Strategic Alliances as a Strategy for Competitive Advantage in International Business - Coursework Example

Strategic Alliances Name Course Institution Date Instructor: Strategic Alliances Introduction Strategic alliances have increasingly become a preferred strategy for firms in an increasingly competitive global marketplace. The last few decades have witnessed an ever increasing number of firms partnering up with each other to pursue new opportunities, access new markets or acquire new technologies and skills. Firms have sought to access their partner’s comparative strengths in key areas such as technology, manufacturing or even market access in exchange for access to their own resources or support in key areas. These alliances have taken a variety of forms and have also resulted in a variety of outcomes. This essay will discuss strategic alliances as a strategy for competitive advantage in international business. First, the essay will define strategic alliances and broadly outline the parameters for strategic alliances as a form of inter-firm collaboration. The motives for entering inot strategic alliances will also be briefly discussed. The essay will then explore the advantages as well as disadvantages of strategic alliances by referring to the experiences of several firms in various forms of strategic alliances. In conclusion, the essay will discuss the reasons why some strategic alliances work for the firms involved and why others are not successful. Strategic Alliances A strategic alliance is a voluntary trading partnership between two or more firms aimed at increasing the effectiveness of their competitive strategies by linking specific facets of the businesses of the participating firms (Yoshino & Rangan 1995, Das & Teng 2000). A strategic alliance provides a platform for mutually beneficial exchange of resources such technologies, skills and products between participating firms to enable the joint accomplishment of the goals of each individual firm in the partnership (Yoshino & Rangan 1995, Inkpen 1999). Strategic alliances are a distinct form of collaboration as opposed to mergers and acquisitions since the firms that participate in the alliance; are autonomous or remain independent even after the formation of the alliance, share the benefits of the alliance as well as control over performance of assigned tasks and contribute on a continuous basis in one or more key strategic areas (Yoshino & Rangan 1995, p.5, Inkpen 1999). Strategic alliances usually take a number of forms within a spectrum that involves varying degrees of interfirm collaboration. These include contractual agreements such as joint research and development, joint product development, long –term sourcing agreements, joint manufacturing and joint marketing, shared distribution and shared service arrangements. They also include equity arrangements where no new entity is formed such as minor equity investments or equity swaps as well as arrangements which include the formation of new entities such as non-subsidiary joint ventures (Yoshino & Rangan 1995). There are a variety of reasons why firms to enter into strategic alliances. These include seeking to enhance productive capacity, reduction of risk and uncertainty in internal structure’s and external environments, acquisition of competitive advantages to increase profits and access to future business opportunities that would allow firms command higher market value for their outputs (Webster 1999). Specific strategic motives include acquisition of means of distribution, to obtain skills and knowledge, to obtain economies of scale, development of new products, technologies or resources, pooling resources, overcoming legal and/or regulatory barriers to entry in new markets, pre-empting competitors or seeking cooperation with rivals (Todeva & Knoke 2005, Inkpen & Ramaswamy 2006). Why Strategic Alliances? Several theoretical perspectives have put forward several conditions under which firms chose to enter into strategic alliances. From a transactional cost perspective, strategic alliances are a preferred form of collaboration between firms when the transaction costs associated with exchange of resources between firms such as writing and enforcing a contract are intermediate but not high enough to justify vertical integration through arrangements such as mergers and acquisitions (Das & Teng 2000). On the other hand, from a resource based perspective, firms also prefer alliances in situations where ownership of the critical inputs or resources needed to pursue new business opportunities, such as new technology and skills, lie with different parties and these inputs are inseparable from the other assets of the owner firms (Das & Teng 2000). As an example, IBM was only able to enter the personal computer market through strategic alliances with outsider firms such as Microsoft for their operating systems software, Epson for peripherals and Intel for chips (Yoshino & Rangan p.9). In such cases, the individual firms n each lacked an essential input to take advantage of the opportunity and could not develop the knowledge in critical and requisite areas of knowledge within an acceptable timeframe or cost (Madhok 1997). There are several advantages and disadvantages of entering into strategic alliances for firms. In some cases, strategic alliances have worked well for the parties involved while in other cases they have not. The following section will discuss some of the benefits or advantages as well as the disadvantages or challenges of strategic alliances. Several cases will be used to discuss why some alliances work for partner firms while others do not. Advantages of Strategic Alliances One of the foremost advantages of entering into strategic alliances for firms is that they can help overcome barriers to entry in foreign markets. Many firms use joint ventures to enter foreign markets by partnering with local firms who have better understanding of local market conditions, strategic control over resources or good business and political connections to facilitate entry (Hitt et al 2009). A case in point is IBM’s entry into the Chinese market using joint ventures with several local companies to overcome government restrictions. Initially, IBM was only allowed to open representative offices and involve itself in local government projects in China. However, it built up connections and established guanxi (relationships) with many local companies before entering into several joint ventures (Luo 2000). IBM was able to successfully penetrate the Chinese market through national computer industry projects such as the Golden Project which focused on promoting information technology and a nationwide public telecommunications network. IBM would sign an agreement with Jitong to jointly invest in the Beijing Jitong Network Development Co. which focused on telecommunications and computer systems for the Golden Bridge network (Luo 2000). Similarly, Starbucks used strategic alliances as a mode of entry into the Indian market in 2012 when they set up an $80 million joint venture with Tata Global Beverages Ltd. This eased entry into the Indian market which had proven to be turbulent for other foreign food brands such as Coca Cola and Kentucky Fried Chicken (Bahree 2012). Strategic alliances also allow firms to share the costs and risks associated with the development of new products and services or where there are large uncertainties with new markets and new technologies (Hill & Jones 2010, Inkpen & Ramaswamy 2006). In the case of global airline alliance Oneworld, it was estimated in 2002 that activities in the alliance would yield cost reduction worth hundreds of millions of dollars (Kleymann & Seristo 2004). In terms of sharing the risks of development of new products, Boeing teamed up with Japanese aviation industry manufacturers to build the Boeing 787 Dreamliner. Japanese suppliers such as Mitsubishi Heavy Industries, Fuji Heavy Industries and Nabtesco Aerospace provided 35 percent of the components for the 787 Dreamliner (Harner 2011, Hill & Jones 2010). In the oil and gas industry, alliances are used to share the high risk investment associated with upstream exploration. The Sah-Daniz Production Sharing Agreement in the Caspian Sea in Azerbaijan included seven partners; BP, Statoil, The State Oil Company of the Azerbaijan Republic, NICO, TotalFinaElf, LUKAgip and TPAO each with varying shares (Inkpen & Ramaswamy 2006). Strategic alliances also enable firms to bring together complementary skills and assets which individual firms may not have been able to on their own. In the 1980s, Glaxo was able to expand into the American, Japanese, German and French markets using strategic alliances which enabled it achieve world market leadership. As Glaxo lacked the sales force and global marketing power to achieve market leadership in these key markets, it pooled its resources with rivals such as Hoffman La-Roche (USA), Merck (Germany), Sankyo (Japan) and Fournier (France) to propel its product Zantac under different brand names to these markets (Doole & Lowe 1997). In such a case, the strategic alliance provided a platform for the individual firms to share information and network while simultaneously reducing competition between them by converting partners into rivals. Disadvantages of Strategic Alliances Despite the potential benefits of entering into strategic alliances, there are several potential disadvantages for individual firms in alliances due to the nature of alliances themselves. Since strategic alliances are voluntary partnerships and do not involve vertical integration of the participating firms as is the case in other forms of collaboration such as mergers and acquisitions, firms may face challenges in control and decision making. In addition, the establishment of effective coordination between the autonomous firms in an alliance can be challenging and time consuming. Challenges may include division of responsibilities, sharing of rewards or even the allocation of resources (Hill & Jones 2010). Different partners may also have different objectives in an alliance and as a result the individual firms may not achieve the anticipated benefits (Yoshino & Rangan 1995). In the joint venture between Toyota and General Motors in 1984 to create the New United Motor Manufacturing Inc. (NUMMI) plant in Fremont, California, GM’s motivation in the alliance was to gain technology and insights into Toyota’s production system and to enable it obtain smaller cars to boost its fuel economy ratings. On the other hand, Toyota sought to test the application of its production systems and culture on the U.S. workforce. Toyota would build its Corolla sedan and hatchback models at NUMMI and sell a version of the car to GM to be marketed as the Chevrolet Nova. However, since the car was essentially a Toyota with a Chevrolet badge from which GM did not make any profit, GM was reluctant to spend money marketing the car. This situation would be replicated with subsequent models such as the Pontiac Vibe in 2009 and NUMMI was eventually closed down in 2010 (Kiley 2010). Strategic alliances are also prone to conflict due to issues such as clash of egos and company cultures, mistrust in handling competitively sensitive areas and addressing conflicting objectives, strategies, corporate values, and ethical standards. A case in point is the protracted legal battles for the control of the joint ventures between French multinational food company Danone and China-based beverage producer Wahaha. In March 1996, Danone and Wahaha signed a joint venture agreement and formed five joint venture companies with Danone also acquiring a 51% stake in Wahaha Beverage (Verbeke 2009). However, in 2007, Danone alleged fraud and corporate sabotage on the part of Hangzhou-based Wahaha claiming that the latter had secretly operated a set of parallel companies which mirrored the joint venture’s operations with products that were virtually identical and in the process had siphoned off as much as $ 100 million from the partnership (Barboza 2009). Wahaha would counter the accusations by accusing Danone of violating the partnership agreement by investing in Chinese competitors. The disputes spiraled into personal attacks as well as an acrimonious legal battle for control of the joint venture companies resulting in Danone exiting the joint venture by relinquishing its stake in Wahaha (Barboza 2009). In this particular case, the alliance also badly damaged Danone’s reputation and brand image in the Chinese market. Another disadvantage of strategic alliances is that if they are not properly managed, they could stall a firm’s growth by creating dependence on other firms for essential expertise over the long term. In such cases, a firm in an alliance may fall behind as evidenced in the case of the 1960s alliance between American firm Honeywell and Japanese firm NEC. The strategic motivation for Honeywell was to shift low end manufacturing to NEC while NEC provided computer parts to Honeywell. However, over time, NEC became increasingly indispensable to Honeywell as it became increasingly familiar with its customer’s needs and augmented its core competencies through continuous investment while Honeywell lagged behind in technology (Hill & Jones 2010). Discussion From the cases discussed, there are several reasons that emerge to account for why some strategic alliances work for partner firms while others do not. In the case of successful alliances such as the joint ventures between IBM and local Chinese companies, alliances work in the interest of participating firms if they select proper partners who have the desired capabilities, capacity and strategic complements for each other’s strategic and operational goals. Similarly, in the case of Glaxo’s alliances with American, German and Japanese rivals, the partners were able to complement each other and convert a rivalry to a mutually beneficial relationship. This helps avoid tension and conflict due to the pursuit of contradicting goals. Successful strategic alliances are also well-negotiated, well planned, properly structured and have a commitment from highest level management of the partner firms to make the alliance work. This includes clearly outlining the expectations of each partner firm in the alliance, agreeing on how to share risks and benefits as well as structuring the alliance to the mutual benefit of both partners. An example of such a well-negotiated strategic alliance agreement is between computer-maker Hewlett Packard (HP) and Walt Disney where Disney’s major divisions are supplied with IT solutions and innovations from HP. The critical success factors in this alliance are; coordinated brand exposure, joint marketing and customer experience as co-branding forms a critical part of this relationship (Inkpen & Ramaswamy 2009,Segil 2002). In addition, each partner has a clear understanding of what is they are expected to contribute and this has enabled them to manage expectations in implementing various activities. On the other hand, alliances which are not properly planned and structured or characterized by conflicting objectives, strategies, corporate values, and ethical standards between partners are unlikely to succeed. In the case of the alliance between Danone and Wahaha, there was a lack of clearly outlined expectations between the two firms in how to manage the joint ventures as well as contradictory strategic objectives which led to mistrust and allegations of corporate sabotage. The disputes that characterized the conclusion of the venture also revealed lack of proper planning and structure in the alliance. Similarly, in the case of the alliance between Toyota and GM, the lack of an agreement on coordinated brand exposure between the two companies contributed to the closure of the joint venture NUMMI. The decision by GM not to invest in marketing of Toyota manufactured cars also show that lack of flexible commitment from high level management compromises the goals of alliances. The case of Toyota and GM also shows the importance of overcoming cultural barriers in alliances between multinational corporations from different cultures. Strategic alliances in which one partner firm is dependent on another for essential expertise over the long term are also not likely to benefit the dependent firm. This is evidenced in the case of the alliance between Honeywell and NEC. Conclusion Strategic alliances have increasingly been used as a strategy to enhance firms’ competitive advantage in an increasingly competitive global environment. As the essay has shown, strategic alliances have several advantages such as allowing firms to access markets, access new technologies and rare resources, pool resources to be able to pursue new business opportunities, convert rivalries into partnerships to increase market share and penetration, achieve economies of scale as well as enabling inter-firm information sharing and learning. However, unless properly negotiated, planned, structured and managed with commitment form high level managers of all firms involved they can be disadvantageous to the individual firms in the partnership. References Bahree, M 2012, ‘Starbucks Will Open Cafes in India’, The Wall Street Journal, January 31, Retrieved on October 13, 2013 from < http://online.wsj.com/news/articles/SB10001424052970204740904577192500354456184> Barboza, D 2009, ‘Danone Exits China Venture After Years of Legal Dispute’, The New York Times, September 30. 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