Strategic alliances as a method of development
Today increasing numbers of businesses are entering in various forms of strategic alliances with various parties in order to increase their efficiency and market share in one way or the other. It has been stated that “strategic alliances are cooperative agreements between firms that go beyond normal company to company dealings. Alliances and/or cooperative agreements can involve joint another’s products or joining forces to manufacture components or assemble finished products” (Aswathappa, 2011, p.383)
It is clear that parties engage in strategic alliances because they expect to get substantial benefits from the partnership. However, the actual success of the partnership depends on many factors, including aims and objectives of the parties, the nature of their alliances, the culture between the companies entering in alliances and others (Das, 2010).
This article represents a critical discussion of the viewpoint according to which strategic alliances, in all forms are beneficial to the parties involved. The article starts with discussing the essence of strategic alliances making distinctions between its various forms. Then the benefits of strategic alliances are described by referring to the real life examples in the global marketplace and discussing the issue in a greater detail.
Moreover, the article also includes analysis downsizes of strategic alliances exploring the reasons for these downsizes, as well as formulating recommendations about how negative effects of strategic alliances can be avoided.
Essence and Forms of Strategic Alliances
Hitt et al (2009) state that the reasons why companies form strategic alliances include reducing the level of competition, enhancing the level of competitiveness, obtaining access to resources, taking advantage of competitive edge of strategic partners, and promote innovation.
Reuer (2004), on the other hand, adopts simplistic approach when explaining the essence of strategic partnerships comparing alliances to the marriage between two people. This comparison may not fully reflect the issue, but the morale behind such type of comparison is that parties have their expectations and responsibilities in alliances and they would expect specific benefits from the partnership.
It has also been stated that “alliances take many forms, from product-development partnerships that involve shared costs for research and development and marketing to vertical alliances in which one company provides a product or components to another firm, which then distributes or sells it in agreed territories or markets” (Kurtz et al, 2009, p.38). Culpan (1993) divides strategic alliances into four main forms: minority equity alliances, joint ventures, contractual collaborations, and informal agreements and the choice of any specific form of partnership depend on a range of factors that primarily include the objective for the party for entering into a strategic alliance.
Different approach is adopted by Harrison et al (2005), who specify the types of strategic alliances to consist of third-party logistics, partnerships between retailer and suppliers, and integration with distributor.
Herman (2005) divides forces of strategic alliance formation into two categories: environmental drivers and internal drivers. Environmental drivers for alliances include globalisation, technological advancement, increasing role of internet and a range of other factors. The above mentioned factors cause changes in the marketplace, and companies are forced to respond to these changes by the ways of forming various types of alliances. Internal drivers, on the other hand, includes the attempts by the companies to obtain competitive edge by the ways of forming strategic alliances.
Benefits of Strategic Alliances
Successful strategic alliances provide considerable benefits for the parties involved. One of the most important benefits strategic alliances are able to offer to the company is the possibility to get advantages of the competitive edge of their partners. This specific benefit of strategic alliances is stressed by Longenecker et al (2005) who mention the case of A.L.I. Technologies Inc, a Canadian digital imaging company that had entered into strategic alliance with IMB, a US-based multinational information technologies company. The strategic alliance between these two companies proved to be highly successful, because it allowed A.L.I. Technologies Inc to use competitive edge of its partner that was substantial amount of financial resources.
The benefit of strategic alliances in entering new markets is mentioned by Hill and Jones (2007). The case of US film producing company Warner Brothers can be pointed to as an appropriate example in this case. With the increasing economic power of China, and multinational companies entering Chinese market in large numbers Warner Brothers decided to follow the trend too. However, entering this market directly would have involve complicated paperwork procedures that would have taken long period of time. Therefore, the company decided to form strategic partnerships with two local companies in film industry in China in the form of joint-ventures, the decision that proved to be affective subsequently.
Moreover, strategic alliances can be highly beneficial in terms of sharing the costs of research and development and other business expenses too and there are many real-life examples to prove this point. For instance, Hill and Jones (2007) mention that one of the leading companies in airline industry Boeing had to engage in a series of strategic alliances with Japanese companies in order to share an estimated cost of eight billion USD associated with the research and development of Boeing 787commercial jetliner.
Cooperation between Cisco and Fujitsu is another case of successful strategic alliance for the purposes of cost saving, where as a result of joined efforts on research and development both companies were able to increase the amount of their sales in their respected markets.
Strategic alliances may also be formed between companies in order to increase the level of their effectiveness in any aspect of the business in general, and to generate effective skills and capabilities in particular. For example, a strategic alliance was established between Microsoft and Toshiba in 2003 to join the skills and capabilities within the two companies that resulted in the development of embedded microprocessors benefiting the both companies.
According to Das (2010) forming strategic alliances among companies can positively contribute to the formation of industry standards in general as well. A good illustration of this viewpoint in real life business environment would relate to the personal digital assistants (PDA). Specifically, Palm Computer and Sony formed a business alliance in 1999, according to which Palm’s operating system was licensed to be used by Sony at the same time setting industry standards, as well as rival market leader Microsoft in the market of operating systems.
Criticism of Strategic Alliances
While all above discussed practical benefits of strategic alliances offer good reasons for businesses to be engaged in them, nevertheless, strategic alliances have a range of shortages as well that have been pointed by various business researchers and practitioners. Specifically, Ungson and Wong (2008) mention a study conducted by Coopers and Lybrand according to which 7 out of 10 alliances fail. There are many potential reasons for strategic alliances between businesses not working.
Griffin and Pustay (2005) warn about several pitfalls that are associated with strategic alliances that include incompatibility of the partners, access to information, conflicts over distribution of earnings, loss of autonomy, and changing circumstances.
The primary reason for why strategic alliances fail has been indicated by Hitt et al (2009) as cultural differences between the two companies. When the two companies form an alliance that in theory should be beneficial to both of them unforeseen problems are likely to emerge at any stages of their cooperation caused by cultural differences that might negatively affect the realization of the proposed plan.
Specifically, cultural differences might result in power problems and conflicts about ways of achieving aims and objectives. However, it does not necessarily mean that all cross-cultural alliances face difficulties on the basis of cultural differences. One of the examples of successful strategic alliances between companies with fundamentally different cultures involves partnership between Motorola and Suning and Gome Appliances, the largest electronics retail chain in China.
Moreover, it has to be noted that “because joint ventures are formed primarily for participating firms to gain core skills that would otherwise be very difficult for them to obtain on their own, the stability of any joint-venture is dependent on the complementarity between joint-venture partners” (Ungson and Wong, 2008, p.281).
Simchi-Levi et al (2003) specify the loss of competitive edge as one of the potential downsizes of engaging in strategic alliances. The authors mention an example of strategic alliances between IBM and Microsoft where according to the agreement the latter company took the responsibility of supplying microprocessors to IBM. However, the perceived strategic alliance resulted in IBM’s core competency to be taken by Microsoft, and dramatic decrease in IBM market share.
Loss of autonomy for a company is another serious shortcoming that is often associated with strategic alliances. Companies that are forming strategic alliances often have to compromise a specific proportion of their power in term of decision making which may relate to some aspects of the business. Slower decision making as a result of engaging in strategic alliances can result in other negative implications as well that can include decrease in overall efficiency for the company and the loss of flexibility in terms of responding to constantly changing marketplace.
Factors of Success for the Formation of Effective Strategic Alliances
As it can be seen above strategic alliances have their advantages, as well as disadvantages. The level of advantages and disadvantages associated with any particular strategic alliance will depend on a range of crucial factors needed to be addressed by partners forming strategic alliances. Specifically, factors of success for strategic alliances can be summarized to the following points:
Firstly, companies should be careful in selecting partners for alliances. According to Charles et al (2007) a good alliance partner has to meet three basic requirements. First, partner in strategic alliance has to assist the company to achieve its long-term aims and objectives. Second, the vision regarding the role and purpose of alliance has to be shared by the partner, because different perceptions regarding the role of the alliance held by partners is the shortest route to the failure of the alliance. Third, a partner on strategic alliance has to be trustworthy in order not to reveal confidential information of the business to third parties, especially to competitors.
Secondly, clear understanding and appreciating the interests of each-other. It is obvious that companies would not enter into strategic alliances unless each of them wants to pursue their interests and obtain specific benefits. In other words, all parties involved in strategic partnership have their expectations that need to be understood and appreciated by their partners.
Thirdly, partners must have clear ideas about their roles and responsibilities within alliance. Unless companies forming strategic alliances agree about their roles and responsibilities in the planning stages of the alliance, various types of disagreements and issues may arise at later stages of their partnership, caused by the distribution of responsibilities between them. This specific factor of success is stressed by Ball and Ball (2005), who maintains that the distribution of roles and responsibilities between partners in strategic alliances should be documented in an effective manner.
Fourthly, atmosphere of trust should prevail within strategic alliances. The importance of this factor increases in occasions where strategic partnerships are being formed by direct or indirect competitors in the marketplace. In the absence of the atmosphere of trust within strategic alliance between companies activities undertaken by one partner in the alliance might be misinterpreted by another partner, and such an atmosphere is going have its negative impact on the overall performance of the alliance.
Fifthly, effective level of communication should be organised within the alliance. The role of intensive and effective communication within strategic alliance is stressed by Kozami (2002), who maintain that effective communication is able to eliminate the potential issues within the alliance at their initial stages, not letting the issue to become bigger and to have negative affect on the performance of alliance in one way or the other.
Sixthly, competence leadership should be ensured for strategic alliances. Although competent leadership is a crucial factor of success for any type of organisation, not just a strategic alliance, the issue has greater implications in case of strategic alliances. This is because strategic alliances usually involve two or more chief executive officers and conflicts on personal and professional levels might arise among them in terms of decision making, because each of them might consider themselves competent enough to take decisions regarding various aspects of the performance of alliance.
Moreover, various other authors offer their strategies in terms of entering into strategic alliances and managing them in an effective manner. One of the most notable contributions in that aspect belongs to Ireland et al (2009) who offer the following strategy of forming and effectively managing strategic alliances. Some of the suggestions below are the repetitions of the success factors discussed above, whereas others offer fresh perspectives on the existing issues.
First, companies should carefully select their strategic partners. Second, partners have to assign responsibilities amongst themselves. Third, partners in strategic alliance should engage in prioritising and resource allocation. Fourth, partners should engage in planning the activities of strategic alliance and implementing those plans. Fifth, criteria regarding performance evaluation should be established by partners in strategic alliance. Sixth, partners should evaluate the success of the strategic alliance using established criteria.
The numbers of strategic alliances between businesses are on the rise because of the constantly changing marketplace caused by external and internal drivers. Companies form strategic alliances among themselves with the purposes of gaining competitive edge in one way or the other. Specifically, strategic alliances offer the advantages of sharing the costs of research and development, entering new markets in a safer and more effective way, benefiting from breakthroughs and innovations through combining the skills and capabilities of partner companies and many other ways.
However, strategic alliances have their pitfalls as well that include the loss of competitive advantage, failure caused by cultural misunderstandings, loss of autonomy, conflicts over the distribution of responsibilities and others.
To summarise the discussions provided I this essay it can be said that no straight answer can be given to the question of effectiveness of strategic alliances in all of their forms. This is because the issue is not straightforward and too many factors depend on the specifications of each individual case. However, it can be concluded that the effectiveness of any type of strategic alliances can be dramatically improved if the success factor provided in this essay are taken into account by businesses and addressed in the most efficient manner.
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