Introduction
Strategic Alliances are becoming very popular in present scenario. In business environment these days alliances are becoming essential building blocks for companies to attain far better and efficient market place. This kind of cooperative agreement helps organizations to accomplish goals and aims better through co-operation rather than competition. Discovering the value of proper alliances it is vital for the lovers to create effective business relationship which assists with achieving cooperative targets. Formation of alliances may come across several issues that can affect further business romantic relationships.
This essay is divided into 3 parts. First part identifies strategic alliances and steps in their formation. Second part recognizes major problems in alliance creation by making use of academic theories and circumstance studies. Third part discusses the importance of spouse selection and provides types of successful spouse selection.
Strategic Alliance
Strategic alliance can be an agreement between several firms or companies achieving on the objective of common interest. Tactical alliance is a trading relationship that enhances the potency of the competitive strategies of the participating organizations by giving for the mutually beneficial trade of systems, skill, or products centered after them. These alliances can range between informal arrangement to formal contract depends on the space of contract in which partners are involved in transfer of capital, technologies, and workers. Alliances between companions consist of in essence four necessary characteristics: 1
- The two or more companies remain unbiased even after building an alliance to go after their goals.
- The companies mixed up in alliance share the normal benefit, competitive advantages and take care of the performance of process.
- The partner firms get involved in achieving common aim by contributing on a regular basis in one or even more key regions of alliance, e. g. technology, product, personnel, etc.
- Trust is another feature that can evolves and develop between associates during the procedure of alliance which comes from selecting right partner.
Stages in Alliance formation
1). Purpose of alliance:
There are various factors which are driving the firms to enter alliances which are globalization of market, quick change in technology, increased in competition, high cost of R&D etc. Out of various corporative purposes there are eight purposes (Physique. 1) which companies are concentrating for alliance development.
Four out of eight strategies- as proper because these purpose effect on the competitiveness and future position of alliances. Other four goal offer with the functional purpose.
Purpose of Business Alliance
Strategic
Operation
Figure 1. Reason for Alliance
2). Motives and goals of Alliance:
Motive represents various reasons for which companies are going for alliances development and how they achieve the desired target. Motive for alliance creation can contain cost advantages, lowering risk and uncertainty, organizational learning, handling industry composition and timing. Objective of alliance handles the outcome of the procedure.
3). Spouse Selection:
Partner selection plays an essential and essential role in the forming of alliance between the companies.
Note: Please refer to the third part of this essay for more information about the value of spouse selection and relevant theories.
4). Types of alliances:
Strategic Alliances are essentially discovered into two types:
- Alliances between non-competing firms
- Alliances between competing firms
These both alliances are further divided into four types that are: Cartels, Competitive alliances, Co-operatives and Collaborative.
Cartels
This type of alliance is basically comes under fighting firms involves in the operation purpose. This alliance operate in the firms like diamond, petroleum, semi conductor potato chips producers dealing in field of product resource, price fixing or sharing common infrastructure.
Competitive alliance
This kind of alliance is normally between the companies or companies who are very strong rivals and basically opponents. It acts the strategic purpose and is specially suitable for the companies dealing in global or local geographical area. The companies in this alliance enjoy the competitive advantage. Some of the types of competitive alliances are: GM and Toyota who are assembling automobiles; Siemens and Philips developing semiconductors etc.
Co-operative alliance
This alliance does apply for non-competing firms focusing on functional purpose. companies show cost and facilities with customers or suppliers. They are involved in co-development or circulation of goods and services.
Collaborative
Collaborative alliances are normal in non-competing companies entails in strategic objectives. The main purpose of this alliances is in the collaboration of activities like joint marketing initiatives, entering new market, and developments of new technologies or new product between your companies.
5). Decision making and coordination between management:
Many of the alliances are unsuccessful because of the poor decision making by the management. For the success of alliance it is important that all associates should acknowledge the precise decision, policy, guideline etc. in the forming of alliance.
Problems Experienced in Alliance Formation
Strategic alliance is a popular choice for an organization who wants to grow. Careful consideration on creating an alliance is a very crucial part because of its success. Many recent studies discuss success factors of alliances and present less importance to the problems experienced in its development. There's a danger for alliance to break because of problems arising at the start of its creation. Seven of the major problems came across in the forming of alliances are reviewed below.
1). Difference in culture and attitude
One of the biggest problems came across by the partners in the alliance is the difference in culture. Alliance includes two different international companies with their cultural dissimilarities like vocabulary, ego, manners, behaviour and approaches. Terms barrier is an important problem in social mismatch. In alliance formation process companies have to talk to each other. Terms is one of the communication means. Companies are also in another way operated predicated on let's say american and eastern manners. For example, companies in the USA assess their performance on the basis of earnings and market talk about whereas companies in Japan assess their performance predicated on operations that they choose to make.
Example case: The Rover/Honda Alliance
Rover Honda alliance was formed in 1979. Poor management of Rover would need a good managerial example like for instance from Japan. Honda received the huge network of suppliers and got chance to learn European style. This alliance was made for the tactical purpose and comes under competing kind of alliance.
These two companies are from different ethnical backgrounds. Relating to Rover it required 6 years out of 10 to understand the business design of Honda. This alliance shows the importance of cultural history. Honda cases to waste this time around in learning the culture of the business instead of putting all attention on business creation and its release to the market. Thus the situation of ethnic difference may be frustrating process and must be considered at the time of creation of alliance.
2). Lack of Trust
Lack of trust between your companies may cause firms never to make an alliance in any way or even to end it in a later process. Lack of trust brings the problem of lack of determination in alliance. In order to form an alliance, companies have to see if indeed they can trust one another. Trust reduces the uncertainty and risk in the alliance.
Suzuki-Maruti Alliance
This alliance was formed on October 2, 1982. Suzuki-Maruti alliance is a collaborative alliance. With the starting place Maruti acquired 74% of shares and Suzuki experienced 26%. However, after India exposed the door for globalization opportunity, shares were became 50-50 relationship. However, after competition entered Indian market the new growth plan with 15 billion rupees was made. Suzuki requested raising the collateral shares which provided wrong impression for Indian authorities that Suzuki wanted to dominate them. However, as both companies realize the importance of trust, they made the decision that in every 5 years if chairman is chosen from Suzuki than managing director must be from Maruti and vice versa. This agreement was not followed by Maruti so courts possessed to solve this issue.
This example case implies that trust can be shattered down the road. Its negative aspect resulted in the participation of court. The reason behind this situation may be poor trust at the start which grew into better issue or the trust was busted with time. In any case, companies have to consider the potential issues and negative effects of insufficient trust through the alliance development or even later on.
3) Lack of Coordination between management
Many alliances fail due to the poor decision making by the management. This is caused by the lack of coordination between management clubs in alliances. Running a business practice it happens that users in alliance do not agree on the specific decisions. It happens sometimes that companies go for some major project on its own by applying their own marketing strategy for products without considering the other organization. In the forming of alliance it is usually agreed to decide on the commitments of top managements, but due to the poor management it may sometime affect the alliances in long-term and ends up with failure.
Example case: Queensland Minerals Limited
At enough time of venture it has been agreed that Boards of Director for Queensland Nutrient must be 4 similarly from both father or mother companies. And out which VHI is responsible for managing the staff. After that Amcon is in charge of sound financial practice which is more efficient than VHI. Further problem began with the management process in the alliance as Amcon wanted to expand Queensland Mineral Ltd. Whereas VHI did not want the expansion. As there is no proper coordination between management of both companies this led to the change of management framework. So finally they came up the result to make 50-50 management framework.
4). Operational risk
This kind of problem arises in the later part of alliances however in order to come over this issue as well as for the successful alliance companions should monitor the operational risk. This problem is came across by companions when they are participating in different trade practices. The main goal of alliances is to pursue the business to achieve the common goal. But when partners involved with business for the self applied interest like delay in creation of good or not providing goods on time may influence the other spouse. This situation causes split up of alliance or dominate.
Example circumstance: Goodyear-Sumi-tomo
Goodyear has a Joint development alliance with Japan's Sumi-tomo. Both of these companies produce tyres for the other person in various area, one in Asia and other in THE UNITED STATES. They remain rivals in many market segments. Being truly a competitor's alliance will maintain danger side and also have more likelihood of failure because competition will always stay competitors even if indeed they have alliance.
5). Performance risk
It involves chance of failing of alliance if companies fulfil all the aspects for successful alliance development. This performance risk may evolve from various environmental conditions like advantages of new procedures by government, war, market condition like tough economy or demand and offer gap. On the other hand permanent orientation has its own value in alliance. On this spouse view the alliance as least semi permanent which means the condition which will come in future should be modified as it is by companions. To be able to emerge from this problem companions should settle a reasonable, concrete objective at each level of creation of alliance.
Vodaphone and China Alliance
These companies shaped alliance on January 9, 2002. They made this alliance of R&D of cordless data services. These companies consider all the possible forward-looking statement with known and mysterious risks and doubt. They carefully consider the performance risk that there is a chance of unexpected events which might break alliance. Inside the annual survey on year concluded on 31 Dec 2000, the registration submitted by the China mobile identified uncertainty and risk for the future. If some of risk, uncertainty or assumptions were incorrect it affects the near future results and may change from the expected. Still they were successful in the alliance. This sort of alliance comes under competitive alliance type where both company provides the strategic purpose.
6). Relational Risk
Relational risk handles the chance that lovers may lack determination of the alliance and the lovers are more designed to fulfil the do it yourself interest rather than common alliance interest. Relational risk is vital and unique in proper alliance. At the formation of alliance companies should acknowledge certain factors to conquer relational risk. If any decision is considered on marketing of product or new product development, the organizations should not provide their own passions; rather they have to cooperate with one another.
Example circumstance:
In 1993 U S West spent $2. 5 billion with time Warner Entertainment which a part of Time Warner Inc. This alliance gone into problem in later part when Time Warner Entertainment agreed upon various other deals with other telecommunication sectors like AT & T. This will likely have an impact on the U S Western world as these businesses were result from its local competitors. These all proposals are vetoed by U S Western world.
7). Risk of partner selection
The last however, not minimal and consider to be very important problem or risk experienced in alliances is spouse selection. This isn't an easy decision to take on selection as there are many conditions for choosing good partner. It happened in the past and present that the majority of the alliances are unsuccessful just because due to the choice of incorrect partner. It could happen when alliances were developed between competition, between vulnerable and strong firms. Before building an alliance companions should go for strong identical equity and incredibly high level of trust an dedication is requires in the selection of partners. When companions are selecting a partner during alliance the partner should be both source of information fit and proper fit and provide the need of alliance.
Importance of Partner Selection
Selection of associates in the alliance considers to be the most crucial part. When lovers enter any alliance they have certain prospects and objectives. So that it is very critical for the management of companies to identify and understand the effective partner selection criteria prior to going for just about any alliance. It really is a very intricate decision for taking. In essence poor decision taken on the partner selection may lead to are unsuccessful of alliances. An effective alliance brings about the combination of partners serving to the same goal. With selecting right partner company can help themselves to grow more in future by the introduction of new technology, skill, workers, access to new market, dividing risks. Selection of appropriate companions is the intense process in the forming of alliance. Before going to any alliance companions must consider three features which helps in selecting best partner.
- Partners should have resources and capacities to serve companies in achieving strategic goals.
- Partners must talk about long-term goals for the alliance
- Partners shouldn't use the alliance merely to learn new technology, relationship between customers and client without the identical contribution of strategies.
As it is informed before also that selection of spouse is is highly complex thing as a little decision may leed to failure of alliance. Companies may face problem in selection of partner due for some reason like:
- Lack of Information of partner
- Overestimation of capability
- Managerial Differences
- Lack of mutual trust between partners
- Cultural difference
According to 1 of the theory called 3C in Business International (1992), to be able to measure the potential resources and capacities of partners, it's important to lessen this conditions to take it down to three requisites C: Compatibility, Functionality, Commitment which is very important in selecting partner.
Compatibility
While selecting the partners it is easy to identify the nice partner by finding the compatibility of of partner from the past alliances. It has been seen that most of the alliance result from past tie-ups between your partners. Looking at the compatibility of the spouse and building an alliance is very simple and easy. It has been seen that building alliances with the known partner reduces the risk of inability in alliance.
Capability
Every spouse when entering selection process spouse it basically searches for the ability of the other spouse. It depends on how they can serve the objective of alliance. It could may happen that one is good in technology, one is better in geographical area. So partner can serve the region where he suitable and cover that particular area whether geographical area, production, syndication etc.
Commitment
The parents may have capabilities and compatibility within nonetheless they must have presumed in the alliance. Companions should have determination for the alliances, so any spouse getting into alliance must have trust on other companions. They have to find the ways to come over any hazards in future by serving on the same goal.
When discussing the selection of partners, partner company should be resource fit and strategic fit. Source fir refers to the amount of to which partners possess appropriate resources. It is important for alliance spouse because resources and functions are the primary thing in charge of the alliance performance. For example: Horsepower and Nokia form alliance to develop hand-held communication device that incorporate cellular phone with computer, where both companies draw the resources and capacities. Strategic fit identifies the alliance where organizations know the other person real objective and these objectives can provide in the alliance without harming the partner organization of alliance itself. For instance: GM and Daewoo shaped an alliance where GM interested mainly to remain with same model and keeping cost down and Daewoo wants to upgrade technology and design. Due to the mismatch of R&D orientation and cost orientation alliance got failed.
Conclusion
This essay consist of three parts where in first part it points out about the tactical alliance and the levels engaged, second part consist of problem encountered in the forming of alliance and last part covers the value of partner selection. Strategic alliance is an important tool for attaining and retaining competitive advantages. Many companies are creating alliance to discover the best quality and solutions or cheap labour and creation cost. But sometimes company form an alliance without analysing capabilities and resources of partners of the life span of alliance or shortage with the goals which may ends in the failure of alliance.
