The Understanding of Strategic Alliances - Essay Example

Strategic Alliances Name: Lecturer: Course: Date: [WORDS 2980] Executive Summary This report examines critical ongoing issues on balancing collaboration and competition within strategic alliances. The underlying argument is that although strategic alliances have become a vital means of doing business in many industries for purposes of achieving competitive advantage, balancing competition and collaboration within the alliance and controlling opportunism have affected the extent to which the alliance becomes successful. The report concludes that alliance managers should also persistently carry out performance risk assessment before and after they enter into strategic alliances. They should also come up with means to protect un-related knowledge while at the same time avoiding submitting their distinct competencies. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 The economic logic for strategic alliances 4 Ease of entering new markets: 5 Sharing of economic risks: 5 Sharing managerial resources: 6 Gaining competitive advantage and synergy: 6 Alternative models of joint ventures 7 Structure and management of different alliance types 8 Types of strategic alliance structures 8 Alliance Management 10 Critical success/ failure factors for strategic alliances 12 Criteria for choosing them 14 Case Study 15 Case analysis 16 Recommendation and conclusion 16 References 18 Introduction Strategic alliances today play an integral role in setting pace for strategic competitiveness in the global economy. Despite the fact that more and more business are seeking strategic alliances because of intensified global competition, such firms have failed to benefit fully from such alliances due to poor strategies for selecting partner firms (Elmuti & Kathawala 2001). The alliances have mostly experienced difficulties that originate from lack of trust, strategic incompatibility, opportunism, deceit, cultural differences and deficient organisational integration. The underlying argument in this paper is that although strategic alliances have become a vital means of doing business in many industries for purposes of achieving competitive advantage, balancing competition and collaboration within the alliance and controlling opportunism have affected the extent to which the alliance becomes successful. The economic logic for strategic alliances In seeking strategic alliances, businesses hope to achieve different economic objectives through collaboration rather than competition. March (1991) proposed the Theory of Co-evolution, when he identified the logics of exploitation and exploration as the key motives for adapting a business to any particular course. Exploitation depicts elaborating on existing business capabilities to incrementally improve efficiencies. On the other hand, exploration refers to establishing or experimenting new resources and capabilities (Ohmae 1989). The strategic objective of exploitation is to discover new opportunities that have the capacity to improve a business’ performance. Basing on Co-evolution theory, the concepts of exploitative and explorative logic both depict what motivate businesses to enter into strategic alliances for different economic reasons (Akio 2004). First, they seek to achieve organic growth at a higher rate, enter new markets easily, gain expertise in serving customer demands, defray the cost of rising research, learn and apply new technology, access global markets and to benefit from vast managerial resources (Comi & Eppler 2006). Ease of entering new markets: The ease of making entry into foreign markets is among the key economic logics for entering into strategic alliances. Recent advances in Information Technology and transportation infrastructure have made it easy for international firms to enter into new markets. However, the cost of making headways into new market may be beyond the capacity of a single firm. Such firms seek to enter into strategic alliances with an international firm to benefit from rapid entry (Cojohari n.d.). The logic is based on Transaction Cost Theory, which suggests that businesses enter alliances to increase economy of scale and minimize costs (Judge & Dooley 2006) Sharing of economic risks: Risk sharing is a key logic for entering into strategic alliances in situations where a market has just opened up, thus presenting economic uncertainties (Akio 2004). Under such circumstances, businesses enter into strategic alliances with the view of cushioning the effects of the possibility of making losses in the outset. As a consequence, business will be able to share initial anticipated losses. The logic is based on Market power theory, which suggests that business seek to achieve successes in the marketplace by securing stronger positions and strategic advantages. Sharing managerial resources: Current trends have showed that while businesses are competent in some areas, they lack the required expertise in other areas (Akio 2004). However, forming strategic alliances enables such firms to access knowledge and expertise in their areas that are wanting. Consequently, the information and knowledge gained by allied businesses can be applied within the joint venture projects as well as for internal business projects (Bhatti 2011). The expertise may include learning ways of acquiring resources. This is based on the Resource dependency theory, which suggests that businesses enter strategic alliance to access unavailable or rare resources. Gaining competitive advantage and synergy: Attaining competitive advantage and synergy is another economic logic that explains the rationale for entering into strategic alliances. In comparison to making entries into new markets, strategic alliance serve to decrease the risks associated with making international expansions and costs of research and development. In actual fact, competition is viewed to be more efficient when partner firms take advantage of their strengths, realising synergy into the process may be difficult to attain if firms seek to enter into the new markets alone. This is based on the Theory of Competitive Strategy, which suggests that businesses enter alliances with the aim of improving their competitive advantages and positions in the market. Alternative models of joint ventures Joint ventures provide businesses with a desirable way to enter new markets, expand and attain business development strategies. A joint venture is typically a contractual arrangement that allows the partnering firms to create relationships for specific business initiative with cost, finality and complexity (Deloitte 2010; Sparling & Cook n.d). The most used model to explain formation and development of joint ventures is the transaction and production cost. According to the theory, a transaction can be governed by price mechanism, hierarchical form or hybrid form (Judge & Dooley 2006). The amount of transaction and production cost related to joint ownership has to be lower than for individual ownership. In regards to the current issues of opportunism that hinder the success of strategic alliance, it can be argued that when the production costs and size of the alliances are affected by risks of partner opportunism, administrative procedures can be used to control allocation of financial incentives (Elmuti & Kathawala 2001; Loke et al. 2009). According to the agency theory, joint ventures serve as agents that parent organisations use to increase their business activities to achieve success. Business attempt to control costs attributed to the agency relationship. In regards to balancing competition and collaboration within the alliance and controlling opportunism, the theory suggests that governance mechanism limiting self-serving behaviours or partner firms can be used to limit future conflicts. According to resource dependency theory, joint ventures are formed to create a pool of strategy resources that ensure partner firms gain competitive advantage, and in the end, superior performance. In respect to balancing competition and collaboration within the alliance and controlling opportunism with the joint venture, the theory suggests that positional advantages can be achieved based on inter-form resources, in addition to the coalition nature of the firms. Market power theory suggests that business can achieve successes using their competitive advantage by securing stronger positions in the industry or market through joint ventures. In respect to balancing competition and collaboration within the alliance with the joint venture, alliance managers should distinguish between cooperative strategies, such as offensive vs. defensive link and link vs. scale. Structure and management of different alliance types Several economists have documented positive correlations between management of businesses’ strategic alliances and performance. In explaining the important role that management plays in balancing competition and collaboration within various alliances, a risk perception theory of strategic alliance is suggested. The model seeks to explain that in managing the alliances, it is critical to understand the difference strategic alliance structures (Kale & Singh 2009). Types of strategic alliance structures Strategic alliances take different forms such as minority equity alliances, joint ventures, joint marketing and promotion, joint research and development, enhanced supplier partnerships, licensing agreements and distributing agreements (Fig 3). The allied firms seek to conduct business activities collaboratively with the view of achieving mutual benefits that are unattainable separately (Kale & Singh 2009). In the current business environment, common strategic alliances include franchising, mergers and joint ventures. Fig 1 below gives an overview of various conceivable inter-firm collaborative relationships that can be considered as strategic alliances. Figure 1: Inter-firm relationships For purposes of effective management of these alliance structures, theorists suggested a range of typologies of the alliances. Yoshino and Rangan (1995) suggested three key types of alliances, namely joint ventures, minority equity alliances and nontraditional contracts. Lorange and Van de ven (1992) suggested four types of alliances, namely consortium, ad hoc pool and project-based joint ventures. Other types of alliances were proposed by Dussuage and Garette (1995), who identified R&D agreements, semi-structured projects, unstructured co-production initiatives and business-based joint ventures. Koza & Lewin (2000) suggested that another typology comprises contractual with shared risks, contractual without shared risks, joint ventures and minority ventures (Table 1 and 2). Table 1: Types of strategic alliance structures Table 2: Distinguishing strategic alliances Alliance Management Assuming a dynamic perspective of strategic alliances, this paper focuses on the current collaboration between alliance partners that is extendable towards different aspects of collaborative relationships. Current literature suggests two separate research streams in risk and knowledge management. This is so since, by managing different risks and application of relevant knowledge the ultimate successes of strategic alliances can be achieved. Current literature proposes that conscious management of current relationships between partners in alliances is critically crucial since the appropriate structuring of the alliances does not offer a direct way of achieving success (Holmberg & Cummings 2009). Knowledge management: Management of strategic alliance structures is to integrate divergent objectives in order to protect the individual firms against unplanned proprietary knowledge spillovers. At the same time, it ensures that knowledge-related to strategic alliance is integrated smoothly (Isoraite 2009; Parise & Sasson 2002). Risk management: Based on evidences that most strategic alliances fail due to the inherent risks related to inter-firm collaboration, risk management is a significant component of ensuring the success of strategic alliances. Das and Teng (2000) identified two types of risks that should be managed. These includes relational risks, which involves the risks that involve opportunistic behaviours of the partnering firms and performance risks, which consists of risks related to failure to achieve the objectives of the alliance (Rothaermel & Deeds 2006). A table with the most severe risks associated with strategic alliances is developed below. Figure 2: Performance and relational risks in strategic alliance management Effective risk management can increase the potential of the alliance to succeed when they draw the attention of managers on the most significant threats that should be mitigated. In general, strategic alliances are evaluated through estimation of the probability of occurrence of the risks (Comi & Eppler 2006). Critical success/ failure factors for strategic alliances Failure to balance competition and collaboration within the alliance can create grounds for opportunism. The success of such an alliance is dependent on a range of key factors that apply in each stage of alliance evolution. First is the formation stage, where a business sets out to initiate an alliance. In which case, a critical success factor is choosing a suitable and compatible partner. Resource-based theories postulate that the greater the level of compatibility, the higher the likelihood of an alliance to succeed (Liao et al. 2003). In the design phase, a firm established the right governance to oversee an alliance (Kale & Singh 2009). Here, effective management of the alliance is a key determinant to its success. In the post-formation phase, a business should manage the alliance based on an ongoing basis. Here again, consistent and effective management of the alliance promotes commitment to the alliance. In the end, the partnering businesses will be able to realise the value of the alliance (Kale & Singh 2009). In a research to determine the critical success factors for strategic alliances Whipple and Frankel (2000), suggested that the largest barrier to the alliances are the costs arising from attempts from the partnering firms to spend in modifying their traditional organisational cultures (Das & Teng 2001). While some firms may be reluctant to change their cultures, others may be reluctant to spend on changing their cultures to be similar to that of the partnering firms. According to Whipple and Frankel (2000), some firms view a cooperative relationship as not capable of providing adequate conditions for successful strategic alliance and hence exploit partners. This situation denotes that suggested by Game theory, where it is suggested that some partnering firms may exploit other partners when benefits from non-cooperation are greater than from cooperation. Transaction cost economics theory also suggests that opportunistic or exploitative behaviour of one partner will lead to alliance failure. In this scenario, specific goals have to be set and performance enhanced for firms to recognise that transition to strategic alliances is worth the while. Whipple and Frankel (2000) further suggested that existence of trust is a critical success factor for alliances, since each of the partnering firms relies on the other to realise mutual goals. This is based on resource-dependence and bargaining-power theory, which specifies that the value of resources owned by each firm determines their bargaining power and that shift in balance of partnering leads to alliance failure (Fei-qiong & Liang-cong 2006). Absence of trustful relationships may also make some partnering firms to be reluctant about sharing critical information to effectively manage the alliance. Such failures are consistent with Relational contracting theory, which suggests that mistrust between partnering firms will leads to failure of a strategic alliance (Fei-qiong & Liang-cong 2006). Wakeam (2003) identified five critical success factors for strategic alliance. These include the ability of the partnering firms to realise the success of their business goals and ability of the firms to develop and maintain their core competencies, such as competitive advantage. The businesses should also be able to block competitive threats, create and maintain their strategic sources and finally be able to mitigate significant business risks (Banal-Estanon et al. 2012). Criteria for choosing them Based on strategic management-based selection process, firms can select more strategic partners through comprehensive analysis of variables other than through impulsive alliance formation. Holmberg and Cummings (2009) suggested that current firms use four criteria in partner selection. These include aligning strategic alliance and corporate objectives, creating a set of critical success factors to be used in evaluating alliance activities, mapping out the potential partnering firm’s industry and lastly, applying a dynamic partner selection analysis tool for evaluating the potential of several targets (Fig 2). Figure 2: Strategic management-based partner selection criteria In regards to aligning strategic alliance and corporate objectives, Holmberg and Cummings (2009) suggest that a business should identify certain links of the selection process to the objectives of the alliance. Tying alliance objectives to corporate objectives from the outset defines the alliance design, the search for the right partner and analysis of how the partner fits. Next, a firm should create and identify appropriate critical success factors. The determined ones can then be used to measure whether they fit each potential partnering firm (Holmberg &Cummings 2009). In the next stage, potential partner map should be created against which the various industry players can be assessed, along with their respective sub-segments or subsidiaries. At this stage, this paper recommends the use of Brandenburger and Nelebuff’s Value Net model to categorise the potential and current industry players who may become partner firms. The model proposes reviewing the customers, suppliers, complementors and competitors (Holmberg &Cummings 2009). In the fourth stage, a dynamic congruence tool is used in selecting a partner. Using the tool, managers can assess reactive- and proactive-follower alliance strategies to identify the potential new alliance partners and opportunities. The tool is applied in winnowing down the potential partner targets by identifying the most attractive industries and partners (Holmberg &Cummings 2009). Case Study In 2009, Microsoft was the leader in mobile operating system (OS) market. It however ceded to Apple in 2010 and Google in 2011. To regain, it sought alliance with Nokia, which was then the mobile leader (Hatchman 2013). Nokia picked on Microsoft over Google, which had also sought an alliance to sell its Android OS. Nokia agreed to only use Microsoft’s phone software to power its smartphones, while Microsoft agreed to boost Nokia’s engineering and marketing (Terlep, Berman & Ovide 2013). While Microsoft increased in profitability by 2013, Nokia’s sales slumped due to competition from Samsung and HTC that are powered by Google’s Android OS. Microsoft was criticised for being opportunistic. Analysts suggested that among Nokia’s biggest blunders was in selecting the wrong partner (Wildstrom 2013). Case analysis Nokia and Microsoft were not compatible from the start. Resource-based theory suggests that the greater the level of compatibility, the higher the likelihood of an alliance to succeed. There was also a problem with trust since Nokia was suspicious from the outset since Microsoft had a bad reputation for being opportunistic (Fei-qiong & Liang-cong 2006). Relational contracting theory suggests that mistrust between partners can lead to failure of an alliance. Transaction cost economics theory also suggests that opportunistic behaviour of one partner will lead to alliance failure. There was a shift in balance of partnering as Nokia became more dependent on Microsoft. This is based on resource-dependence and bargaining-power theory, which specifies that shift in balance of partnering leads to alliance failure (Fei-qiong & Liang-cong 2006). Recommendation and conclusion Although strategic alliances have become a vital means of doing business in many industries for purposes of achieving competitive advantage, balancing competition and collaboration within the alliance and controlling opportunism have affected the extent to which the alliances become successful. The alliances have mostly experienced difficulties that originate from lack of trust, strategic incompatibility, opportunism, deceit, cultural differences and deficient organisational integration. However, entering into strategic alliance with a reputable and established company can help a partner firm to create favourable brand image as well as build effective distribution networks. Alliance managers should also persistently carry out performance risk assessment before and after they enter into strategic alliances. This will help balance competition and collaboration within the alliance and controlling opportunism. The managers should also come up with means to protect un-related knowledge while at the same time avoiding submitting their distinct competencies. 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Strategic Alliances: An Entrepreneurial Approach to Globalization, Harvard Business School Press, Boston, MA. Read More