Strategic Alliance Essay

An informal or formal agreement between two or more companies with a common business objective is a strategic alliance. Strategic alliances can take forms ranging from informal cooperation to joint ownership of worldwide operations. Some contractual agreements are also treated as strategic alliances when those agreements involve a long-term, continual strategic partnership and thereby provide strategic gains for partners.

Strategic alliances are being used for many different purposes by the partners involved. A long-term and trust-based agreement between a manufacturer and supplier firm is considered a strategic alliance because it is beyond going to open market and choosing the best deal each time and affords mutually rewarding cost savings, consistency, and quality improvements for the manufacturer and stable sales and certainty for the suppliers. In banking, the “exporting” of services through alliance partners rather than direct investment or contracting (licensing) was common. That is, banks use correspondents with whom they maintain parallel (corresponding) balances of deposits and offer services to each other’s clients in each country. Large banks tend to have many such relationships around the world, in addition to any overseas affiliates they may operate. Additionally, banks will use multiplebank alliances to provide automatic teller machine (ATM) access to their clients in many locations, operate credit card alliances through Visa and MasterCard to offer such services globally to their clients, working closely with actual or potential competitors. Banks also often contract out parts of their activities to alliance partners in a vertical deintegration context, for example, contracting out their mortgage loan servicing activity to specialist firms or selling off their mortgages to intermediaries that create mortgage-backed bonds in a secondary market.

Penetrating foreign markets is a primary objective of many companies entering strategic alliances; others are aimed at defending home markets. Another focus is the spreading of the risk and cost inherent in production and development efforts. Technology companies have joined forces to win over markets to their operating standard. Each form of alliance is distinct in terms of the amount of commitment required, the extent of equity involved, and, therefore, the degree of control each partner has, as well as the number of partners.

In informal strategic alliances, partners work together without a binding agreement. This arrangement often takes the form of visits to exchange information about new products, processes, and technology or may take the more formal form of the exchange of personnel for limited periods of time. Such partners are unlikely to compete for markets and tend to be of modest size, making collaboration advantageous if not absolutely necessary. The relationships are based on mutual trust and friendship, and may lead to more for-mal arrangements, such as contractual agreements or joint projects.

Formal, contractual agreements between strategic alliance partners may be used for joint research and development (R&D), joint marketing, joint production, or outsourcing. Contract manufacturing allows the corporation to separate the physical production of goods from the research and development and marketing stages, especially if the latter are the core competencies of the firm. Such contracting improves company focus on higher value-added activities, provides access to world-class capabilities, and allows partners to reduce their operating costs. Contract manufacturing provides many companies, especially in developing countries, the opportunity to gain the necessary experience in product design and manufacturing technology to allow them to function in world markets.

In Japan, vertical alliances or keiretsu are very popular and have supported the rapid growth of many high-tech companies and enabled parallel enhancement of the technology used by component suppliers and assemblers. Pharmaceutical, automotive, and electrical goods industries are examples of this. Toyohiro Kono attributes the appeal of alliances to the group orientation of Japanese firms, as opposed to independence that characterizes Western firms.

Strategic alliances may also be used to aid development and produce economies of scale in production; for example NKK entered into an alliance with Tetint (of Argentina) to produce and market a seamless pipe, while Mitsui Ship Building is cooperating with Kawasaki Heavy Industries in the design and construction of ships. In Poland, production-oriented strategic alliances predominate in the food processing industry, whereas in Romania there are a greater number of consultancy relationships for managerial and organizational improvements, including foreign consultancies.

Government intervention continues on a major scale in some countries. Socialism puts serious restrictions on capitalism. The social contract in many nations of full employment and a good safety net requires boundaries on free capitalism. In some parts of the world and in certain industries, governments insist on complete or majority ownership of firms, which has caused multinational companies to turn to an alternative method of enlarging their overseas business; for example, a management contract in which the firm sells its expertise in running a company while avoiding the risk or benefit of ownership.

Increasingly, governments are publicizing alliance opportunities, like the recent Chinese government promotion of foreign direct investment opportunities in the growing traditional Chinese medicines area or the Indian government’s promotion of foreign direct investment opportunities in infrastructure projects.

In his analysis of strategic alliances, Kono identifies six major reasons for failure: financial loss, opportunity loss, goal differences, differences in corporate culture, lack of mutual trust, and lack of competitive power. Kono also identifies success factors, specifically mutual trust, first-class complementary capabilities to create competitive core competencies, and continuous mutual learning to enhance competencies.

There are other reasons for strategic alliance breakup. In the case of Eli Lilly and Ranbaxy in India, the breakup of the joint venture, another form of strategic alliance, came when both partners had developed sufficient strength to stand on their own in their chosen market. This has become a common occurrence in rapidly developing economies.

Bibliography:

  1. Yair Aharoni and Lilach Nachum, Globalization of Services: Some Implications for Theory and Practice (Routledge, 2000);
  2. Refik Culpan, Global Business Alliances: Theory and Practice (Quorum, 2002);
  3. Cyrus Freidheim, The Trillion-Dollar Enterprise: How the Alliance Revolution Will Transform Global Business (Perseus, 1998);
  4. Victor A. Gilsing and Charmianne Lemmens, Strategic Alliance Networks and Innovation: A Deterministic and Voluntaristic View Combined (Eindhoven Centre for Innovation Studies, 2005);
  5. Hans-Werner Gottinger, Strategic Alliances in Biotechnology and Pharmaceuticals: Sources and Strategies for Alliance Formation in a Global Industry (Palgrave Macmillan, 2008);
  6. Toyohiro Kono, Trends in Japanese Management: Continuing Strengths, Current Problems and Changing Priorities (Palgrave, 2001);
  7. Francis McGowan et al., The Emerging Industrial Structure of the Wider Europe (Routledge, 2004);
  8. Peter R. Murray, The ‘a-Form’ Strategic Alliance Archetype: Patterns of Organisation (Macquarie University, 2003);
  9. Susanne Royer, Roland H. Simons, and Robert W. Waldersee, Perceived Partner Reputation and Strategic Alliance Structuring: Comparing Public and Private Sectors (Queensland University of Technology, 2000);
  10. Malcolm Warner, Eden Yin, and Chong Ju Choi, Global Strategic Alliance Membership: Market Versus Institutional Criteria (Judge Institute of Management, 2002).

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