Discuss the advantages and disadvantages of strategic alliances. Find examples of strategic alliances both working and not working for parties involved and explain why?
Strategic alliances can contribute to the success of a business and are beneficial when maintained with efficient management. As defined in Global Business Today the term ‘strategic alliances’ refers to a “cooperative agreement between potential or actual competitors for the benefit of all companies concerned” (Hill, et al., 2011). The overall concept of a strategic alliance is that it is a relationship between two companies which allows them to create more value than they can on their own. Strategic alliances are becoming increasingly important to the overall strategy of companies as they can generate significant competitive advantage when they are used effectively. Strategic alliances can occur through the form of formal joint ventures or short term contractual agreements where companies agree to cooperate on particular tasks such as developing a new product. Strategic alliances can also be informal, for example a company may just seek to use the expertise of a similar company or government agency to strengthen the businesses own capacities. These alliances can occur with counterpart companies, government agencies, publishers, association management companies, universities, or other for-profit entities. (Hynes & Diane, 2008)
In recent years the changes to economic conditions and fierce competition has resulted in increasing cooperation amongst companies. In the current economy markets are constantly changing, making it increasingly difficult for one company to stay current on all technologies, resources, competencies, and information needed to be successful in those markets. Strategic alliances provide an option for companies to access new markets, expand geographic reach, obtain new technology, and complement skills and core competencies relatively fast. Strategic alliances are now considered a key source of competitive advantage for companies and have allowed them to cope with increasing organizational and technological complexities that have emerged in the global market.
Although the formality of strategic alliances can vary, they usually have a formation process which involves five steps. These are strategy development, partner assessment, contract negotiation, alliance operation and alliance termination. The development process starts with the company establishing which areas of the business will improve with a strategic alliance. Once these areas are identified the analysis of potential partners can occur. An ideal partner should represent a company whose cultures and core strengths are complementary to the business seeking the alliance. After details of the strategic alliance have been established an agreement or contract can be developed. It is recommended that the strategic alliance agreement be committed to a formal paper contractual agreement. It is also important to regularly review the mutual goals and performance of the alliance. Regular meetings with alliance partners are an effective way to ensure these reviews are completed and also to evaluate the status of the alliance (Holmberg, 2009).
There are several common objectives which make a strategic alliance appealing for a business. Along with the many advantages which will be discussed below, some of the objectives a business may try to achieve from a strategic alliance are to distribute products or services to a set of customers, to jointly develop products and services for the local market or to work with local or regional counterparts to drive a common agenda. These objectives are particularly relevant for businesses seeking to establish an alliance with an off shore company as an offshore company could offer local contacts, language capabilities and knowledge of the cultures, protocols and business styles of that particular environment. Another objective for entering a new alliance may be to resist competition. For example if a high-volume producer was to begin operations in a new geographic market, defence would be significantly easier if the effected company began an alliance with another.
There are a number of key advantages which can result from the implementation of a strategic alliance which is why they are a common feature of business today. One of the most significant benefits of using strategic alliances, particularly relevant to international business, is the facilitating entry into a foreign market (Hill, et al., 2011). In the current global business environment, there are circumstances where companies seek a local partner who understands business conditions when entering a foreign market. An example of this is Warner Brother’s film producers entering a joint venture with two Chinese film producers in 2004. This arrangement allowed Warner Brothers to avoid complex approval processes when producing films in China. In this case, forming a strategic alliance is also a good method of overcoming protectionist barriers. Alliances can allow companies to avoid controls on importation and overcome barriers to commercial penetration.
Another advantage of a strategic alliance is the opportunity to gain skills and assets that neither company could easily develop on its own. In doing this, an alliance also allows a company to offer its customers a new range of services while continuing to focus on its capabilities and specialised services (Buckles, n.d.). An example of this is Microsoft and Toshiba in 2003 when they combined to develop new embedded microprocessors. The two companies combined to develop this product using the software engineering skills of Microsoft and the specialist skills of Toshiba in developing microprocessors. Strategic alliances may also be created to help a firm improve technological standards for the industry that will benefit them. Palm computer is one example of a company entering a strategic alliance to achieve technological advancements. Palm joined an alliance with Sony to establish its operating system as the industry standard for PDA’s and was quite successful in achieving this. Another example of a similar strategic alliance is between Cisco and Fujitsu. In 2004, Cisco Systems, a large manufacturer of internet routers, entered into an alliance with Fujitsu, which specialises in electronics and telecommunications. A strong focus of this alliance was to combine each company’s leading edge technologies and production expertise, which enable the companies to produce superior products to competitors. Some of the other improvements which both of these companies experienced as part of the strategic alliance were increased market share, increased sales and also a greater access to research and development which contributed to product development and competitive advantage (Hill, et al., 2011).
Strategic alliances allow firms to share the fixed costs and associated risks of developing new products or processes. One example of this cost sharing method being used effectively is between Boeing and a number of Japanese companies. In the case of Boeing, cost sharing was the major incentive as the development of their new 787 aircraft which included costs of US$8 billion was able to be shared (Hill, et al., 2011).
Some other relevant advantages for businesses entering into a strategic alliance can include capitalizing on the individual strengths of partnering companies, increased contacts and links to local communities who influence the success of the business, shared responsibility for implementation of new products and can also reduce the liability of companies included in the alliance. Economy of scale may be another reason for a company to enter a strategic alliance. There are many alliances which are designed to divide fixed costs of production and distribution, which will in turn improve volume.
The case of the alliance between Xerox Corporation and the Fuji Xerox Corporation shows how successful a strategic alliance can be if it is managed effectively. Fuji Xerox is a successful company which specialises in manufacturing and developing copiers and laser printers. In its current form, Fuji Xerox Co Ltd (Japan) is a subsidiary of FUJIFILM Holdings Corporation of Japan (75% ownership) and Xerox Limited of the USA (25% ownership) (XEROX, 2013). The strategic alliance between these companies occurred when Fuji Xerox and Xerox created a joint venture in 1962. At this point in time Xerox was an American company which was struggling to compete with other Japanese printing manufacturers. During this joint venture Fuji Xerox has enjoyed some powerful advantages as well as suffered some disadvantages because of this structure. Many of the operations of Xerox and Fuji Xerox remained the same. The key change resulting from this alliance was that Xerox lost a portion of control over its capabilities, as opposed to a competitor such as Canon which has 100% control. There are also several disadvantages which are associated with the formation of a strategic alliance. Before a business enters a strategic alliance it should consider some factors which may influence its success. Some of the factors to be considered by the company are whether market share increase as a result of expanding and developing new markets, whether the alliance will increase the company’s revenue, whether the alliance will increase value of the company in the industry, and whether the alliance will contribute to the company achieving its missions and goals. One of the most significant disadvantages associated with strategic alliances is the costs involved. Costs of an alliance can affect a company not only through expenses leaving the company’s hands, but also due to returns from which it could be denied. Some costs incurred by a company joining a strategic alliance may include the investment of managerial time resources in establishing the alliance, managing it, and resolving possible conflicts of interest between the partners over the functioning of the alliance. Alliances can also create indirect costs by blocking the possibility of cooperating with competing companies, and therefore possibly even denying the company various financing options (Chen, 2003).
A strategic alliance can also expose a company to its partners, and any unique technologies that they may have are revealed to the partner company, which could later become a competitor or could utilize the information obtained during the alliance to their own benefit. Partners could potentially reverse engineer unique products of the company which would the lose value. In addition, partners could lead the company in directions that serve the partner company better than they do the company itself. This is why ongoing reviews are a crucial aspect of the alliance as they ensure all parties included in the alliance are working towards the same missions and goals.
Another potential disadvantage for companies who are part of a strategic alliance is changes to the balance of power during the course of the agreement. Although some of the costs of alliances such as joint ventures may be forecasted during the negotiations for its establishment, in many cases the balance of power between the parties can change during the course of the venture’s life, and the parties involved may have a change of mind. An example the balance of power being affected could be negative effects to the stock market and the influence that this may have on a public company in a joint venture with a private company. Changes in the competitive environment could also impact costs of an alliance for companies.
As well as the disadvantages above, there are some common problems which contribute to the failure of strategic alliances and can influence the success of a business. Poor alliance management can be detrimental to the success. Management often underestimates how much time and energy should be committed to managing a strategic alliance. Poorly defined goals, losing control of basic strategy and unanticipated conflicts in business objectives are other issues which can affect the success of a strategic alliance. (Business.Govt.NZ, 2013) Some of the more obvious disadvantages of starting a strategic alliance are sharing profits with a partner, potential for disputes, cultural difficulties (particularly relevant for a business working with a foreign partner), and the high level of commitment which is required to maintain the alliance.
Choosing an appropriate partner is another crucial process to the success of an alliance. When analysing potential partners to join in an alliance, a company should consider whether the partner will assist them in achieving strategic goals. This could be through the form of greater market access, cost and risk sharing, as well as access to core competencies. It is also crucial that the potential partner has shares the same vision of the alliance. When considering the partner the company should ensure that the potential partner is a company that will not seek to opportunistically exploit the alliance for its own benefit. A company with a reputation for fair play is important. IBM is an excellent example of a company which has used this methodology. Over the years IBM has been involved in many alliances. IBM has prioritised effective management of its alliances and ensures that it is not involved in opportunistic behaviour. (Hill, et al., 2011)
The alliance structure chosen by companies involved is also an important process as it can protect/reduce how much information a company is giving to its partner. This process also gives companies included in the alliance the opportunity to create contractual safeguards, discuss agreements and risk.
Overall, it can be said that a strategic alliance can be a powerful tool for achieving a company’s strategic goals. In order to maximise the success of strategic alliance, companies should follow an organized process which includes strategy development and alliance termination. It is important for companies to take the time to properly set the strategy for the alliance and to create the optimum structure of the alliance, and to review the results on a timely basis. As a result of the advantages discussed above, strategic alliances can provide a powerful competitive advantage in new markets with assistance to expenses, speed, knowledge, and technology access. Following the above framework will provide an approach to developing a successful strategic alliance which will provide the business with many opportunities in the future. Like many other business operations, strategic alliances do have some disadvantages; however with careful planning and appropriate action to ensure common problems do not occur, the process of creating an alliance can be very successful and can provide a company with opportunities to generate revenue.
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