The Concept of Strategic Alliances - Coursework Example

Strategic Alliances College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Introduction Strategic alliances basically started as joint ventures primarily aimed at enabling the exploitation of natural resources. Within the past three decades strategic alliances have experienced a very high rate of formation. Today, they have taken many other forms amid increased competition and globalisation resulting in a shift in the motives for their formation. Globalisation has pushed the momentum for business strategic alliances worldwide for several reasons ranging from market entry to reduction of risk amid swelling uncertainty and intricacy in the business environment. Strategic alliances advanced and spread in form of formal inter-organisational dealings, predominantly involving companies in international business systems. The aim of these cooperative arrangements is to accomplish organisational objectives better through partnership than through competition, even though they have their challenges and failures as well. Strategic alliances have grown to become important forms of business activity in numerous industries, for the most part in view of the insight that companies are competing on an international field. In this paper I discuss whether strategic alliances are cooperative agreements between actual or potential competitors as postulated by Hill (2007, p.301) detailing their success or failure and providing illustrative examples. Strategic Alliances The concept of strategic alliances means different things to different individuals, and for this reason, the term has attracted altered definitions from different authors. In this paper I adopt quite a few definitions that refer to the concept of strategic alliances as cooperative agreements: Parkhe (1993, p. 794) defines strategic alliances as "fairly enduring inter-firm cooperative arrangements, that involve flows and linkages that employ resources and/or governance structures from independent organisations, for the joint achievement of individual goals connected to the corporate mission of each one sponsoring firm.” Varadarajan and Cunningham (1995, p. 282) describe strategic alliances as "the merging of particular resources and skills by the cooperating organisations with an intention to realise joint goals, as well as goals specific to the separate partners". Sporleder (1993) view strategic alliances as agreements flanked by firms to cooperate with a determination to realise some strategic drive. Dussauge and Garrette (1995) give a more comprehensive definition. They describe strategic alliances as cooperative agreements or relationships involving two or more independent firms, which will manage one definite project, with a determined spell, for which they will be together in order to expand their competencies. Strategic alliances are created to sanction the partners to pool resources and synchronise efforts in order to accomplish results that neither could attain individually. The key parameters adjoining strategic alliances are resourcefulness, need and speed. In a strategic alliance, the partnering firms: (1) stay officially autonomous after the alliance is shaped; (2) share benefits and administrative control over the feat of apportioned tasks; and (3) make constant influences in one or more strategic areas, such as technology or products (Yoshino & Rangan, 1995, p.5). These three gages suggest that strategic alliances generate interdependence among independent economic units, getting new-fangled benefits to the partners in form of intangible assets, and requiring them to make lasting assistances to their corporation. Strategic alliances could either be formed vertically (vertical alliances) or horizontally (horizontal alliances). Vertical alliances involve two or more firms in an industry at different stages of production, whereas horizontal alliances involve two or more firms at the same stage of production. For the most part, partners in vertical alliances are likely to be stakeholders and not shareholders. Also, there are different forms of strategic alliances that characterise different tactics that the partnering firms embrace in order to regulate their reliance on the alliance and on other partners. Isorait (2009) identifies different forms of strategic alliances. These include: (1) Joint Ventures that are an agreement by two or more partners to form one entity to embark on a certain task and can involve research and development, (2) Outsourcing, which has gained much prominence, (3) Affiliate Marketing that has burst out over recent years, with the most prosperous online retailers, such as Amazon, expending it to great effect, (4) Technology or Product Licensing, which involves a contractual arrangement whereby trademarks, intellectual properties as well as trade secrets are licensed to another firm or to sell certain products or services. Strategic Alliances as Cooperative Agreements The bent on strategic alliances is not that a product will be substituted but rather that each one partner in the alliance will realise greater benefits arising from that cooperation. There are different motives that drive these cooperative agreements. One motive is the minimisation of costs. In particular, economists argue that strategic alliances are transitional hybrid forms between the limits of markets and the chain of command. In forming the alliance, firms select different arrangements that reduce the total production and transaction costs. Therefore, the cost minimisation motive envisages that strategic alliances are intended to realise a minimum cost arrangement. The alliance would not just be reactive in reducing the costs, it is proactive seeing as it may result in the creation of new products, new organisations, new markets, new management concepts, and new technology that would otherwise not be created. The organisation theory approach, in particular the resource dependency motive also drives organisations to form strategic alliances. The resource dependence motive is where partner organisations depend on each other within their business environment to obtain required sources. For instance, joint ventures help to stabilise the flow of resources that a firm requires and for dropping the uncertainty provoked by the firm. Strategic alliances are also a form of business strategy. Porter (1986) argued that strategic alliances are formed on the basis of five forces; threat of new entrants, threat of substitute products, bargaining power of suppliers, bargaining power of buyers, and rivalry among firms. Porter [1985], provided three generic strategies; cost leadership, product differentiation, and focus, which are used together with the five forces so as to leave behind competitors. The strategic alliances are formed also as a protective tool in order to evade strategic uncertainty. In general, the above three conceptual frameworks (cost minimisation, organization theory, and competitive strategy) ought to be reflected as complements, rather than as rivals. These cooperative agreements are targeted at long-term profit optimising objectives by trying to boost the value of the firm’s assets. Apart from the motives discussed above, strategic alliances come with various benefits that crop out of the motives. The financial benefits gained by means of strategic alliances are the most shared grounds for the creation of an alliance flanked by two or more firms that can result from several openings that the cooperation creates. However, the actual or potential benefits that may well arise from strategic alliances fall into different generic groupings, as discussed below: Ease of entering a market: Within the past two decades, great strides have been made in the fields of telecommunications, computer and information technology as well as transportation. These developments have made easy the access to foreign markets by international businesses. Admittance to foreign markets comes along with huge benefits, such as economies of scale and range in marketing along with distribution. It would prove to be a difficult exercise for an individual firm to penetrate the international market, with the major aspect being the cost element. However, through forming a strategic alliance with an international firm, the firm will be able to rapidly entre a foreign market while keeping the cost down. Furthermore, entering a foreign market through a strategic partnership may well enable the firm to circumvent other challenges, such as the deep-rooted competition and antagonistic government regulations (Soares, 2007). This may also extend to a firm seeking to gain a footing in an industry in which the partner (s) is already well-known. This can boost the speed at which the product or service is recognised in the market. Also, a strategic alliance with a reputable firm can help to create favourable brand image and effective distribution networks. Moreover, reputable firms may need to introduce new brands to marketplace. In a satiation where smaller firms can be able to market quicker than the bigger more established firms, a strategic alliance with the smaller firms will be beneficial. Leveraging off the strategic alliance will help to seizure the shelf space which is key for the success of any brand. Risk sharing has also come out as one more shared justification for commissioning a cooperative procedure particularly as soon as a market just opens up, or when there is copious uncertainty and shakiness in a certain market. Given the competitive nature of business, it would be daunting task for a firm to penetrate a new market or unveil a new product, and through a strategic alliance the firm may well be able to mitigate or control its risks. Most firms in the technological industry identify with the shared knowledge and expertise as a key driver for them to form strategic alliances. Usually, each one of these firms is competent in some area but falls short of the required expertise in other areas. This creates a vacuum that can only be filled through forming a strategic alliance with a firm or firms with the required knowledge and expertise in an area that the firm lacks. That’s why strategic alliances are cooperative relations; firms will gain access to expertise that they did not have hitherto in an area and at the same time give expertise in some area to their new partner. The expertise and knowledge can range from learning to deal with government regulations, production knowledge, or learning how to secure resources (Soares, 2007). One company that has exploited this motivation is Toshiba, which firmly believes that a single company cannot control any technology or business by itself. The company integrated strategic alliances into its company strategy as an approach to developing cooperation with different partners for dissimilar technologies. This has helped the company to grow to be one of the most prominent players in the international electronics industry. For instance, Toshiba recognising the strength of Apple in software technology, formed an alliance with Apple Computer to develop multimedia computer products. In this case, Toshiba contributed its manufacturing knowledge and expertise. In a similar connexion, Toshiba cooperated with Microsoft to create hand held computer systems. In creating semiconductors, Toshiba (in etching) and IBM (in lithography) along with Siemens (in engineering) cooperated to pool different types of skills. According to Soares (2007), achieving synergy and competitive advantage may be one more cause go for strategic alliances. Competition becomes more effective once partners clout off each other’s strengths, bringing synergy into the process that would otherwise not be achieved by trying to penetrate or enter a new market or industry alone. Lenovo as a company, each time sought to come to be a global company. Despite being the leading PC maker in China controlling over a quarter of the market share, it was not able to do much business out of the country. Lenovo stumble upon obstacles for its further expansion and growth. The collective antagonistic competition from aggressive foreign rivals such as Dell and HP in the Chinese market did put more pressure on Lenovo’s margins. Faced with these pressures, Lenovo decided to form a strategic alliance with IBM to obtain its low profitability PC business with US$1.75 billion. In return, IBM was to benefit by being China’s PC maker’s “favoured supplier” of support services as well as customer financing. As a result, Lenovo would see its sales go up by almost four times to the excess of US$12 billion. It also benefit from an expanded global market; besides taking over the ownership of the Think family trademarks. Lenovo also gained the right to make IBM-branded PCs under a five-year licencing agreement. Threats Strategic alliances have not always been successful; they face various threats. The difficulty in pulling off the synergies of strategic alliances generally stem from one of a number of factors. The biggest threat to an alliance is the survival of the affiliation. Survival depends upon the appreciation of the objectives of the strategic alliance and ensuring that the duties of each one partner in meeting the objectives are well-defined and agreed. Failure to understand the objectives means that the expected benefits may not be realised and the synergies among the partners will not improve their effect. An example of a failed strategic alliance was the merger between the French firm Carnaud and British Metalbox Packaging. This merger botched principally owing to a difference in making decisions and antagonistic subsidiaries. Conclusion To wrap it up, strategic alliances are much needed in the current business environment given the heightened globalisation that has brought about increased competition. The alliance will enable the partner firm (s) to reap from the cooperation in terms of cost minimisation, and enabling their business strategies. Therefore, it can be said that strategic alliances are cooperative agreements between actual or potential competitors (Hill, 2007, p.301). Moreover, the alliances come along with various benefits such as creation of new products and technologies, ease of market penetration, enhanced synergy and competitiveness, sharing risks as well as knowledge and expertise. However, the alliances ought to be handled carefully for them to survive seeing as some failures have been reported (Zaman, 2001). References Isoraite, M. 2009, Importance of Strategic Alliances, Intellectual Economics, 1 (5): 39 – 46. Porter, M. E. 1986, Coalitions and global strategy, M. E. Porter, ed. Competition in Global Industries. Harvard Business School Press, Boston, MA, 315–343. Soares, B. 2007, The use of strategic alliances as an instrument for rapid growth, by New Zealand based quested companies, United New Zealand School of Business Dissertations and Theses. Sporleder, T. 1993, Assessing Vertical Strategic Alliances by Agribusiness, Canadian Journal of Agricultural Economics. Zaman, M. F. 2001, Measuring Strategic Alliance Success: a Conceptual Framework, Monash University. Read More