Strategic Management and Strategic Alliances - Admission/Application Essay Example

PART I Strategic Management: Strategic Alliances Introduction The recent literature on firm-specific knowledge in sustainability of competitive advantage among firms has spawned various theoretical perspectives. Central to dynamic capabilities of strategies of a firm would be acquisition of new capabilities with the common tool used for this purpose noted by Doz (2007) as strategic alliance. An alliance describes a voluntary association which promotes the common interests of the members. Hence, strategic alliance refers to a voluntary form of grouping where firms come together for a common objective within a specified period. Modern defines strategic alliance in terms of “at least two companies or partners voluntarily combining value chain activities, architecture, and value chain linkages for the purpose of increasing individual and collective value addition, increasing competitive advantage, and achieving agreed or common objectives” (2007, p.537). These alliances could vary from informal agreements, referred to as handshake agreements to formal agreements encompassing lengthy contracts where parties contribute capital into a joint venture or exchange equity. Important characteristics associated with strategic alliances as documented by David and Han (2004) and Jeffrey and John (2010) include: the partners retain their legal independence after formation of the alliance; the managerial control and benefits get shared; and continuously making of contributions in the strategic areas like products or technology. These characteristics play a critical role in differentiating strategic alliance from other strategies such as joint ventures and mergers and acquisitions. In joint ventures, Modern (2007) notes that the partners join together to form a distinguished legal entity guided by the partnerships act. For acquisitions, a firm takes over another and distinctively establishes as the new owner, common in the context of smaller companies being acquired by larger ones. In mergers, however, the firms would be of the same size and form a separate entity that would be owned and operated separately. Whereas much focus on strategic alliances would be between two companies, there has been a trend towards multi-company alliances with Elmuti and Kathawala (2001) giving an example of the alliance involving Apple, Philips, Motorola, Sony, Matsushita and AT&T yielding General Magic Corporation that develops the Telescript communications software. These alliances could occur in various forms including marketing and sales alliances, product and manufacturing alliances and technology alliances. History While many scholars regard strategic alliance as a recent phenomenon, inter-organisational linkages have been in existence since the genesis of the firm as a unit of production. Examples include entrepreneur and firm linkages to credit institutions like banks, suppliers of raw materials like craftsmen and family farms and trade associations like the early Dutch Guilds. Contemporary organisational networks included diverse organisations like buyers, suppliers, regulatory authorities and competitors among others, who together made up production’s economic organisation as networks of alliances (Puranam & Srikanth 2007; Shah & Swaminathan 2008). Strategic Alliance Today In the modern business environment, alliances have become critical as most organisations seek for competitive advantage (Kale & Sikh 2009). Elmuti and Kathawala (2001) observe that the number of strategic alliances being reported doubled in the past ten years with searches indicating massive numbers of companies formed through these alliances and consulting companies on the same. According to Holmberg and Cummings, in many EU and US industries, these alliances have shifted in their competitive paradigm from the traditional form of firm-to-firm competition as most of them move towards “alliance based, network-vs.-network competition” (2009, p.164). As such, the researchers attribute about a third on the revenues from top 2,000 European and US companies to such alliances. Furthermore, with the shift of customer value propositions due to the strategic innovations, individual firm’s competitiveness could be reduced to insignificant levels hence the need to combine performances. Shah and Swaminathan (2008) found out that paradigm shifts would come through firms employing non-traditional approaches which propagates the significance of having strategic perspective towards formation of alliances. Organisations that seek to identify, develop and effectively maintain sustainable competitive advantage would increasingly employ collaborative paradigm that enables them develop sophisticated, flexible and effective strategic alliances. Reasons for Formation of Strategic Alliances Companies attribute their reasons for entering into alliances to many factors. Elmuti and Kathawala (2001) cite growth and entry into new markets as a leading factor. With limited time to establish new markets in the fast moving global economy nowadays, companies perceive formation of alliances with companies already operating in such markets as an appropriate alternative. Partnership with international companies could in particular make expansion into new markets easier. This is perhaps what caused Anhueser-Busch to licence its brewing and marketing rights for Budweiser to brewers like Modelo in Mexico, Kirin in Japan and Labatt in Canada among others instead of building its own brewers in these markets. Secondly, since not all organisations have the capacity to provide the technology needed for effective competition in the market, there would be teaming up between the companies with minimal resources and those endowed with technological resources so as to collectively provide the needed technology (Hoffmann 2007). Similarly, companies could form alliances to mitigate against financial risk and to share in the cost needed for research and development. In cases where the financial risk accompanying the pursuance of a new production method or product prove to be too great to be borne by a single organisation, two or more organisations would come together so as to spread the risk. Elmuti and Kathawala (2001) give the example of the alliance of airline manufacturers, British Aerospace, Boeing, Aerospatiale, Construcciones Aeronauticas and Deutsche Aerospace, that came together to spread the exorbitant cost of manufacturing a new jet plane. It would be observed that these alliances aim at ensuring organisations attain competitive advantage in their marketplaces through provision of tools necessary for competitiveness. Smaller companies would particularly form alliances with other companies so as to attain the needed competitiveness. Nonetheless, majority of these alliances fail, with an even greater potion performing poorly. Although these failures could be attributed to various reasons, Holmberg and Cummings (2009) attribute these to two issues: poor alliance management and poor partner selection. Even the most effective alliance management could fail to overcome initial poor screening and targeting. Consequently, such alliances suffer from lack of trust, coordination between management teams, clear objectives and goals, clash of cultures and differences in attitudes among partners and operational procedures. As such, informed by strategic management, Kale and Singh (2009), provide a guideline on how to ensure that an organisation enters into an effective alliance and successfully maintains it throughout its lifetime. The Phases of a Strategic Alliance Aligning strategic and corporate alliance objectives: The first step in forming strategic alliances should be the selection process aimed at aligning the objectives of the alliance to overall corporate goals, also referred to as alliance formation phase. Acknowledging that the level of objective alignment and performance tracking would vary among organisations, Holmberg and Cummings (2009) observe the importance of clarifying the value that the organisation would reap from the alliance. This should be accompanied by the identification of the specific links to corporate strategies. Kale and Singh (2009) bring this into perspective by differentiating partner complementarity, commitment and compatibility or fit. Partner complementarity refers to the extent to which a partner would contribute non-overlapping resources into the alliance. Partner compatibility describes the fit between the working styles and culture of the partners while partner commitment refers to the willingness of a partner to contribution of the resources required in the alliance and making short term sacrifices with the aim of achieving the alliance’s objectives. Whereas complementarity would imply much interdependence among alliance partners, commitment tends to be more critical in those alliances whose partners have established the gains to reap from coming together but do not have a clear approach to achievement of the same. Alliances make sense when they leverage and support corporate strategies and objectives more effectively as compared to alternative approaches. Nonetheless, this alignment of objectives could be overlooked in majority of the alliances. Alliance design: The construction of the alliance governance also forms a crucial stage in the phases of alliance existence. Among the various ways through which governance could be handled in an alliance, contractual provisions clearly set the partners’ mutual rights and obligations by specifying the input of each organisation into the alliance, the process of exchanges and resolution of disputes. Secondly, self-enforcing governance could be employed relying on goodwill, reputation and trust. This relational governance reduces transactional cost due to savings on monitoring costs, contracting costs and complex adaptation costs. Finally, in equity ownership, a partner could invest in relationship-specific assets so as to acquire the expected benefits (Hoffman 2007). Nonetheless, when making governance decisions in an alliance, it would be critical to evaluate the relationships among the governance mechanisms. According to Doz (2007) and Kale and Singh (2009), equity alone would be insufficient to give successful governance alliance and these mechanisms could complement one another in propagating the success of the alliance. Managers should thus aim at selecting governance complexity that matches the needed safeguards depending on the anticipated hazards. Post-formation alliance management: The decisions associated with alliance governance and partner selection affect the survival of alliances after formation. Thus, Kale and Singh (2009) give two factors that need to be considered critically after alliance formation: management of coordination among partners and the development of trust among them. The partners should coordinate their activities so as to manage their interdependence and foster the realisation of the benefits of the alliance. But there could spring up severe coordination problems due to lack of sufficient knowledge on the interdependence of the partners’ actions and the handling of information. Coordination problems in this case refer to the difficulties in the alignment of partners’ actions. To curb these problems, clear guidelines should be developed on the specific tasks of each partner and the implementers, referred to as programming. The second option referred to as coordination mechanism involves the formal creation of an authority structure or role that oversees the interaction of partners and sharing of information and resources. Finally, for partners who would require informing one another of their actions on a regular basis and evaluating their interdependence, feedback mechanism would be applied. With trust being an important aspect of alliances, it should be cyclically developed through a process of commitment, bargaining, interaction and execution among the partners. Based on this, various trust-building mechanisms have been developed. Kale and Singh (2009) observe that this would be through making of large unilateral commitments and voluntary placement in a vulnerable position and asking the partner to reciprocate. A second way would encompass honouring commitments and committing only to executable actions. Also referred to as relational capital, interpersonal trust helps strengthen inter-firm trust as individual from the concerned firms work together regularly, understand the roles of one another and stabilise in their roles. The development of trust during this final phase facilitates the sharing of information among partners, promote the willingness of partners to the alliance and lowers relational risk perceptions. Moreover, trust increases partner satisfaction in the alliance and achievement of their set goals. As a result, the alliance’s scope and longevity increases. Conclusion Strategic alliances have been long in existence, with its rapid increase witnessed in the recent years as more and more organisations seek for sustainable competitive advantage. As firms come together to leverage on their individual strengths, challenges arise that could make the realisation of the anticipated outcomes elusive. Therefore, for alliances to realise the set goals and objectives, there would be need for commitment from the senior management, similarity in management philosophies, strong and effective management team and frequent performance feedback. This should be accompanied by frequent communication between or among the partners. Of importance would be to ensure that the partners share in the same goals and objectives and be made clear to all participants before thorough planning commences. Indeed, with the benefits being reaped from the various alliances, the future trends indicate an even increasing adoption of this strategy among international companies as they seek to conquer new markets and maintain their competitiveness. PART II Case Study: Chrysler-Fiat Alliance Introduction In the automobile industry, PSA has been documented by Hitt, Ireland and Hoskisson (2009) as the pioneer in strategic alliance in 1966 when it entered into an alliance with Renault. Over the years, many other companies have adopted this strategy as a way of gaining sustainable competitive advantage, including the 2009 strategic alliance between Chrysler and Fiat motor manufacturers. In 1925, Chrysler was founded and was noted to focus on production of inexpensive vehicles targeting the middle income earners. But over time, Chrysler constantly trailed behind GM and Ford motor manufacturers in the North American motor market in technology, market share and consumer satisfaction (Anwar 2011). The complexity of its market had even been worsened by the entry of Japanese Honda, Nissan and Toyota into the market. In spite of the merger with Benz in 1998, the firm could still not compete considerably against the other players in the market due to post-merger problems, lay-offs and losses. With the 2008/2009 global recession, Chrysler was sold off to Fiat leading to their strategic alliance in 2009. Founded in 1899, Fiat had survived challenges in the industry, with a larger portion of its troubles being ascribed to the stringent Italian labour laws, cost issues and the business environment. By 1910, Fiat became the largest auto manufacturer in Italy, manufacturing military vehicles during the World War II and other machinery for the government (Anwar 2011). With the acquisition of Alfa Romeo in 1986, it became Europe’s largest automaker. But the firm entered into financial problems in 2002, two years after GM had bought about 20% stake in the company. After the dissolution of the partnership in 2005, the new turnaround CEO, Sergio Marchionne propelled the firm forward to its acquisition of 20% of Chrysler in 2009. The issues facing these companies necessitated this strategic alliance in 2009. Chrysler had suffered financial problems in the 2008/2009 financial crisis and needed to be bailed out by the US government so as to resume normal operations. But even so, the US government could not lend to this firm as it suffered from production of poor performance small cars which proved to be inefficient in fuel consumption as such posted dwindling sales leading the firm to extinction (AFP 2009). Other than its wanting technology, the firm had its market in Europe shrinking. Fiat on the other hand needed to penetrate the North American market having exited in the 1980s due to due to mismanagement, quality problems and limited market share (Anwar 2011). With Elmuti and Kathawala (2001) citing the reasons of strategic alliances as raising productivity and seeking economies of scale, the Chrysler-Fiat alliance aimed at compensating for each of the partner’s weaknesses. Referred to as compatibility by Kale and Singh (2009), the Chrysler-Fiat alliance was practical because according to Anwar (2011), the brand portfolios of the two companies were compatible. Both of them manufactured small cars which were in high demand due to the high gasoline prices. Fiat aimed at providing Chrysler with assembly platforms and technology-related expertise so as to develop small fuel-efficient cars in North America. Chrysler also benefitted from the expertise leadership of Fiat’s turnaround CEO, Mr. Marchionne. Fiat had made a good reinvention of itself by producing small fuel efficient cars and adopting a lean, well integrated organisational structure by 2009 which Chrysler aimed at borrowing from Fiat having lost its competitiveness due to expensive labour contracts and global competition. With this, the US government could lend Chrysler additional loans and the firm would benefit from Fiat’s European market distribution network. Fiat could then raise its share to 35% and eventually to 51% in 2013. On the other hand, Fiat aimed at riding on Chrysler’s brand name in the North American market to penetrate this market. The combined production of these companies could see them produce five million cars due to their geographical reach and tangible economies of scale. Nonetheless, just as Holmberg and Cummings (2009) indicated that alliances also face problems, the Chrysler-Fiat alliance exhibited problems in mismatch of its brand portfolios, corporate integration and technology sharing (Anwar 2011). Another critical problem noted of such cross-border alliances would be knowledge sharing in research and development, distribution, ownership, control and antitrust and regulatory concerns. Despite their acceptable brands, both Chrysler and Fiat lagged behind in global integration and quality but had a smooth control sharing (BBC 2009). Despite these challenges, the alliance paid off because in the 2009 US government auto bailout, Chrysler which had lost over $8 billion was given $4 billion, though with the condition of filing bankruptcy (AFP 2009). Similarly, the alliance expanded the markets of the partners beyond North America and Europe to a global scale which gave them an advantage in the market of small cars and hybrid segments. Global market expansion has been cited by Hill and Jones (2010) as one of the advantages of strategic alliances. With the alliance expected to achieve its objectives in product rationalisations, cost cutting, global integration and research and development savings within five years, it would be credited as one of the most successful transatlantic alliances in the auto industry (Anwar 2011). The Chrysler-Fiat strategic alliance provides an example of technological alliance where Chrysler aimed at gaining from Fiat’s technological expertise in the manufacture of small fuel efficient cars. It could also be viewed as a marketing and sales alliance as it aimed at expanding into new markets. With Fiat being instrumental in providing manufacturing skills to Chrysler and the alliance looking forward to produce more small and fuel efficient cars, it could also be said to be a product and manufacturing alliance. Indeed, product and manufacturing alliance largely explains the Chrysler-Fiat alliance more than the other two forms of alliances. The compatibility of the two firms yielded positive outcomes and minimal mistrust issues. As such, this could be said to have been a successful alliance even though the full attainment of its objectives would only be realised at the end of its five-year alliance period. References AFP 2009, ‘A good deal for Fiat may still not be good enough to save Chrysler’, The Economist, 21 January, viewed 3 March 2013, http://www.economist.com Anwar, ST 2011, International management: Managing across borders and cultures, 7th edn, A & M University, West Texas. BBC 2009, ‘Fiat and Chrysler create alliance’, BBC News, 20 January, viewed 3 March 2013, http://news.bbc.co.uk/2/hi/7839542.stm David, RJ & Han, SK 2004, ‘A systematic assessment of the empirical support for the transaction cost economics’, Strategic Management Journal, vol. 25, no. 1, pp. 39 – 58. 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