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Strategic Alliances Features

 

A distinctive feature of the activities of global corporations today is that they are using
cooperative relationships such as licensing, joint ventures, R&D partnerships, and
informal arrangements—all under the rubric of alliances of various forms—on an
increasing scale. More formally, a strategic alliance can be described as a coalition of
two or more organizations to achieve strategically significant goals that are mutually
beneficial. The business press reports like clockwork the birth of strategic alliances in
various kinds of industries. Eye-catching are especially those partnerships between
firms that have been archenemies for ages. A principal reason for the increase in
cooperative relationships is that firms today no longer have the capacity of a General
Motors of the 1940s, which developed all its technologies in-house. As a result, firms,
especially those operating in technology intensive industries, may not be at the
forefront of all the required critical technologies.
Strategic alliances come in all shapes. At one extreme, alliances can be based on a
simple licensing agreement between two partners. At the other extreme, they can
consist of a thick web of ties. The nature of alliances also varies depending on the skills
brought in by the partners. A first category, very common in high-tech industries, is
based on technology swaps. Given the skyrocketing costs of new product development,
strategic alliances offer a means to companies to pool their resources and learn from
one another. Such alliances must be struck from a position of strength.Bargaining chips
might be patents that the company holds. A second type of cross-border alliances
involves marketing-based assets and resources such as access to distribution channels
or trademarks. A case in point is the partnership established by Coca-Cola and Nestle
to market ready-to-drink coffees and teas under the Nescafe e and Nestea brand names.
This deal allowed the two partners to combine a well-established brand name with
access to a vast proven distribution network. In India, Huggies, Kimberly-Clark’s
diapers, are manufactured and distributed through an alliance with Hindustan Lever,
the local unit of Unilever, whose powerful distribution network covers 400,000 retail
outlets. A third category of alliances is situated in the operations and logistics area. In
their relentless search for scale economies for operations/logistics activities, companies may decide to join forces by setting up a partnership.Finally,operations-based alliances
are driven by a desire to transfer manufacturing know-how. A classic example is the
NUMMI joint venture setup by Toyota and General Motors to swap car-manufacturing
expertise.
The strategic pay-offs of cross-border alliances are alluring, especially in high-tech
industries. Lorange and colleagues suggest that there are four generic reasons for
forming strategic alliances: defense, catch-up, remain, or restructure.
Their scheme centers around two dimensions: the strategic importance of the business
unit to the parent company and the competitive position of the business.
? Defend. Companies create alliances for their core businesses to defend their leader-
ship position. Basically, the underlying goal is to sustain the firm’s leadership position
by learning new skills, getting access to new markets, developing new technologies, or
finessing other capabilities that help the company to reinforce its competitive
advantage(s).
? Catch-Up. Firms may also shape strategic alliances to catch up. This happens when
companies create an alliance to shore a core business in which they do not have a
leadership position. Nestle and General Mills launched Cereal Partners Worldwide to
attack Kellogg’s dominance in the global cereal market. Likewise, Pepsi and General
Mills,two of the weaker players in the European snack food business,setup a joint venture
for their snack food business to compete more effectively in the European market.
? Remain. Firms might also enter a strategic alliance to simply remain in a business.
This might occur for business divisions where the firm has established a leadership
position but which only play a peripheral role in the company’s business portfolio.
That way, the alliance enables the company to get the maximum efficiency out of its
position.
? Restructure. Lastly, a firm might also view alliances as a vehicle to restructure a
business that is not core and in which it has no leadership position.The ultimate intent
here is that one partner uses the alliance to rejuvenate the business, thereby turning
the business unit in a ‘‘presentable bride,’’ so to speak. Usually, one of the other
partners in the alliance ends up acquiring of the business unit.

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The recipe for a successful strategic alliance will probably never be written. Still, a
number of studies done by consulting agencies and academic scholars have uncovered
several findings on what distinguishes enduring cross-border alliances from the floundering ones. An analysis of cross-border alliances done by McKinsey came up with
the following recommendations:
? Alliances between strong and weak partners seldom work. Building up ties with
partners that are weak is a recipe for disaster. The weak partner becomes a drag on
the competitiveness of the partnership. As a senior Hewlett-Packard executive put it:
‘‘One should go for the best possible partners—leaders in their field,not followers.’’
? Autonomy and flexibility. These are two key ingredients for successful partnerships.
Autonomy might mean that the alliance has its own management team and its own
board of directors.This speeds up the decision-making process.Autonomy also makes it
easier to resolve conflicts that arise. To cope with environmental changes over time,
flexibility is essential. Market needs change, new technologies emerge, and competitive
forces regroup. Being flexible, alliances can more easily adapt to these changes by
revising their objectives, the charter of the venture, or other aspects of the alliance.
? Equal ownership. In 50-50 ownerships, the partners are equally concerned about the
other’s success. Both partners should contribute equally to the alliance. Thereby, all
partners will be in a win-win situation where the gains are equally distributed.
However, 50-50 joint ventures between partners from developed countries and
developing countries are more likely to get bogged down in decision-making dead-
locks. One recent study of equity joint ventures in China found that partnerships with
minority foreign equity holding run much more smoothly than other equity sharing
arrangements. Indeed, 50-50 partnerships ran into all sorts of internal managerial
problems including difficulties in joint decision-making and coordination with local
managers. Majority foreign equity ventures had fewer internal problems but encoun-
tered many external issues such as lack of local sourcing and high dependence on
imported materials. So, in spite of the findings of the McKinsey study,the ownership
question—50/50 versus majority stake—remains murky.
We would like to add a few more success factors to these. Stable alliances have the
commitment and support of the top of the parents’ organization. Strong alliance
managers are key to success. Alliances between partners that are related (in terms
of products, markets, and/or technologies) or have similar cultures, assets sizes and
venturing experiencing levels tend to be much more viable. Furthermore, successful
alliances tend to start on a narrow basis and broaden over time.

 

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