International Strategic Alliances


Pe s e w a Pr e s e n t a t i o n s

International Strategic Alliances

Growth of Strategic Alliances

Growth and spread of cross-border strategic alliances between firms is one of the most significant developments in the global economy in recent years.

Collaborative ventures between firms across national boundaries are not new. What is new is their current scale, their proliferation and the fact that they have become central to the global strategies of many firms rather than peripheral to them (Dicken 2003,

Global Shift)

The overwhelming majority of strategic alliances are between competitors.

What is a strategic alliance?

An international Strategic Alliance is a strategic cooperative agreement , or agreements, between two or more firms, from at least two countries, which involves exchange, sharing, or codevelopment for achieving strategically significant objectives that are mutually beneficial and beyond what a single firm could achieve alone (Mellahi et al 2005)

Strategic alliances are formal agreements between firms to pursue a specific strategic objective…. In particular, an alliance involves the sharing of risks as well as rewards through joint decision-making responsibility for a specific venture. In a strategic alliance only some of the of the participant’s business activities are involved; in every other respect the firms remain not only separate but also usually competitors (Dicken 2003, Global Shift)

According to Mockler (2000)strategic alliances have three distinguishing characteristics:

• two or more entities unite to pursue a set of important, agreedupon goals while in some way remaining independent subsequent to the formation of an alliance.

The partners share both the benefits of the alliance and control over the performance of assigned tasks during the life of the alliance. This is the most distinctive characteristic of alliances and the one that makes them so difficult to manage.

The partners contribute on a continuing basis in one or more key strategic areas, e.g. technology or products

Child and Faulkner (1998)

Strategic alliances including JV, consortia and collaborations are at base about organisational learning and should be structured towards that end.

Other forms of co-operations (e.g. virtual organisations, networks, outsourced corporations) are about skills and capability substitution . Their strengths lies in their specialisation, their adaptability and flexibility, but not necessarily in the learning opportunities they afford

Types of Alliances

Joint Ventures (JV): where two or more independent companies set up a daughter firm jointly owned by the parents. Consortia are JV type arrangements but are typically focused on a particular project or venture (e.g European Airbus, large civil engineering projects)

Technology-development coalitions (e.g. BMW, GM and Daimler-

Chrysler to develop hybrid car)

Franchising: (Mc Donald's, Holiday Inn)

Marketing and distribution agreements (e.g. United Airlines,

Lufthansa, Air Canada, Scandinavian Airlines and Thai Airways, allowed the integration of passengers on selected flights, marketing plans and sales promotions)

Licensing and cross-licensing agreements (e.g. Often found in science based industries where the right to develop a patented product is given for a fee. Common in pharmaceuticals, biotechnology, software)

Logistic coalitions : (e.g. Hapag-Lloyd Maritime Container and IBM)

Co-production (e.g. In services UK Inland Revenue and EDS to process PAYE tax collection)

In many cases alliances will involve some exchange of shares or small equity investment

When is an agreement not a strategic alliance?

JV may or may not be strategic alliances depending on the circumstances. (E.g. if one of the partners brings little to the

JV apart from initial capital contribution then it can’t be called a strategic alliance)

An agreement where a firm grants a license for using technology in exchange for a royalty is not a strategic alliance except when there is a continuing contribution and control among two or more independent firms.

Vertical and Horizontal Alliances

Vertical relationships

Relationships formed between international suppliers and buyers that agree to use and share their skills and capabilities in the supply chain

(e.g. Microsoft has several vertical strategic alliances with governments in the area of e-government)

Horizontal relationships

Relationships between rival firms selling similar goods and services.

Though cooperating with one another, the partner firms retain their strategic autonomy. They are formed by rival companies in order to enhance their respective capabilities and competitive positions in non-competing lines of operations or markets.

At the same time, these firms may face each other as competitors in different lines of operations or markets (e.g. GM and Toyota; GlaxoSmithkline and

Merck collaborated in unravelling the genome)

Motives for Strategic Alliances

Two Broad motives


Technological Change

Globalisation : overcoming problems of market access above all when markets are new/unfamiliar to the firm

Traditionally cross-border alliances were driven by two factors (i) the desire by MNCs to access market knowledge and distribution capabilities of a local company and (ii) the desire by local companies to access the technology, brands and product development capabilities of MNCs.

Today political obstacles to ownership and market entry are diminishing but still national and cultural differences make international strategic alliances attractive for entering new markets.

Also increasing pressure to sell products in larger number of countries therefore: cross-distribution (or cross-licensing) agreements where firms market and distribute each others products in different geographical markets

(E.g. In pharmaceuticals where there are market sharing agreements)

Technological factors : sharing increasing costs and risks of

R&D and new product development; increase speed to market of new products; gaining access to new technologies; enhancing firm’s technological development capabilities.

This is the result of

Shorter product life-cycles

Rapid pace of technological change

The increasing fusion of technologies from previously separate scientific and technological fields (e.g. mechanical and electronics; chemical, biology, nanotechnology and IT; telecommunications and IT). Therefore in a number of industries (e.g. media and entertainment, telecommunications, pharmaceuticals, film cameras) firms need to master an increasing number of technologies to be able to compete.

Another factor affecting some industries is the need to pool resources and capabilities and achieve economies of scale.

Therefore also joint manufacturing agreements to cope with excess or deficient production capacity

Example of the car industry : Increasingly competitive industry.

The development of new models (which themselves have a shrinking life cycle) requires massive investments in machinery and other equipment as well as R&D. As a result even the largest manufacturers are involved in collaborative ventures with other manufacturers. The survival of smaller firms seems to depend increasingly on inter-firm agreements to supply parts, to produce jointly under license and to engage in joint R&D

Strategic alliances can also be formed to increase market power

(i.e reduce competition)

Dangers of strategic alliances

If one of the partners uses the alliance as a means of appropriating competences and knowledge from its partner

(who it still sees as an actual or potential competitor).

Therefore danger that one firm could ‘give away too much’ or loose control of its core competences

Increase dependency on partner. Rather than carrying out its own consistent strategy a firm can begin to base its actions on its partners moves. As a result the firm does not move in a planned direction towards its goals but depends on what the partner does.

The Management of Strategic Alliances

The selection of the right partner

The importance of fit: strategic, operational and cultural fit

Balance between trust and risk

Partner Selection

The selected partners must bring a valuable mix of skills, resources and competencies to the collaboration.

Managers should consider two types of criterion when selecting a partner:

Task-related criteria : variables related to the viability of the proposed venture including features such as access to finance, managerial and employee competences, technology, marketing and distribution system

Partner-related criteria : characteristics of the partner’s national and corporate culture, the size and structure of partner, the motivations of partners, the compatibility and trust between the two companies top management teams.

Medcof (1997) suggests that managers should pay attention to the 4Cs- capability, compatibility, commitment, and control when selecting a partner.

Is the prospective partner capable of carrying out its role in the alliance?

Is the prospective partner compatible operationally? (e.g. IT systems)

Is the prospective partner committed to the alliance and its strategic aims?

Are the control arrangements for the coordination of the alliance appropriate?

Strategic Alliances and Fit

Strategic fit

The degree to which a potential alliance partner enhances and complements a partner’s strategy

There is a fit when corporate strategies of the partners are nonconflicting corporate; when no hidden competitive agendas; when the combined opportunity is greater than that offered by going it alone.

Complementary assets and synergies are important but not sufficient for a successful alliance. For this the balance of need between partners must also be similar

Long-term objective of partners should not conflict,

Operational fit

MNC and their partners must have compatible systems, procedures, and technologies that fit together and work together.

(e.g. compatibility of information system, location of facilities, similar procedures for testing new products)

Cultural fit

There are two types of cultural fits:

Corporate culture : refers to ‘the way we do things in this firm’.

Firms from the same country do things differently

Compatibility of partner firms in terms of organisational management styles (e.g. level of employee participation or authoritarian management; centralised or decentralised decision making and responsibility; short-termist/long-termist). Also ‘soft issues’ (e.g. ethics, responsiveness to change)

National culture : refers to patterns of beliefs and values that are manifested in practices, behaviours, and artefacts shared by members of the same nation.

International strategic alliances can suffer from problems of communication; differences in values or behaviour can cause interaction problems (e.g. KLM/Al Italia)

Balance between trust and risk

Two types of risks:

(i) Relational risks : Refers to the probability and consequences of not having satisfactory cooperation.

Opportunistic behaviour include ‘shirking, appropriating the partner’s resources, distorting information, harbouring hidden agendas, and delivering unsatisfactory products and services’

(ii) Performance risks : The likelihood that an alliance may fail even when the partner firms are fully committed. Could be due to external factors such as unprecedented fierce competition, political change, wars. Or internal factors: such as

‘lack of competence in critical areas’

Research shows that trust is the most important factor for successful alliances

The End of an Alliance

When should an alliance end?

When mission has been accomplished (e.g. gained knowledge of foreign market; joint research led to the development of specific technology)

Partner strategies may change (e.g. Collaboration between.

Honda and Rovers ended when Rover was acquired by BMW)

Collaborative relationship may break down in disputes that cannot be resolved

However often difficult to end alliances

Alliance performance may be difficult to measure therefore not always clear whether working or not

Alliances are difficult to manage- so managers reluctant to walk away after protracted negotiations

Negotiations on the end of alliance can be as protracted as the setting up of the relationship

How successful are strategic alliances ?

The success of International JV and other forms of strategic alliances has been mixed

Research suggests that failure rates for International strategic alliances are about 50%

However, beware: benefits can flow in both directions though not always at the same time eg.: Xero’s JV with Fuji

During the early years of the Xero’s JV with Fuji to manufacture and sell copiers in Asia, the flow of technology was mainly from

Xerox to Fuji.

However, when Xerox Corp ran into problems in the 1990s it was saved by technology, product designs, and management techniques from Fuji-Xerox