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THE EMERGING ROLE OF STRATEGIC ALLIANCES A strategic alliance is a type of long-term alliance which offers a natural linkage between

the internal environment and the interaction process because it emphasizes how collaboration is a function of long-term, win-win interaction. The term strategic alliance also can be used to describe a number of organisational structures in which two or more channel members cooperate and form a partnership based on mutual goals. But a strategic alliance is not just a cooperative relationship. It is a symbiotic relationship as well an interdependent, mutually beneficial channel relationship between two or more parties. As the CRM illustrates, strategic alliances are formed within the internal channel environment that exists between channel members operating at different channel levels or at the same level. The premise for strategic alliance is this. Once an alliance is formed, strategic partners will presumably be able to operate with greater efficiency and more effectiveness in external channel environments, that is, in the marketplace, than they could alone. David Lei offers the following definition of strategic alliances : Coalignments between two or more firms in which the partners hope to learn and acquire from each other technologies, products, skills and knowledge that are not available to other competitors. Coalignment The term coalignment implies that a channel member joins or links its organisation with other channel members in pursuit of a common objective. While the timeline for achieving these objectives may vary across partners, a sense of shared purpose should exist among the strategic partners. The basic for a strategic alliance clearly should follow from a common purpose shared among alliance partners. The importance of a common business objective cannot be taken lightly. Without a shared objective, partners have not agreed on what new values they will create together. Then, when tough choices have to be made, there is no basis for deciding and conflict often follows. Exchanging Technologies, Product Skills and Knowledge Strategic alliances often involve relationships between several channel members, each of whom features different core competencies. Companies are coaligning to pool resources and exploit market opportunities. Accordingly, the sense that markets can be shared among firms is emerging in many channel settings. Competitive Edge Strategic alliances involve an exchange of technologies, products, skills and knowledge among its partners. As a result, alliance partners garner a collective competitive advantage in the marketplace. Some suggest that strategic alliances are best suited for allowing channel members to develop more favourable competitive positions, and should not be used for any other purpose. To gain these competitive advantages, each channel member must contribute some value to the strategic alliance. The value of these contributions cannot be measured necessarily by their size. Many alliances survive on less visible assets like research and development proficiency, marketplace acceptance, or management prowess. Increased global competition is a major factor contributing to the increase in strategic alliances.

Myriad Strategic Alliance Forms Form of Alliance Collaborative advertising Alliance Partners Descriptions American Express and Toys Cooperative effort for R Us television advertising and other promotional activities Cooperative bidding Boeing, General Dynamics and Cooperated together in winning Lockheed advanced tactical fighter contract Cross-licensing Hoffman-LaRoche (HL) and HL and Glaxo agreed for HL to Glaxo sell Zantac, and anti-ulcer drug in the US Cross-manufacturing Ford and Mazda Design and build similar cars on same manufacturing/assembly line Internal spin-offs Cummins Engine and Toshiba Created new company to Corp develop and market silicon nitride products Lease service agreement CIGNA and United Motor Arrangement to provide Works finanacing services for non U.S. firms and governments Research and development Cytel and Sumitomo Chemicals Alliance to develop the next partnerships generation of biotechnology drugs Resource venturing Swiss Chemical, Texasgulf, Canadian-based mining natural RTZ and US Borax resource venture Shared distribution Nissan and Volkswagen Nissan sells Volkswagens cars and Volkswagen distributes Nissans cars in Europe Technology transfer IBM and Apple Computer Agreement to develop next generation of operating software systems The Nature and Scope of Strategic Alliances Impact of Strategic Alliances While on average alliances outperform more conventional business development approaches like mergers or acquisitions, they are inevitably expensive propositions. Enormous investments on time, capital and human resources are required. Rationale for Strategic Alliance Formation Channel members are entering strategic alliances to attain market and profitability objectives they could never dream of reaching alone. A strategic alliance affords new market opportunities for channel members. Strategic alliances offer a host of advantages to its partners :
(i)

Market entry : Strategic alliances can open new markets to channel members. This is especially true when firms are attempting to market across international borders. Individual channel members often lack the resources, expertise or the experience needed to successfully penetrate a foreign market. Strategic alliances provide channel mmebers with a way to overcome such limitations to extend their operations range by capitalising on a partners experience in a host country.

(ii)

(iii) (iv) (v)

Economy : Strategic alliances can facilitate reductions in wasteful, redundant activities. At the same time, alliance partners can pool limited resources. In this way, strategic alliances can lead to economies of scale in the procurement and allocation of resources. Risk : Strategic alliances can reduce the risks involved in market and product development, and accelerate the time-to-market for new products. Gain market share : Expansion : Strategic alliances can expedite channel members expansion into related and unrelated industries. Strategic alliances frequently allow firms with little experience in a particular industry or market to move quickly up the learning curve and successfully capitalise on fleeting opportunities.

The strategic alliance business form should not be confused with a merger or acquisition strategy. A merger is a statutory combination of two or more companies that occurs when all properties are transferred to a single organisational entity. An acquisition involves a takeover of an organisations possessions. However, a strategic alliance simply consolidates or blends two or more alliance partners. The overriding rationale for strategic alliances lies in the opportunity to create exchange value and gain positioning advantages by combining channel members complementary strengths. The alliances exchange value may not always result in an equal payoff, but a win-win situation must be possible for each alliance partner. Complementary partners make for successful alliances Partner Strength PepsiCo : Marketing clout in beverage market KFC : Established brand and store format, operation skills Siemens : Presence in worldwide telecommunications markets and cable manufacturing technology Ericsson : Technological strength in public telecommunications network Partner Strength Lipton : Recognised tea brand and customer franchise Mitsubishi : Real estate and site selection in Japan Corning : Technological strength in optical fibre and glass Alliance Objective To sell canned iced tea beverages jointly To establish a KFC chain in Japan To create a fibreoptic cable business

Hewlett-Packard : Computers, To create and market network software, and access to management systems electronics channel

TYPES OF STRATEGIC ALLIANCES (I) Licensing Arrangements (II) Joint ventures (III) Consortia Licensing Arrangements A licensing arrangement revolves around a contractual agreement in which one alliance partner makes intangible assets such a stechnology, skills and knowledge available to another partner in exchange for some renumeration such a sroyalties. This is the least sophisticated strategic alliance option. Alliance partners engaging in licensing agreements do not take an equity stake in one another and the scope of the alliance is generally limited to the agreements highly prespecified terms. Although less flexible than joint ventures and consortia, a licensing arrangement offers an attractive strategic alliance alternative because little to no capital investment is needed to enter new

markets. Moreover, licensing agreements may be the only strategic option available in some markets because local governments prohibit foreign ownership. Licensing agreements can be categorised into manufacturing and service agreements. Manufacturing Agreements Manufacturing agreements are on the rises in international markets. The principal reason behind their global appeal is the limited cooperation required between organisational cultures involved in the manufacturing lecnesing agreement. Also, the exchange values that result from an international manufacturing licensing agreement is usually straightforward.: a swap of technology for market entry in a new country or region. A decision to manufacture in another country often leads to cost savings. But the impetus for true strategic alliances should extend beyond the labour or resource cost savings achieved. In manufacturing licensing agreements, for example, the licensing channel member may seek an alliance partner that can help it capitalise on its technology advantage. The alliance partners can then collectively establish global standards to preempt competitive threats. Licensee firms presumably know the host country and/or regional market well. Together the alliance partner can establish a pioneering advantage at the early strategies of the technologys lifecycle. This makes manufacturing agreement type strategic alliances specially attractive in technology-driven markets. Outbound licensing means granting other manufacturers contractual permission to use their brand names. Service Agreements Service-oriented licensing agreements can also be enacted. Franchising is the most common form of international licensing. Franchising licensing agreements afford several advantages including : the opportunity for quick market entry with a minimal investment because franchisees essentially fund the firms expansion into new markets. Standardised business models that allow the lead firm to maintain a standard global image of its brand name or product. Managerial control over operations and marketing programmes in the newly developed markets. Many international markets are ripe for franchise licensing agreements. Joint Ventures Joint Ventures involve the creation of a new organisational entity by two or more existing firms. The previously existing firms then assume active roles in developing and implementing a marketing strategy for the joint venture. Joint ventures are amongst the most popular strategic alliance options in the global marketplace. However, joint ventures also require a greater assumption of risk by each channel partner. Unlike licensing agreements, joint ventures require that organisational cultures be intermingled. In joint ventures, alliance partners engage in a dynamic exchange of resources. This sharing of resources and thus risks, as well gives joint ventures a relative advantage over licensing agreements. Each alliance partner in a joint venture has a stake in the new entitys success. A greater exchange of skills, systems, and market knowledge usually unfolds between alliance partners that are involved in a joint venture. The three primary reasons for participating in joint ventures are to gain : Channel access

Management expertise Sustainable competitive advantage

When contrasted with licensing arrangements, joint ventures also serve up other advantages. Joint ventures provide the opportunity to : (i) Learn through participating in an alliance. The extensive exchange of value that occurs between the exchange partners fosters greater collaboration. (ii) Take advantages of pooled resources controlled by complementary partners. These pooled resources facilitate fast upgrading of managerial technological processes within each organisation. (iii) Achieve economies of scale in resource procurement and manufacturing processes. (iv) Develop an almost immediate market presence because of the critical mass resulting from the consolidation of two or more alliance partners. In the past conventional joint ventures usually functioned as operational structures. These operational structures sought to allocate specific resources toward a predetermined market objective. Not much flexibility was available. The type of joint venture emerging today, on the other hand, is typically less structured and offers more opportunity to adapt to changes in internal and external channel environments. Such flexibility allows joint ventures to seize market opportunities extending beyond those specified in the ventures original goals. Rather than simply exchanging organisational know-how, venture partners are sharing products, distribution channels, manufacturing systems, and a host of less conspicuous assets. This new type of joint venture requires substantial openness among athe alliance partners. Consortia Consortia have long been a Japanese trademark, existing in the form of keiretsus. The keiretsu is a family of companies, centred around a large trading company or financial institution. Companies are joined together through interlocking boards of directors, bank holdings, and close personal relationships between senior management. These families usually consist of 20-50 industrial firms. Family companies are extremely committed to the keiretsu as a whole, more so than to any single company. Family companies generally agree to not sell any holdings outside the keiretsu. Sumitomo and Mitsubishi are prominent keiretsus. See exhibit 17.4 in the module DEVELOPING STRATEGIC ALLIANCES When an alliance is first considered, firms should carefully evaluate the answer to the following questions : (i) What are the relative advantages of pursuing a stated business objective with and without an alliance? Strategic alliances are usually born out of a firms recognition that it lacks the competency or resources to compete alone in a particular market. But not all companies pursue strategic alliances as a means of fulfilling their organisational vision. (ii) Does true, meaningful exchange value exist that can be realised through this alliance? There is no assurance that a firm will benefit from a strategic alliance. In fact, many alliances turn out to be the first step toward an acquisition. Acquisitions often occur when a weak firm enters into an alliance with a strong firm, but the weaker partner fails to realise any exchange value other than a capital infusion. In such cases, no mutuality exists between the alliance partners. Once a firm determines it is likely to benefit from a strategic alliance, a four-step process is usually

necessary to successfully bring off the alliance. The steps in alliance formation are : achieving strategic harmony selecting partners developing action plans to achieve alliance objectives assessing the extent to which the alliance reaches stated goals (i) Achieving Strategic Harmony Many alliances encounter problems before they get started. A well-designed alliance begins with a single, clear strategic vision. Practical reasons usually lie behind the formation of channel alliances. Channel alliances potentially allow channel partners to improve inventory management, increase order processing efficiency, and/or achieve better coordination of marketing strategies and tactics. But strategic harmony must exist between the channel partners for such outcomes to be achieved and it often proves elusive. On the surface, the development of strategic harmony would appear to involve simply negotiating an agreement regarding the expected outcomes of the alliance. However, strategic harmony is unlikely to be realised if a sense of imbalance exists between the allianec partners. One-sided alliances tend to fail. Difficulties often result from the efforts to meld two or more organisational cultures into one. This problem is particularly acute in global strategic alliances where cultural differences can be pronounced. Flexibility is the key to the successful negotiation of an alliance strategy. But some organisations cultures are far less prone to flexibility in the negotiating process. Another dilemma confronting alliance partners in the pursuit of their strategic harmony relates to the transfer of technology, products, skills, and knowledge. The role that organisational culture plays in strategic alliance formation is summarised by the following four categories :
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The Quarerback : Quarterbacks can transfer their skills to others, but do not receive skills well. Management in these organisations is usually hierarchial and features strong, nontransferable skills, systems and cultures. Unfortunately, this type of alliance partner tends to be inflexible at the strategy development stage. The Wide Receiver : Wide receivers easily accept skills from other organisations, but fail to do a good job of transferring their own skills to other partners. These partners learn a great deal through alliance formation, but have difficulty actively managing the exchange of technologies, products, skills or knowledge. An opportunity to achieve strategic harmony with such a partner exists, but wide receivers must recognise their own shortcomings. The Spectator : Spectators are particularly good at receiving or transferring exchange value. They are prone to an us versus them mindset which hardly serves the ends of strategic development or strategic harmony well. The cultures of spectator firms are generally so distinctive that they block the development of successful strategic alliances. The Utility Player : Utility players can perform any position; they are highly flexible. Utility players can transfer and receive skills from other organisations, and willingly adapt to accommodate other partners systems. Such organisations have open management cultures. They feature the easiest cultures from which to pursue strategic harmony in an alliance. Utility players excel at channel collaboration.

While strategic alliances usually feature long-term orientations, the perception of exactly what constitutes the long-term is likely to vary across alliance partners. Alliance participants should make sure they share compatible timeline expectations early on in the strategy development process. (ii) Selecting Alliance Partners

In alliances, as in any other channel relationship, the internal channel environment influences the interaction process. The partners individual characteristics should mesh together in a logical, complementary and mutually beneficial fashion. Generally speaking, strategic alliance partners should supplement one another with respect to products, market presence, or functional skills. Alliance partners must each contribute to and benefit from the alliance. Channel members with nothing to contribute will likely diminish their partners market strengths, rather than augment them. Often weaker partners seeking capital infusions through joint ventures or other strategic alliance types lack the core competencies needed to nurture collaborative relationships. History tells us that most combinations of alliance partners do not enjoy enduring relationships. The chemistry that exists between strategic partners influences the alliances life expectatncy. For strategic alliances to evolve into enduring and collaborative interfirm arrangements, firms must first seek partners who themselves possess, a long-term orienbtation. The combination of alliance partners can take many forms, but are best considered along two dimensions as follows : the partners relative market strength the partners relative contribution to the alliances competitive position These combinations can be classified into five groups : (i) The Racer : A Racer is an alliance between two or more strong, direct competitors vying for overall leadership in a given market. Both partners want to get to the finish line first, but each is willing to concede a lap in exchange for some other, longer-term benefit. In an organisational contect, the Racer alliance partner wants to create short-term synergies for specific products and/or markets. Racer alliance relationships are typically characterised by prespecified agreements regarding the extent of the collaborative activities. An agreement (and spirit) of the shared control thus arises between the partners, but is confined to a relatively small domain of collaboration. This is because each alliance partner continues to compete against each other on the larger track. For this reason, racer alliances often succumb to competitive tensions. Racer alliances are prone to either dissolution or to one alliance partner acquiring the other. Racer alliances impermanent nature is widely recognised.
(ii)

The Uninsured : Uninsured alliances represent partnerships forged between the weak. Two firms band together in the hope that one plus one will equal three. But in reality, the result is often less than two. Rather than attain market power, each alliance partner tends to bring the other down because the alliance features more pooled problems than pooled resources. The collective deficiencies are too great for the weak partners to overcome. Such alliances are generally doomed from the start. The Road Hog : Road hogs represent a partnership fashioned between a weaker and much stronger firm. These alliances typically promise mixed outcomes for their participants. The Road Hog is going to take up both lanes in its drive to grab market control. The weak firms only recourse is to surrender in the hope of marshalling some degree of autonomy in its own operations. However, the stronger alliance partner has little concern for its weaker partner.

(iii)

In Road Hog alliances, the stronger firm is likely to eye the acquisition of its weaker partner from the outset of the relationship. These firms often compete against each other in the marketplace. Ultimately, the relationship becomes the weak versus the strong, and the stronger party views the weaker partner as a capital investment. This type of alliance rarely lasts more than five years. The relationship is generally dissolved through acquisition or divestiture.
(iv)

Back-Seat Driver : Here, an alliance is again formed between a weak firm and a strong.

However, in the back-seat driver alliance the weaker partner gains strength from the alliance. Eventually, the alliance partners become equals. At that point, the alliance usually dissolves since the weaker party can now survive on its own. The weaker partner has essentially accepted a back seat status until it can move into the drivers seat on its own. The stronger party always expected to be in the drivers seat, strengthening its position by capitalising on the weaker party.
(v)

Travelling Companion : Travelling companion alliances are relationships between complementary equals. Such partnerships are based on a genuine sense of collaboration. Both alliance partners have the willingness and flexibility to build on each others core competencies. Usually, each partner contributes different product, geographic or functional strengths to the alliance. Travelling companions last longer than strategic alliances median lifespan of seven years since neither party has a desire to end the partnership.

THE DOWNSIDE OF STRATEGIC ALLIANCES (I) A lack of strategy development is the chief culprit in the failure of strategic alliances. This suggests that the strategic alliance form itself is not at fault. Managers will have to spend more time formulating workable, realistic strategies to succeed in strategic alliances. More effort should be allocated towards choosing the right alliance partner. Other factors contributing to the failure of strategic alliances include : The absence of a compelling reason for forming a strategic alliance in the first place, i.e., some alliances are a bad idea and dont deserve to see the light of the day. One or both partners are burdened by unrealistic expectations regarding the synergies that would result from the alliance. The strategic partners corporate cultures clash with one another. One (or both) of the parties was insufficiently interested in the strategic alliance. When this circumstance arises, windows of opportunity to improve performance in functional areas are likely to slam shut before the companies can leap through.

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