Need and Potential Risks of Strategic Alliances - Case Study Example

?Alliances are complex business decisions that are established between two or more entities, with an aim to maximize growth. Business alliances vary in their styles, from contractual obligations such as licensing, shared resources and competencies, to collaborative approaches that include mergers, acquisitions and joint ventures, to name a few. In a broad sense, the ‘Alliance portfolio’ describes the internal capabilities of a firm and also understands the necessary infrastructure, knowledge and resource capabilities required to create, design and manage alliances. Strategic alliances may be defined as partnerships of two of more companies that work together to attain mutual objectives (Radu, 2010). Alliances can be ‘equity alliances’ or ‘non equity alliances; specifically, joint ventures may involve a hierarchical control from a parent entity (Hennart J., 1988). Prior experience and robust infrastructure are considered during alliance partner selection. Success of a corporate alliance is measured in terms of the value addition imparted due to the combined activities of the parties involved. This is achieved through a well defined ‘Alliance Strategy’ which involves a proper design, appropriate monitoring, governance and performance management processes. I would like to elaborate on the ‘KLM and Northwest Alliance’, which was the first integrated airline alliance in history. The association between the two airlines began in 1991 with joint ‘code – sharing’ and went on to form a major ‘Trans-Atlantic Joint Venture’. A peculiar characteristic of this joint venture was the absence of a new legal entity. KLM and Northwest entered into an ‘Open Sky agreement’ and ‘Anti-trust immunity’ in 1993 and thus formed a globally renowned unit. As is true with most alliances, this contract was designed specifically to support and strengthen the competitive advantages of the partners (Liana M., Nicoleta B and Dana P., 2009). KLM Royal Dutch Airlines, incorporated in 1919, was based out of Amsterdam. KLM was a regional leader but wanted to expand its network to many cities in the US. A company cannot be solely viewed as an individual unit; rather, it is subject to interactions with various other bodies, constantly striving to foster good inter-organizational ties and relations. Around the late 1980s, due to liberalization and de-regulation of markets, free competition prevailed in the European airline industry. KLM realized the need to collaborate and co-operate with airlines based out of other countries, in order to maximize their global connectivity. KLM invested in a detailed process of partner selection and finally zeroed in on Northwest Airlines due to its international reputation, vast experience with passenger as well as cargo transport and its dominance in the US market. A strong proposal was made to develop collaboration between an American and a European carrier to achieve competitive costs, expansion of their network and greater revenue. Northwest Airlines began its operations in 1926 and was a medium-sized airline carrier, focussing more on flights in the United States to Asia, but rarely to the European regions. Despite their stronghold in the US regions, Northwest had, by then, earned poor points for service quality and did not have the funds or infrastructure to individually scale up on mega proportions. Northwest realized the need to explore wider opportunities in Amsterdam, the European sector and expand their operations accordingly. Contrary to KLM, Northwest did not go through a very fine partner selection process and chose KLM as its alliance partner owing to their pre-existing ownership in Northwest. It is acknowledged that the main theoretical motivations for the formation of joint ventures include reduction in transaction costs, strategic competitive positioning or market power and a quest for organizational learning and knowledge development (Gulati, 1998). It is on a similar model that the two airlines, KLM and Northwest, came into an alliance in a bid to enhance revenue, expand and grow to be a global market power. This involved a convergence of strategic goals, with a simultaneous divergence of competitive goals (Hamel G., Doz Y.L and Prahalad C. K., 1989). Corporate growth is sought within and across geographic, technological and industrial boundaries, with an aim to cut down on costs and achieve greater revenues. For a pre-defined corporate vision, strategic alliances throw light on the methodology that is to be adopted, to reach the final destination. Corporate alliances combine resources, involve joint decision- making, significantly alleviate risks and increase access to knowledge. Interestingly though, in the case of KLM and Northwest, the alliance was based a sound foundation of trust and there was no contractual agreement between the two parties until 1997! An equity issue in 1997 spurred the formulation of a ‘joint venture agreement’ encompassing the transportation of passengers and cargo across various global routes. The alliance was based on principles of ‘code sharing’, ‘joint pricing policy’, ‘management of revenue’, ‘co-ordination of connecting and feeder flights’ as well as catering, purchasing, marketing, rewards and loyalty measures. The concept of networking gave mutual access to skills and technological advancements available in different countries (Gomes-Casseres B., 1994). Specific importance was associated with arriving at jointly consented decisions, resolving conflicts and open communication between the partners. The two parties also clearly defined the procedures for termination of the contract in case of any untoward issues. Above all, the alliance involved a significant measure of trust and mutual co-operation between the core members, which was evident in the case of KLM and Northwest Airlines. Efforts must be made to minimize contractual hazards and thus mitigate inter-party risk within an alliance. Alliances influence organizational learning in terms of experiential learning, as well as through inter-partner learning, which was evident from the KLM-Northwest alliance. The design of an alliance involves clearly defining the scope, meticulous partner selection, partner contribution and establishment of structures and processes for value sharing and decision making as per the appropriate stage of the value chain. The ‘strategic scope’ sets the product, technical, functional and geographical boundaries of the alliance, whereas, the ‘operational scope’ defines the activities, teams and research capabilities of the alliance. The scope must be aligned with a clear logic for value creation. The ‘transactional cost’ in joint ventures defines its boundary activities with other firms (Kogut B., 1988). In the case of KLM and Northwest, the value added to the industry was enormous; it was the first of its kind in history! Strategic scope was defined in such a manner as to reduce risk of conflict between the partners while operational scope was aimed at maximizing productivity, output and efficiency. The capacity contribution of KLM and Northwest was initially set at 60:40, but was modified to a 50:50 partner contribution, following a conflict on equity grounds. KLM and Northwest did face the challenge of ‘inter-partner competition’, a situation in which one partner tries to opportunistically maximize its private interests at the expense of the other partner (Krishnan R., Martin X. and Noorder N., 2006). Specific to this alliance, sales personnel of each parent entity would attempt to sell more seats of the parent airline, as compared to that of the partner, despite the joint venture. The parties realized the dangers of such unwarranted competition between themselves and in 1998, decided to integrate their sales forces. This served to have a highly beneficial bearing on the relations of the alliance parties. In this manner, almost all major activities were managed in a ‘joint’, collaborated way except for marketing and advertising campaigns. However, the non trans-Atlantic revenues were handled altogether separate, from the Joint Venture revenues. This led to a greater understanding between the two airlines. Control of the operations was based on knowledge of the player in the market, i.e.,Northwest was more aggressive in its control over the US market. The ‘Alliance Steering Committee’ was formulated to oversee strategic and operational aspects of the alliance and also to discuss their stance in the face of stiff competition from market forces. Financial control was achieved by ensuring that revenues met the minimum forecasts, thus maintaining a profitable association. Above all, the as per the joint venture contract, the profits are now shared equally between the two parties. Conflict resolution has been handled with utmost fairness, keeping in mind the long term relations involved in the alliance. Some of the techniques commonly used in Alliance management are Alliance staffing, Management of Learning and Relationship management. There are numerous ways in which KLM and Northwest mutually learn and benefit from the other, in terms of quality, connectivity and reliability. The two companies have even developed a common branded premium product available on World Business Class! Organizational learning through joint ventures is believed to involve a blend of co-operation and competition, with each partner vying to gain expertise on the other’s capabilities, while managing the collaborative process efficiently (Reuer, 2004). In this way, the companies have been on a constant learning curve and have actively utilized, trained and developed the huge pool of human resources working with both firms. The performance of an alliance must be evaluated in terms of the ‘returns’, innovations accomplished or in general, the value of the firm itself, in comparison to the parental performance before the strategic alliance was implemented. Alliance management is essential for the smooth functioning of day – to – day activities and the management of relational assets. Alliance performance is managed at the Firm level (parental level) and at the Alliance level. Indicators of Alliance Performance include Financial measures, Objective measures and Perceptual measures (based on the Manager’s view). The performance of the KLM – Northwest Alliance is monitored once in three months. In these review meetings, issues of importance are discussed and solutions are sought through open communication channels for the betterment of services. Information exchange is encouraged and decisions are made in a ‘joint’ manner, generally in group consensus. In addition, joint social gatherings, dinners and meetings are organized for the team members of both, KLM and Northwest airlines. The joint venture provides keen support to develop a sound chemistry between the teams. Traditionally, there are two schools of thought regarding the success of organizational performance: ‘The Industrial organization’ thrives due to its affiliation to a favourable industry, whereas the ‘Resource base view’ implies organizational success due to its inherent heterogeneity. The ‘middle path’ strategy adopted by KLM and Northwest relies on ‘relational assets’, which allows for unique combinations of resources and capabilities between partners enhancing the competitive advantage over a period of time. It is indeed remarkable that both KLM and Northwest perceive this as a successful alliance strategy, with alliance operations doubling since inception. This has been possible due to the mutual trust, co-ordination, management and proactive review measures implemented. KLM has always faced challenges of the language (being different from English), while Northwest has a layered organizational structure, requiring approvals at multiple levels. Yet, acceptability between cultures has grown over time and effective communication has been the key to elimination of hurdles. Given the dynamic and unpredictable nature of the external environment, companies have been forced to incorporate changes and adjustments to suit the market (Avramescu T. and Ungureanu E., 2008). The new joint venture agreement allows the two airlines to develop their own alliance partners in the US and Europe, respectively. The year 2003 witnessed the merger of KLM and Air France, giving rise to the second largest carrier in Europe with a market share of 30% (Hawlena, 2012). Measures have been proposed for further improving the service quality and connectivity; yet, the joint venture agreement does not hold scope to manage issues such as the purchase of new airplanes by each airline and passenger or cargo capacity of the aircraft. It is heartening to note that the profits made by this joint venture contributes in a significant way to the financial success of both the parent companies and has expanded their network in an unprecedented way despite the competition! Thus, the ‘KLM – Northwest joint venture’ is a true representation of an international alliance, demonstrating the various intricacies of strategic partnerships! The greater the alignment of the alliances, greater would be the organizational success in terms of profitability, stability, reliability and brand value. I believe this alliance is well aligned and has well exceeded expectations. The dawn of the 21st century has witnessed fierce market competition, which inspires enterprises to establish win-win or multi-win strategic alliances between the players (Ji H. and Huang Y., 2010). Even today, KLM and Northwest continue to be ever - inspired to develop and nurture their unique relationship and to take this alliance to greater heights in the near future! References 1. Radu C. (2010) Need and potential risks of strategic alliances for competing successfully Economia : Seria Management, (13) Pg. 165-169. 2. Hennart J. (1988) A Transaction Costs Theory of Equity Joint Ventures, Strategic Management Journal, Vol. 9, Pg. 361-374. 3.  Liana M., Nicoleta B and Dana P. (2009) Strategic Alliances: From Success to Failure, Annals of the University of Oradea, (1), Pg. 202-206. 4. Gulati R. (1998) Alliances and Networks, Strategic Management Journal, Vol. 19, Pg. 293- 317. 5. Hamel G., Doz Y.L and Prahalad C. K. (1989) Collaborate with your competitors and win Harvard Business Review, (1), Pg. 133 – 139. 6. Gomes-Casseres B. (1994) Group Versus Group: How Alliance Networks Compete, Harvard Business Review, (4), Pg. 62 - 74. 7. Kogut B. (1988), Joint Ventures: Theoretical and Empirical Perspectives, Strategic Management Journal, Vol. 9, 319-332. 8. Krishnan R., Martin X. and Noorder N. (2006) When Does Trust Matter to Alliance Performance , The Academy of Management Journal, Vol. 49, No. 5., Pg. 894 -917. 9. Reuer J. (2004) Introduction – Strategic Alliances Research: Progress and Prospects, Oxford University Press, Pg. 1 – 16. 10. Avramescu T. and Ungureanu E. (2008) The Risks and Advantages of the Decisional Process Strategically Associated to the Romanian Companies, Annals of the University of Petrosani : Economics, (1), Pg. 5-10. 11. Hawlena J. (2012) Influence of alliances, mergers and takeovers on efficiency of air transport Transport Problems: an International Scientific Journal, (2), Pg. 15-26.   12. Ji H. and Huang Y. (2010) A Research on Influential Factors Related to the Stability of Competition- Oriented Strategic Alliances, International Journal of Business and Management. Read More