Why have strategic alliances grown in popularity?
“Google and Lycos Europe Announce Strategic Alliance” (Google press center, 2003), “Bayer Healthcare and Intendis announce strategic alliance” (Wayne and Montville, 2007), “Fiat and Chrysler Announce Strategic Alliance” (Car News Gluckman and Kurcezski, 2009), “City Bank and American Express announce strategic alliance” (Dhaka, 2009). Alliances have become increasingly popular. Over the past years the number of firms forming strategic alliances has risen constantly. “According to Securities Data Corporation, the number of alliances has increased about 25% per year for the last decade.” In fact some eight out of ten electronics companies now have alliances or are negotiating new ones (Kolasky 1997). The above listed examples show that the trend of forming alliances not only concerns the electronics companies but all business sectors. This essay will critically evaluate on the basis of various examples why strategic alliances have grown in popularity and who gains. Therefore, it is necessary to understand what strategic alliances are and in which types they can appear.
A uniform definition of strategic alliances does not exist. Porter (1990, p. ???) defines strategic alliances as “long-term agreements between firms that go beyond normal market transactions but fall short of merger.” According to Dussauge and Garrette (1999, p. ???) alliances can be defined as
“a cooperative agreement or association between two or more independent enterprises, which will manage one specific project, with a determined duration … in order to improve their competences. It is constituted to allow its partners to pool resources and coordinate efforts … to achieve results that neither could obtain by acting alone. The key parameters surrounding alliances are opportunism, necessity and speed.”
All in all alliances are partnerships, in which merit is combined in order to achieve a mutual goal and to increase sales volume without bearing all the risks.
As there are many ways to define strategic alliances there are also many ways of classifying them. To tie in with Dussauge and Garrette (1999) strategic alliances can be divided into partnerships between non-competing firms and alliances between competitors, which are specified in the following. Partnerships between non-competing firms are relationships between companies from different industries, which therefore are not in direct competition with each other. They implicate international expansion joint venture, vertical partnerships and cross-industry agreements. International expansion joint venture opens a new market to the foreign partner and offers the local partner a product to distribute, e.g. Renault and Diesel Naciona, SA (DINA). Vertical partnership is collaboration at two successive working stages within the same production process, e.g. McDonald’s and Coca Cola. Cooperations between completely different industries (cross-industry agreements) aspire the diversification of the activities of companies through a leverage of their abilities, e.g. Philips and DuPont de Nemours produced surface coatings for data storage. Alliances between competitors are divided into three categories, which are shared-supply alliances, quasi-concentration alliances and complementary alliances. Within shared-supply alliances rivals come together to share elements when the display for a particular production process is much greater than for the whole product. The products remain within each company, e.g. Volkswagen and Renault produced jointly automatic gear boxes. In a quasi-concentration alliance just one common product is developed, produced and marketed by all allies, e.g. the collaboration of British Aerospace, DASA and Alenia in the case of the Tornado fighter plane. In the event of complementary alliances a product produced by one company is marketed with the help of the distribution network of another company, e.g. the distribution of Mitsubishi cars by Chrysler.
Strategic alliances have gained popularity across many industries. The typification of alliances mentioned above show that alliances are not industry specific, but mostly cross-sectoral. They include amongst others automobile, pharmaceutical and aerospace industries. The reasons for the growing popularity of strategic alliances are quite evident. According to Segal-Horn and Faulkner (1999) one of the primary drivers of strategic alliances is the growing globalisation and regionalisation of markets. Several forces that resulted from the globalisation make the strategy of alliances very important. “The steady reduction of trade barriers has led to the dramatic growth of cross-border cooperation between companies…” (Segal-Horn and Faulkner, 1999, p. 205). The blurring of industry boundaries forces companies to face new rivals. Alliances can provide the companies with capabilities that they need to front global competitors.
“Alliances can provide firms with many benefits such as access to new knowledge, complementary resources, new markets and new technologies…to learn, exploit economies of scale and scope, share risks and outsource various activities along the value chain.” (Gulati et al. 2000 cited in Segal-Horn 2004, p. ???)
Gulati´s statement shows that strategic alliances can offer many opportunities and advantages. In respect to technology development the companies can learn from each other as there is an exchange and sharing of technologies, know-how and expertise. This expertise and technology sharing allows the companies to achieve faster the joint aims. To cite Wagonor (2001) manager of GM, “leveraging on someone who does it better allows you to get there faster.” Canon and HP shared their technologies in copier business. Canon developed the technology for toner and toner cartridges and HP developed the software and computer chips to operate the cartridges (Acredula, 2001).
Concerning the market development collaboration can facilitate international expansion and the companies can benefit from a faster entry to new markets. In the case of the alliance between Coca-Cola and Proctor and Gamble (P&G), Coca-Cola benefited from a faster entry into the snack and non-carbonated beverage market (Acredula 2001). An alliance partner can also help a company that enters a foreign market with local knowledge, logistics and domestic behaviour as well as with the governmental requirements. Another advantage that an alliance offers the companies is maintenance of the market position and production at lowest cost locations – which leads to a very important advantage, cost reduction. Allies in cooperation can for example share costs for advertising and marketing as well as the costs for research and development (R&D). In the case of failure the partners of an alliance share the risk as it is spread between all allies and can therefore minimize their damage and losses. This makes the companies more willing to take a risk as they would be alone. Finally, the shrinking product life cycle which cause growing pressure for innovation and growth has forced companies to look outside their own borders for new ideas (Bannerman, 2005). To sum up, strategic alliances allow firms to share risks and resources, gain knowledge and technology, expand the existing product base, and obtain access to new markets.
The named advantages of strategic alliances can help companies to keep pace with increasingly complex technologies and constantly changing global markets (Kolasky, 1997). Forming alliances seems to be a useful tool to adopt to the changing market conditions and to stay competitive in a global business world. According to Johnson and Scholes (2008) enterprises sometimes cannot cope with increasingly complex environments only with interior resources and competences. They may see the need to obtain materials, skills, innovation, finance or access to markets through other cooperation s. “A single firm is unlikely to possess all the resources and capabilities to achieve global competitiveness” (Dussauge and Garrette 1999, p.???). Collaboration is often necessary for the survival and growth of a company. Alliances are a useful strategy to pool competences, technology know-how, skills and resources together to create a new unit (De Wit and Meyer, 1998). Toshiba believes that “a single company cannot dominate any technology or business by itself”. That is why Toshiba chose the strategy of developing relationships with different partners (e.g. IBM, Siemens, GE, Ericsson, Microsoft, Samsung) for different technologies which helped the company to become one of the leading players in the global electronics industry. Toshiba is successful with that strategy because of a thorough alliance partner selection. Toshiba has chosen Apple Computers as a partner to develop multimedia computer. Toshiba’s manufacturing expertise combined with Apple’s software technology was an achievement because the alliance allowed both companies to gain from each others competences (Kotelnikov, 2001).
However, not only companies come off as winners from strategic alliances but also suppliers, employees, consumers, the government as well as shareholders of the allied companies. It is obvious that companies gain higher sales and therefore higher profits, e.g. the collective revenue for the partnership of the Star Alliance is at more than $63 billion. Furthermore, suppliers gain new clients. The increasing number of clients leads to more orders that in turn lead to more turnovers and more profit. The exchange of know-how and expertise mentioned before benefit the employees. The special knowledge makes them more employable and can assure a safer workplace. As companies are able to produce their products at lowest cost locations, reduce costs and diversify their product range consumers can profit from a wider range of products to more favourable prices. The increasing consumptions and more exports than imports lead to a higher Gross National Product (GNP) in the country of the producing company. As a positive side-effect the shareholders benefit from higher dividends because increased sales force leads to higher turnover and higher share prices (Acredula, 2001).
The last two paragraphs show that strategic alliances present several potentially beneficial advantages. However, alliances also have been criticised. Their high failure rates – half of the alliances fail – show the other side of the coin (Acredula, 2001 b). Some organisations may only have one option – namely going it alone. This can be in the case of “working in a field which is breaking new ground or where there are no other suitable partners available” (Johnson and Scholes, 1999, p. ???). The risk of exposing competences and technical know-how to partners who can become future competitors and disputes as well as issues that result from working with other partners, sharing of profits and advantages, less autonomy and control are also significant points that have to be considered. For example, one partner may go into an alliance for short term learning gain, whereas the other partner may see the alliance as more strategic, long term and replacing one area of its value chain. Dutch KLM and Alitalia could not avoid the failure of their full merger as partners compatibility did not exist and Alitalia did not come up with arranged expectations. Like most alliances they have failed due to differing objectives or motives of the partners (Witt and Mayer 1998).
The companies have to be aware that alliances require a clear strategy and hard work. Careful planning – like a clear definition of core competencies, goals and objectives as well as a limitation of the partner’s role and relationship and a timeline – a deal structure with an exit plan – are essential to eliminate or rather to avoid disadvantages as well as to succeed. “According to a survey of 455 CEOs, the most important factor in designing a strategic alliance is the selection of the right partner (chosen by 75% of the CEOs)” (Holohan, 1998). But one has also have to go beyond the visible peak of the iceberg and consider the main fundamentals of a successful alliance including communication, transparency and trust (Johnson, 2005). Although, alliances are often criticised for being a slower form of development and despite the high failure rate the constant growth of alliances will definitely continue in the future (Johnson and Scholes, 1999).