Strategies in Action

1. Introduction

In the new global environment, with grater competition from more and more product and choices, alliances are not just a planning option but a strategic necessity. As Jim Kelly, CEO of UPS, which has a number of global alliances, puts it,” The old adage’ If you can’t beat ‘em, join ‘em’ is being replaced by ‘Join’ em and you can’t be beat[1].’” Companies discovered that they need strategic partners ‘alliances’ if they hope to be effective. Even giant companies often cannot achieve leadership, either national or globally, without forming alliances with domestic or multinational companies that complement or leverage their capabilities and recourse such as the Star alliance, which brings together 15 airlines. This is the globalization era and all companies now are thinking globally specially with new countries joining the World Trade Organization every year. Despite the many good reasons for pursuing alliances, a high percentage end in failure. A study by McKinsey & Company revealed that roughly one-third of 49 alliances failed to live up the partners’ expectations[2]. In this assignment, I will discuss the benefits and risks for an organization of employing strategic alliances to expand into new markets. My discussion will be based upon the material covered on the module and my own example to support the arguments.

2. A Borderless World

Why companies such as Wal-Mart, Federal Express and America online want to pursue a global strategy, despite failures and losses?  They recognize that business is becoming a unified global failed as trade barriers fall, communication becomes faster and cheaper.  Thomas Middelhoff of Germany’s Bertelsmann AG, which purchased U.S. publisher Random House, put it this way: “There are no German and American companies. There are only successful and unsuccessful companies[3].” Companies that choose to supply globally need to be aware of the particular opportunities and threats that globalization presents to them. Globalised corporation include popular names like: Citicorp, Coca Cola, IBM and Exxon receive more than 50% of their annual profit from oversees operations. Andrew S. Grove, chairman of Intel Corporation, “You have no choice but to operate in a world shaped by globalization and the information revolution. There are two options: Adapt or Die”. Globalization of the world economy is a market condition that demands bold offensive strategies to protect positions previously won. In other words, companies should adapt the globalization or it will not be able to compete in the era.

Strategic Alliances

A strategic alliance is a specific form of collaboration between two or more companies.  The term “strategic alliance” can mean many things. In its broadest sense, it can apply to virtually any form of collaboration between two or more firms, including one or more of the following activities:

• Design contracts
• Technology transfer agreements
• Joint product development
• Purchasing agreements
• Distribution agreements
• Marketing and promotional collaboration
• Intellectual advice

Perlmutter and Heenan defined a global strategic partnership as an alliance following a specific pattern. Start with two or more organization develops a long term strategy to a reciprocal relation than the relation is organized along horizontal and finally the participating retains their identities. Borys and Jemison developed a model capable of exploring alliances more. They found that there were four insights necessary as a framework for farther study:

1. The breadth of the partnership
2. The permeability of the organization boundaries.
3. The interdependence of partner operations in the value chain
4. The nature of the partnership’s stability mechanisms.

Levitt, Morone, Drucker and others have suggested that the driving forces behind this globalization of strategic alliance behavior are the activity of marketing and technology. Many strategic alliances take the form of marketing alliances[4].  These fall into product or service alliance, promotional alliance, logistics alliance and pricing alliance. The value chain theory shown in the following diagram[5] was very useful for the organizations to understand the competitive dynamics of all its activities.

Porter’s first model was the first step toward an integrated model of strategic management that includes the main elements of the competitive arena. The alliances between the strategic cores are: upstream alliance with suppliers, downstream alliance with customers,   diversification alliance with substitutes and / or new area of business, and horizontal alliance with compotators Compared to other types of company-to-company relationship, strategic alliances often have the following characteristics[6]:

• Usually a non-equity, loosely structured relationship
• Each partner retains its business independence
• One Company will take a lead role in any contract or marketing and the others will be "partners" in the work. They could work as sub contractors or suppliers to the main company
• The alliance can be struck between companies which would normally be considered competitors
• The relative size of the partners is not a significant factor
• Each partner must contribute distinctive “core strengths” e.g. technology, manufacturing capacity, access to distribution

Strategic alliances can be combined with other agreements, such as licensing of technology.

What’s less clear to these companies is how to overcome the many challenges inherent in implementing joint ventures and alliances. In 1991, we assessed the performance of 49 joint ventures and alliances and found that only 51% were “successful”—that is, each partner had achieved returns greater than the cost of capital. A decade later, in 2001, we assessed the outcomes of more than 2,000 alliance announcements—and the success rate still hovered at just 53%, despite studies that have highlighted the well-known reasons for JV failure: wrong strategies, incompatible partners, inequitable or unrealistic deals, and weak management[7].

Conceptual Framework of Strategic Alliances

We should be aware that there are three ways of conceptualize international strategic alliance, which are structure, function and objective[8]. The most common way is the one that focuses on the structure. Joint venture, minority-equity, licensing and non-equity contractual   are some of the organizational form chosen for collaboration by the organization. The functions way often collapsed into four primary categories, which are technology, finance, markets, and productions. The last way is by objectives which six managerial objectives. The six managerial objectives are learning, leaning, leveraging, linking, leaping and locking out. These frameworks should help to explain the benefits and where the risk could occur.   

The Benefits of Employing Strategic Alliances

Whether a company realizes the potential of alliance and collaborative partnerships with foreign enterprises seems to be a function of six factors[9]:

1. Picking a good partner
2. Being sensitive to culture differences
3.  Recognizing that the alliance must benefit both sides
4. Ensuring that both parties live up to their commitments
5. Structuring the decision-making process so that actions can be taken swiftly when needed
6. Managing the learning process and than adjusting the alliance agreement over
7. time to fit new circumstances

Most alliance with foreign companies that aim at technology- sharing or providing market access turn out temporary, serving their  purpose after a few years because the benefits of mutual learning have occurred and because the business of both partner have developed to a point where they are ready to go their own way[10]. Four key benefits can be expected from a strategic alliance:

1. Increased leverage

Strategic alliances allow you to gain greater results from your company’s core strengths Example; Sun Microsystems has leveraged its capabilities impressively through a multitude of alliances[11]. Some alliances survived for a long time, others were short-lived; some were narrowly focused and a few broader. Sun's partners included Fujitsu, Toshiba, Oracle, Netscape/AOL and IBM. But none of these partners or individual alliances accounts for Sun's success. Rather, the way Sun integrated alliances into a coherent strategy and managed them over time allowed it to get the most from partnerships. Anther example; the relation between The NBA and Coca-Cola is a marketing alliance (promotional alliance) and also between Coca-Cola and the FIFA has help Coca-Cola to increase leverage. The Coca-Cola core strength is its own brand as worldwide leader in the soft drinks industry. By forming a strategic alliance with such international sports organization,    Coca-cola leverage in the industry will be increased further.

2. Risk sharing

A strategic alliance with an international company will help to offset your market exposure and allow you to jointly exploit new opportunities. Reduction of risk in alliances can be[12]:

1. Spreading the risk of a large project over more than one firm
2. Enabling product diversification and thus reducing market risk associated with being reliant on only one product
3. Enabling faster market entry and quicker establishment of a presence in the market, which in turn allows a more rapid pay back of investment
4. Cost subaddivity, i.e. the cost of the partnership is less than the cost of investment undertaken by each firm alone. In strategic alliances slack and expertise can be combined which lower costs

Alliances are always friendly and generally have a strong focus on mutuality, with equal commitments and balanced risk-sharing by the partners. This win/win attitude is often missing in mergers, which can be one-sided and hostile from the start. Today's alliances not only help companies share the costs of risky projects, they also help them hedge risks, mitigate the costs of responding to unpredictable trends and, most importantly, buy and shape options to exploit future opportunities. The best example to see the benefits of strategic alliance risk sharing is considering what occurred in Wells Fargo’s 1995 take-over of First Interstate. Not wishing to go to the altar with Wells Fargo, First Interstate gave golden parachutes with two years’ salary to hundreds of executives and granted all other employees’ severance packages double the industry average. The resulting mass exodus among First Interstate employees left branches under-staffed and produced serious erosion of the customer base. The hostility behind this debacle would not exist in an alliance and this is explaining one of the six reasons why alliance works better than acquisitions by Dorothy Langer 

3. Opportunities for growth

Strategic alliances can create the means by which small companies can grow. By “Marrying” your company’s product to somebody else’s distribution, or your R&D to a partner’s production skills, you may be able to expand your business overseas more quickly and more cheaply than by other means. Example; Vodaphone AirTouch PLC and Bell Atlantic Corporation in 1999 agreed to a collaborative partnership to create a wireless business with a single brand and common digital technology covering the entire U.S. market and to work together on global synergies in handset and equipment purchases, globally roaming agreement, and the development of new products and technology. Today both companies business growth tremendously and they have and they operate and invest in 25 countries. Consumer-product Company Amway is anther example, which expanded into Australia in 1971. In the 1980s, Amway moved into 10 more countries. By 1999, Amway had evolved into a multinational juggernaut with a sales force of more than 3 million independent distributors hauling in $5 billion in sales. Today, Amway sells products in 43 countries worldwide. Its goal: to have overseas market account for 80% of its sales[13].  

   

4. Greater responsiveness

By allowing you to focus on developing your core strengths, strategic alliances provide the ability to respond more quickly to change and opportunity. Example; after fewer than 15 years of existence, AOL has a huge market value of well over $100 billion. This startling record of success is attributable, in large part, to AOL’s web of alliances and partnerships, which have helped it, become the world’s largest provider of on-line services. Through a portfolio of partners, AOL gains access to products, content, technology, and global customers—assets that create a network of increasing returns and help explain the company’s prodigious market cap. Each new alliance for content makes AOL more attractive to subscribers, and this in turn attracts more advertisers and content partners. In 1997, for example, AOL formed an innovative alliance with Tel-Save to market long-distance service to AOL’s customers. The alliance was received positively by the market. Likewise, in October 1997, long before AOL acquired Netscape Communications, the two companies announced an alliance to launch a co-branded instant-messaging service. Airbus Industries is anther big example to the greater responsiveness, one of the world’s two leading makers of commercial aircraft, was formed by an alliance of aerospace companies from Britain, Spain, Germany, and France that include British aerospace, and Aerospatiale. Airbus has been announced the biggest commercial aircraft company as they have received the biggest number of plans request for 2005 and this is their fifth year on the row.      

The Risks of Employing Strategic Alliances

Achieving effective collaboration between independent companies, each with different motive and perhaps conflicting objective, is not easy.  The company must weigh several risks:

• High commitment – time, money, people

In early 1999, when Renault CEO Louis Schweitzer bid $5.4 billion for a controlling stake in Nissan, he took the risk because he believed he had a manager who could shore up the Japanese carmaker. In June 1999, Ghosn flew to Tokyo with 40 Renault executives. On the one hand, they had to win over demoralized Nissan executives. But they also had to fix the company fast -- Nissan had lost money for six of the past seven years, its market share had fallen for 27 consecutive years and its debts totaled $20 billion. The functional international strategic alliance between Renault and Nissan Motor Co. Ltd was not a risk free decision as it required a huge commitment from Renault toward a company that a have a big amount of liabilities. This risk sharing decision was not easy with a company like Nissan Motor Co. Carlos Ghosn is credited with the dramatic turnaround of Nissan Motor Co. Ltd., of which he is president and CEO.  This April, he adds the title of president and CEO of Renault to his duties. French automaker Renault holds a controlling interest in Nissan. A huge risk was involved and a tremendous effort, from a $5.6 billion loss in 2000 to $2.5 billion profit in 2001. On the other hand, if it did not work will with Carlos Ghosn what will happen?

• Culture differences

McDonald’s has been highly successful in markets outside the United States, partly because it has been adept in altering its menu of offering to cater to local tastes.  Why? The answer will be the local culture. This objective framework (Leaping) has a negative aspects, which culture incompatibility. By ignoring this risk you could lose.       Procter & Gamble’s Crest toothpaste initially failed in Mexico when it used the U.S. campaign[14]. Mexicans did not care as much for the decay-prevention benefit, nor did scientifically oriented advertising appeal to them. Hallmark cards also failed when they were introduced in France. The French dislike syrupy sentiment and prefer writing their own cards.  The risk of culture differences could cause the organization to fail.

• Difficulty of identifying a compatible partner

The best explanation to that if you are welling to use the structure framework by chosen the joint venture collaboration you need to have a partner first. Identifying the compatible partner is not an easy task and the best example to the Starbucks and PepsiCo.    Starbucks and PepsiCo were forced to rethink the direction of their joint venture after the first product it introduced, a carbonated coffee drink, received mixed results in early tests with customers. “We had a great partner, a leveraged organizational model, but no product,” one Starbucks executive recalled. A lot of money and effort will be wasted easily if the organization failed to find the compatible partner. Therefore, we should understand that it is not easy to find a compatible partner and that kind of risk should be taken in consideration.

• Potential for conflict

The long term goals of a strategic alliance today could be changed over time, which would result a conflict. That kind of framework could be harmful if we did not take in consideration such possibility over longer term. Example; Senior management at TRW Koyo Steering Systems, a JV manufacturer of automotive components, followed a policy of “equal communications” with each of the parent companies (TRW Automotive and Koyo Seiko). When Arvind Korde, CEO of the JV, needed to communicate facts or issues to one parent, he always copied the other parent, thereby promoting openness and trust. And Korde and his team were quick to react to problems. One year into the venture, the JV was on the verge of securing its first customer, which exposed the parent companies’ difference of opinion around pricing. TRW, which was focused on profitability more than growth, argued for higher margins and prices. Koyo Seiko sought to build market share and maximize the scale of its global relationship with key Asian customers. “This was a real turning point for the JV,” Korde recalls. “Despite our early success, I wasn’t sure we would make it out of there alive[15].” What we could be notified from that the organization should weigh this kind of risk before making the decision.

• A small company risks being subsumed by a larger partner

The objectives framework based on the objective learning has its positive and negative aspects. Positively, it is inexpensive but is this we are looking for and is the positive could overweight the negative.   The partner opportunism is the main negative point.  This could put a huge pressure on the company as it will increase the shareholder expectation. I would say that will not be for the benefit of the organization and it could affect their future plans. 

• Strategic priorities change over time

If you used the same example in “Potential for conflict “, the strategic priorities of both companies did change over time. After a year Structure framework ‘Joint Venture’,   TRW priority was focusing on the profitability more that the growth and Koyo Seiko priority was sought to build market share. As a result, the companies strategic priorities at the time of the alliance could be change over time. “This was a real turning point for the JV,” Korde recalls. “Despite our early success, I wasn’t sure we would make it out of there alive .This change could have a negative affect over one of the partner as he did not take such risk in consideration. 

• Payment difficulties

That type of risk could be noticed on the organizations, which are adopting functional international strategic alliance. This risk could affect the whole business of the organization and the Boo.com is a good example that demonstrates to what extent that affect could be harmful. The Boo.com raised $135 million in venture capital that it used to build high-tech e-commerce sites in seven languages in 18 countries. Boo.com constricted satellite offices in six cities. After months of delay, monthly sales of $1.1 million a month could not make up for mounting expenses, which ran to an estimated $1 million a week.  At a liquidation auction, the company was purchased by American e-retailer fashionmall.com for less than $500,000[16].   

• Political risk in the country where the strategic alliance is based

The objectives framework based on the objective locking out could give a temporary competitive hiatus. It will be really attractive to make strategic alliance on a country full with oil such as Iraq and Iran but you should be aware that the political risk with such company now are huge.  Iraq and Iran are representing how far the political risk should be taken in consideration seriously. A lot of international organization had suffered from the United Nation decision against Iran back on 1980. Those companies did lose a lot due to the political risk, which they did not take in consideration. The same thing happened again in Iraq for other companies, when the war was started in Iraq. Even today, both countries are attractive to companies but the political risk is huge. Therefore, the political risk is important and it should be weigh before companies start to think about strategic alliance.  

   

• If the relationship breaks down, the cost/ownership of market information, market intelligence and jointly developed products can be an issue.

The best example to explain such risk is what happened to AT&T and British Telecom. AT&T and British Telecom spend $10 billion in forming their joint venture to build an Internet-based global network linking 100 major cities.  The structure framework, which may include joint venture, could represent a big lose for both parties. What would happen to AT&T and British Telecom if did not work well with them or between TRW Automotive and Koyo Seiko? The financial lose that could happen if such relation break down is huge. Therefore, any organization before adopting that type of framework they should consider the amount of risk involved.

     

Entering into a strategic alliance requires commitment above all else – in hours as much as dollars. It also takes time to build a strong alliance. Identifying and reaching agreement with the right company can be very time consuming, and developing a strong relationship can take years.

Conclusion

  By using the textbook and other references, I did talk about the new borderless world that we live on today. I did discuss what the strategic alliance in general is than I have explained what the three different framework of the strategic alliance are. Through the example that I have used, I tried to discuss the benefits and the risk of the strategic alliance. I have demonstrated my understanding the benefits and risks involved.

  

End

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[1] Julia Cohen Mason, “Strategic Alliances: Partnering For Success,” Management Review, ( May 1993):10-15

[2] Stratford Sherman, “Are Strategic Alliances Working?” Fortune, September 21, 1992,pp. 77-78

[3] Joseph B White, “There Are No German or U.S. Companies, Only Successful Once.” The Wall Street Journal ( May 7, 1998), A1

[4] Kotler, Marketing Management, The Eleventh Edition p108, Prentice Hall Publications  

[5] www.marketingteacher.com

[6] http://www.marketnewzealand.com/

[7]James Bamford, David Ernest, and David Fubini, Launching a World-Class Joint Venture, Harvard Business Review ( Feb 2004)

[8] Stephen Preece, Incorporating International Strategic Alliances into overall firm Strategy, The International Executive, VOL. 37 (3), May/June 1995,p261-p277

[9] Doz and Hamel, Alliance Advantage, chapter 4-8.

[10] Thompson and Strickland, Crafting and Executing Strategy, The Twelfth Edition,  p217

[11] Benjamin Gomes-Casseres, Strategy must lie at the heart of alliances ,FT Mastering Management, p.14-15, October 16, 2000

[12] Glaister K.W. &. Buckley P.J 1996, “Strategic Motives for International Alliance Formation”, Journal of Management Studies, Vol 33, No. 3, pp. 301-332

[13] Kotler, Marketing Management, The Eleventh Edition p387, Prentice Hall Publications   

[14] Kotler, Marketing Management, The Eleventh Edition p385, Prentice Hall Publications  

[15] James Bamford, David Ernest, and David Fubini,Launching a World-Class Joint Venture, Harvard Business Review ( Feb 2004)

[16] Sarah Ellison, “Boo.com: Buried by Badly Managed Buzz,” Wall Street Journal, May 23,2000,p.B10