Volkswagen and Suzuki Partnership and Break-Up - Case Study Example

International strategy: Volkswagen and Suzuki Partnership and Break-Up Name Professor Institution Course Date Type of international strategy is being pursued by Volkswagen and Suzuki The increase in competition has prompted companies to target new potential markets. Various risks which are associated with direct entry into global markets such as high start up costs, political risks and general economic risks (Jones & Coviello 200, p.284). For that reason, companies seek to form an alliance with the others to reduce these disadvantages and also to benefit from each others’ capabilities. For instance, in 2009 Volkswagen AG of Germany entered into a relationship with Suzuki Corporation to access market in each other’s domestic market. Volkswagen bought a stake at Suzuki worth 19.9% with an agreement to share distribution network and technologies between themselves (Icmrindia 2012, p.1). From this information, it is noticeable that Volkswagen and Suzuki Corporation pursued a strategic alliance in their approach to benefit from their capabilities and access Japanese and German motor market. Drago (1997, p.53) defines strategic alliance as an agreement that could be short term or long term where between two or more companies come together to pursue certain objectives like sharing resources for their own benefits. Such resources could be technology, copyright and trademarks among others. Kale & Singh (2009) pined that strategic alliances have become more popular among companies targeting different global markets. In most cases, strategic alliance encompasses three features which are also noted in this case study. The features which are common in strategic alliances are that it is crafted between firms from developed nations, technology sharing and developing new products remain key agendas. In this Volkswagen-Suzuki Corporation alliance, technology sharing was one of their goals (Icmrindia 2013). This is because technological innovations represent some progress and it is difficult for a company to be in possession of abilities to do its own research and development efficiently. According to Besanko et al (2013, p.148) frequent research is spurred by the fact that some products have short-term life cycle and likelihood of a firm to remain innovative relies on the effectives of its technology. Hence, sharing technology gives the edge and reduces the need to buy new technological machines. This was the key perspective when Volkswagen and Suzuki Corporation were getting into the agreement. For instance, Icmrindia (2013) posited that when Volkswagen agreed to acquire a stake at the Suzuki Company in 2009, they signed a contract to enjoy each other’s technology infrastructure including network. While Volkswagen Company consented that it would allow Suzuki into its hybrid and electric technology as well facilitation of access to German market, Suzuki consented to enable Volkswagen to easily access the Indian markets. Nevertheless, such alliances have the tendency of exhibiting a mix of potential and peril. While strategic alliances make companies to take advantage of opportunities, executives ought to be alert to the risk of unfavorable circumstances (Koc & Ceylan 2007, p.109). For instance, the alliance executives may require resolving disgruntling alliance issues; enhance poor terms of operation and handle the negative outcomes of exit hurdles. It is these issues that Volkswagen and Suzuki did not handle with latter leading to break-up. In 2011, Suzuki claimed that Volkswagen had violated the contract by not allowing it access to its hybrid technology which it had promised. Icmrindia (2013, p.3) asserted that Volkswagen also blamed its counterpart Suzuki Company of violating the agreement by purchasing Fiat Company’s diesel engine. Cultural diversities between the home countries of these two companies hampered this strategic alliance. Suzuki accused Volkswagen for high-handedness in implementation of the agreement. Advantages of strategic alliance for Suzuki and Volkswagen Companies Schilke & Goerzen (2010, p.198) contend that in a simple perspective, strategic alliance simply necessitates a business to realize their independent goals even if they collaborate with other businesses. However, the concerns of modern complex and globalized market prompt companies to make such arrangements with an intention of gaining competitive edges amongst the fierce rivals within that market. According to Teng & Das (2008, p.131), a company which creates strategic alliances with others normally benefit in through numerous means. The success of Volkswagen and Suzuki deal could have seen them increasing their capabilities and competitive, sharing the economic risks and target markets access (Kale & Singh 2009). In this case, the agreement is that both Suzuki and Volkswagen wanted to gain each other’s technology and technical know-how with an aim of gaining competitive advantages both in German and Japanese markets. For instance, the technology capabilities such hybrid and electric technologies which Volkswagen owned meant that if they alliance was to succeed; Suzuki would have enjoyed technological research and development. In this perspective view, strategic alliances can be said to create opportunities for the companies to attain their desired objectives (Drago 1997, p.56). Also Suzuki promised to enable Volkswagen get into India and Japanese market. Every foreign company finds it difficult just to enter into a new market by direct means. This is because local companies in that market often try to block the entry due the fact that new foreign companies normally and stimulate competition and scramble for market share (Heimeriks 2010, p.61). Also, cost of starting a new company which includes buying new plant, high employees and costs of construction is high. Therefore, in brief, strategic alliance reduces economic and political risk in new foreign markets. Disadvantages of strategic alliance for Suzuki and Volkswagen companies Heimeriks (2010, p.59) holds that Suzuki and Volkswagen belong to motor industry and compete for markets and sales (Icmrindia 2012). For that reason, they cannot declare every secret about their technology and markets to each other. The disadvantage was witnessed in Suzuki and Volkswagen alliance. As much as agreement was made, the mistrust between the two companies made them not to honor it. For example, Volkswagen never allowed Suzuki to use its technologies on fear of gaining knowledge about its system, research and development (Icmrindia 2012). It was also an indication that companies can enter into an agreement to gain that does not necessarily means they will reciprocate. It is even arguable that Volkswagen purchased 19.9 percent worth of stake at Suzuki to gain relationship which could facilitate its entry into India market. Likewise, Suzuki violated the by entering into an agreement with Fiat to sell diesel engines to Fiat subsidiary in Indian, yet it they were in agreement that Volkswagen would the first to be supplied with those engines (Icmrindia 2012). Kuivalainen et al (2004, p.37) claim that coordination of the agreement between two or more companies is usually complicated because of the informational settings and lack of formal hierarchy. The fact that there was nobody to monitor the strategic alliance between the Suzuki and Volkswagen encourage them to breach it. Suzuki even went further to enter into an agreement with Fiat to supply diesel engines to Indian market; a situation which further caused the breakdown of the Suzuki-Volkswagen deal (Icmrindia 2012. Difference and similarities in German and Japanese culture, and how cultural diversities contributed to Suzuki and Volkswagen alliance breakdown In this case study perspective, difference in culture was blamed for stalling of Suzuki and Volkswagen alliance. This means there could be similarities, but also major differences between German and Japanese cultures. According to Hofstede, cultural difference can be compared and contrasted using five dimensions namely Individualism versus Collectivism, Power Distance, Long-Term Orientation, Uncertainty Avoidance and Masculinity versus Femininity (Hofstede, Gert & Minkov 2010). A comparison between and contrast between German and Japanese cultures shows a great difference in all the five dimensions. Analysis of Hofstede’s model shows Japanese culture to have high power distance when compared to German culture (Hofstede, Gert & Minkov 2010). According to The Hofstede Centre (2015) the model rates Japan at 54 compared to 35 that of Germany. These ratings depict Japan as a society where people want to be close to power or dominate. While the Japanese likes the centralized organization where decisions are made at the top German organizations are decentralized and decisions are consulted before it is arrived at. Japanese citizens think that having decentralized organization slow down the process of decision making because many people have to be involved (Hofstede, Gert & Minkov 2010). The belief in power and dominance made sign another agreement with Fiat to supply diesel engines in India and gain market share in that market. It was one the reasons which contributed to breakdown of the alliance. However, the similarity in this dimension is that both the two countries believes that power must be achieved through merit (Mindtools 2015). Experts could argue that this is the reason why believed in the capabilities of their technologies, and they sharing could steer them to greater heights. There is also a huge difference in culture between Japan and Germany based on Individualism versus Collectivism dimension. The Hofstede Centre (2015) pined that the comparison by Hofstede show that German scores 67 while Japan scores 46. It is a depiction that Germany culture highly promotes individualism compared to Japan. This could be reason why Suzuki could have breached their agreement with Volkswagen when the company entered into an agreement with another company, Fiat Motors. Japanese people believe collectivism is a better way of achieving. The society which is inclined into collectivism people has the tendency of fearing losing any important thing (The Hofstede Centre 2015). For instance, suppose Suzuki could have declined another alliance with Fiat, the company could have lost the business to another market player. As for Germany, where culture is inclined towards individualism, people tend to honest and honor responsibility. This is the reason why Volkswagen was crying foul of Suzuki not honoring pledge to enable it access in motor vehicle market. Uncertainty difference show that Germany scores 65 while Japan get the large score of 92 (The Hofstede Centre 2015). The situation depicts how societies leave the future to take shape of itself and not to try controlling it. In the case study, this process is portrayed by the fact the no company tried to monitor or control the implementation of the alliance until it proved to be collapsing. Criticisms of the Hofestede’s model of Culture Even though summary of the criticisms of Hofestede’s model have been widely used by researchers and scholars as point of reference, the model has received numerous criticism including his use of survey, use of nations to research on culture, use of companies to study culture, referencing of old IBM data and use of four to five dimensions. Researchers including McSweeney (2002, p.1) have criticized Hofestede’s work for using survey as his means of collecting data. Survey has several flaws and may not give accurate data. Smith (2004, p.9) challenged that Hofstede’s study just considered the population of people he was interviewing as homogenous whole. The truth is that in the population, people could be of different ethnic group thus subscribing to diverse cultures. The people interviewed may not give appropriate information depending on the mood, knowledge and expertise towards the subject. Also, when sampling is used, it can never give the true representation of views of everyone. In normal circumstances, there are numerous types of culture which exist in one country including national culture, occupational culture, generational culture, organizational culture and religious culture among others. McSweeney (2002, p.1) argued that when the Hofestede’s singles out national culture of the two countries like in the case Germany and Japan, he is living out other types of culture which influences organizational behavior; for example generational culture. Also, Hofestede’s was criticized and labeled not convincing when he picked one Company IBM and its employees to evaluate the world cultural similarities and differences (McSweeney 2002, p.4). Smith (2004, p.7) asserts that organizational culture varies from one company to another, hence biases in using one company’s organizational culture to resent several companies. Smith (2004, p.9) stated that using culture to judge the decision of a company may not hold water because; a whole country has different cultural habits which influence their behavior and belief. Therefore, it is misleading to argue that Japanese culture and that of Germany influenced the collapse of Volkswagen –Suzuki alliance. In many cases, companies now employee’s people from different background who influence each other and neutralize their cultures. Also, the diversity management has helped employees drop their cultures to become global citizens therefore I have no confidence in using this model to evaluate culture. References Besanko, D, Dranove, D, Shanley, M & Schaefer, S 2013, Economics of Strategy, 6th edition, Hoboken, NJ, Wiley, p. 148 Drago, W.A 1997, When strategic alliances make sense, Industrial Management & Data Systems, Vol. 97, No.2 pp. 53 – 57 Heimeriks, K.H 2010, Confident or competent? How to avoid superstitious learning in alliance portfolios, Long Range Planning, Vol. 43, No. 1, pp. 57-84 Hofstede, G, Gert JH & Minkov, M 2010, Cultures and Organizations: Software of the Mind, 3rd ed. New York, McGraw-Hill. Icmrindia 2012, After the Breakup: The Troubled Alliance between Volkswagen and Suzuki, pp.1-11, Viewed 18th Jan 2015 from http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR412.htm Jones, M.V & Coviello, N.E 2005, Internationalization: conceptualizing process of behavior in time, Journal of International Business Studies, Vol. 36, No. 3, pp. 284-303. Kale, P & Singh, H 2009, Managing Strategic Alliances: What Do We Know Now, and Where Do We Go From Here? Perspectives, Academy of Management. Koc, T & Ceylan, C 2007, Factors impacting the innovative capacity in large-scale companies, Technovation, Vol. 27, pp. 105-114. Kuivalainen, O, Sundqvist, S, Puumalainen, K & Cadogan, J.W 2004, The effect of environmental turbulence and leader characteristics on international performance: are knowledge-based firms different? Canadian Journal of Administrative Sciences, Vol. 21. No. 1, pp. 35-50. McSweeney, B 2002, Hofstede’s model of national cultural differences and their consequences: A triumph of faith – a failure of analysis, Sage Publications, pp. 1-7. Mindtools 2015, Hofstede's Cultural Dimensions: Understanding Workplace Values around the World, viewed on 18th January 2015 from http://www.mindtools.com/pages/article/newLDR_66.htm Schilke, O & Goerzen, A 2010, Alliance management capability: an investigation of the construct and its measurement, Journal of Management, Vol. 36 No. 5, pp. 192-219. Smith, P.B 2004, Nations, Cultures and Individuals: New Perspectives on Old Dilemmas, Journal of Cross-Cultural Psychology, Vol.35, pp.6-12 Teng, B & Das, T.K 2008, Governance structure choice in strategic alliances: The roles of alliance objectives, alliance management experience, and international partners, Management Decision, Vol. 46, No.5, pp. 725-742. The Hofstede Centre 2015, Geert Hosftede Cultural Comparisons, viewed on 23rd January 2015 from Read More