the third largest automobile manufacturer in Japan and had an outstanding reputation of engineering excellence (Humphrey, Leder and Salerno 2000, 121). Instead of competing head-on with the Japanese automobile manufacturer, Ford opted to enter into strategic alliance with Mazda as a source from where to learn new and efficient production technologies in order to make a develop a competitive product. On the other hand, Mazda capitalized on the alliance with Ford to access new markets in North America and to learn more about the American company’s cost-control production. Mazda’s other objective of entering into the alliance was to get opportunities for exploring the prospects of establishing a major manufacturing facility in the US and Canada (Humphrey, Leder and Salerno 2000, 121). At the time when the alliance was formed, Mazda assumed the role of supplying unassembled automotive parts, which the Ford Company assembled and sold under its name in various pacific countries. During the 1970s, there were economic turbulences occasioned by oil crises. The crises severely affected the strategic relations of the two companies. Nevertheless, Ford reconsidered the advantages of the alliance and attained 25% ownership equity in Mazda in 1979 (Humphrey, Leder and Salerno 2000, 122). This initiative was the starting point of one of the most successful alliances in the world up to date. The terms of collaboration after the acquisition included the supply of manual and automatic transaxles by Mazda for Ford cars. Mazda was also obliged to establish a network through which Ford could sell its re-stylized Mazda cars. This move established Ford as the largest seller of American automobiles in Japan. The success of the two companies was enhanced mainly through equal commitment by both firms. The two companies operated an alliance based on open communication, cooperation and mutual respect rather than one company exercising control over the other. In addition, the two partners have been dependent on each other’s negotiation skills and this has enabled both companies to gain equal benefits from the alliance (Humphrey, Leder and Salerno 2000, 124). Failed Case of International Strategic Alliance: Daimler-Chrysler Alliance In 1926, the merger of two Germany auto manufacturers, Daimler Motor Company and Benz & Co. led to the formation of Daimler-Benz Company. The new company manufactured the famed Mercedes cars, which were the best example of Germany’s automotive quality and engineering. In 1998, Daimler-Benz entered into a strategic partnership with the United States’ Chrysler Corporation (Hyun 2005, 50). The two, global leading auto manufacturers agreed to combine efforts in what was perceived to be a merger of two equals. The merged entity was ranked third largest in the global automotive industry in terms of market capitalization, revenues and earnings. Its main competitors were Ford and General Motors. A few years later, the joint venture began to incur huge losses which could not sustain the strategic objectives of the alliance. In particular, the company suffered third quarter losses of more than half a billion US dollars in 2000. In 2001, the merged company announced its intentions to slash more than 26,000 jobs at the ailing Chrysler division (Hyun 2005, 50). In the subsequent years, the merger sustained more losses and in 2007, Daimler-Benz sold 80% of its stake in Chrysler to a private equity firm. This strategic move ended the short lived strategic alliance and Daimler-Benz embarked on the production of its luxury Mercedes cars and the track business (Hyun 2005, 48). Although strategic, the merger made no good business for either party. The alliance failed largely due to incompatibility of cultures and management styles, which hindered effective realization and utilization of synergies. Daimler-Benz insisted on managing the alliance in the same manner as it could manage its Germany operations. While Daimler-Benz valued decentralized decision making and hierarchy, Chrysler advocated for valued efficiency and equal empowerment. The apparent differences in organizational management approach spelt the end of what could have otherwise become the greatest and most successful cross-border alliance in the world (Hyun 2005, 50). Future Role of Strategic Cross-Border Alliances in Internationalization Cross-border alliances have become increasingly strategic and remain to be the only success factor for the future of many companies across industries. The era of 1970s was characterised by product performance efforts during which alliances were primarily focused at getting access to the latest technologies and establishing presence in international markets. Later on, the emphasis of strategic alliances shifted to positional strategies. More and more companies sought to consolidate market positions and gain economies of scale. These objectives having been realized, the current emphasis of strategic alliances is on building capabilities. Modern trends in cross border alliances show that industry lines are increasingly becoming blurred as market become global. In the newly established globally competitive arena, assets and geographical positioning are not enough and as such, new capabilities are necessary for businesses to succeed. According to Collins and Hitt (2006, 150), three important forces will shape the future of cross-border strategic alliances and value delivery: i. Globalization of markets: In almost all countries, there is no industry that is dominated by local competition. Globalization has developed new opportunities for foreign direct investments and as a result, companies are entering into strategic alliances to take advantage of the opportunities presented by this phenomenon. ii. The increasing blurring of industry boundaries. This has driven firms to converge rapidly. iii. Scarcity of resources and increasing competition. Most research studies on the future of strategic alliances point to increased efficiency in service delivery. In general, cross border alliances will be valuable tools for providing firm-level benefits to companies as well as social benefits by raising innovativeness, efficiency and firm level welfare. In his book Bamford, Ernst & Fubini (2004, 44) have asserted that cross border alliances will be crucial in developing complementary inputs and stimulating innovative activities that will ultimately lead to development of new technologies and products. There are many benefits that firms stand to gain by entering into strategic alliances. These include cost-economizing in research and development activities and access to intangible resources such as increased access to enhanced managerial skills and increased knowledge of customers and markets. Companies that manage to acquire technological advantages through alliances and cooperation in research and development programs will inevitably enjoy higher profits and hence ensure higher chances of survival in the long run (Bamford, Ernst & Fubini 2004, 44). Collins and Hitt (2006, 150), have explained that firm-level efficiencies gained through cross-border alliances will prompt increased consumer and social benefits besides stimulating development in countries where allied firms operate. Undoubtedly, alliances will help revitalize local economies and ailing firms by creating jobs through technology transfer and economies of scale. International strategic alliances will be most welcome in the pharmaceutical industry where they will help accelerate development of critical medicines and treatment processes. This will in turn raise social welfare by providing patients with better choices of drugs at low prices. Parise and Henderson (2001, 910) have noted that future cross-border alliances will not necessarily be limited to firms within the same industry but will rather occur between firms in different industries and of varying financial sizes. Conclusions/Recommendations Researches (Haque, Green & Keogh 2004, 47) have shown that about two-thirds of cross-border strategic alliances fail to realize anticipated long-term objectives. The high rate of failures in these kinds of alliances can be attributed to differences in organizational culture as well as management styles. Bierly and Gallagher (2007) have explained in his book that strategic alliances fail because businesses enter into alliances with partners who share divergent organizational philosophies and strategic objectives. It is therefore imperative for firms to identify the right partner, through whom they can realize the intended goals. Parties in the alliance should work in a mutually beneficial and open manner and share relevant information with each other. This can be beneficial in enhancing communication and decision making. Parise and Henderson (2001, 910) have explained that when forming international strategic alliances, it is recommendable for the parties to negotiate deals which provide for risk and benefit analysis. Risk-benefit analysis forms the basis for developing appropriate business processes, structures, approaches, metrics and commitments that make the alliance work. The allied firm should be free to change strategies as often as necessary to keep pace with changing market demands. It is pertinent that the parties the alliance exhibit high levels of respect for one another as regards decision-making. In addition, the individual firms should create an atmosphere of mutual and flexible commitment to realization of strategic long-term objectives. Risk mitigation is a crucial requirement in cross border alliances and is a necessary component of success in international business. To attain the greatest chances of success, partnering firms should develop a highly disciplined and structured alliance process that foresees risks and takes necessary steps to avoid the risks. It is also necessary for the firms in the alliance to execute joint research initiatives Bierly and Gallagher (2007). It has been realized that managers in strategic alliances commit most of their focus on business integration and in the process fail to manage human integration. Human actions are necessary to effect a successful international strategic alliance. In view of this consideration, companies in the alliance should foster a work environment which promotes job satisfaction and diversity management. 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