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Strategic alliances and Joint Ventures
Intense competition, changing technology and need for expansion drive firms to look out for
opportunities to take over other firms or form alliances. When geographical boundaries are
open
for business operations, international tie-ups are common. Strategic alliances may take
different forms from just marketing or production tie-ups to mergers. Managing alliances
requires special caution, and managers should be aware of the principle of managing them.
Strategic alliances – defined
Strategic alliances are cooperation arrangements between two or more companies for
achieving a common objective. Yoshino and Rangan define strategic alliances in terms of
three necessary and sufficient characteristics F 0 B 7 Two or more firms unite to pursue a set of agreed upon goals but remain independent subsequent to the formation of the alliance, F 0 B 7 The partner firms share the benefits if the alliance and control over the performance of assigned tasks –perhaps the most distinctive characteristic of alliances and the one that makes them so difficult to manage, F 0 B 7 The partner firms contribute on a continuing basis on one or money key strategic areas, for example, technology, product, and so forth.
In similar words , Lando Zeppi, Managing partner of Booz, Allen and Hamilton, defines strategic alliance as :
a cooperative arrangement between two or more companies where: F 0 B 7 A common strategy is developed in unison and a win-win attitude is adopted by all parties F 0 B 7 The relationship is reciprocal, with each partner prepared to share specific strengths with each other, thus lending power to the enterprise. F 0 B 7 A pooling of resources, investments, and risks occurs for mutual (rather than individual gain)
Strategic alliances can be defined simply
as:
“ a cooperation between two or more independent firms involving shared control and contributing contributions by all partners for mutual benefit ”. Some alliances are short term and some are long term leading to full mergers of companies.
Reasons for forming strategic alliances
The basic reason for entering into strategic alliance is to enhance their organizational
capabilities and there by gain competitive advantage. Towards this they strive to gain access to
new markets and new supply resources sufficiently they enter into strategic alliances.
Specifically speaking the following are the principal reasons.
- To obtain technology and / or manufacturing capabilities For example, Intel formed a partnership with Hewlett-Packard to use HP’s capabilities in RISC technology in order to develop the successor to Intel’s Pentium microprocessor.
- To obtain access to specific markets Rather than buy a foreign company or build breweries of its own in other countries, Anheuser-Busch chose to license the right to brew and market Budweiser to other brewers, such as Labatt in Canada, Modelo in Mexico, and Kirin in Japan. The alliance of coco cola Inc. with local bottling mergers in the global market and even in India.
- To reduce financial risk To reduce the risk of financial investment a company may join hands with another company or companies Because the costs of developing a new large jet airplane is becoming too high for any manufacturer, Boeing, Aerospatiale of France, British Aerospace, Constucciones Aeronautics of Spain, and Deutsche Aerospace of Germany planned a joint venture to design such a plane.
4 To reduce political risk Political risk is another important factor. Besides cultural factors, political factors are complex and difficult to mange. It is better to tie up with a local firm to find way s of overcoming such risks.
Table 10-1: IBM Alliance Strategy
Personal Computers Semiconductor Technology
Software and Processing F 0 B 7 Matsushita (Lowend PCs) F 0 B 7 Ricoh (Hand-held PCs) Computer Hardware /Screens F 0 B 7 Toshiba^ (Display tech) F 0 B 7 Mitsubishi (Mainframes) F 0 B 7 Canon (Printers) F 0 B 7 Hitachi^ (Large printers)
Factory Automation F 0 B 7 Texas Instruments F 0 B 7 Sumitomo Metal F 0 B 7 Nippon^ Koka n technology
F 0 B 7 Micron Technology F 0 B 7 Motorola^ (X-ray lithography) F 0 B 7 Motorola (Micr o processor designs) F 0 B 7 Sematech^ (U.S. Consortium) F 0 B 7 Intel (Microprocessor designs) F 0 B 7 Siemens ( 16 M and 64 Megabit chips) F 0 B 7 Apple^ Computer (Operating Systems and multimedia F 0 B 7 Integration F 0 B 7 Elec (Electron bea n technology) F 0 B 7 Toshiba^ &^ Siemens
F 0 B 7 Microsoft F 0 B 7 Oracle F 0 B 7 Sun Microsystems F 0 B 7 Silicon Graphics F 0 B 7 Metaphor F 0 B 7 Hewlett-Packard F 0 B 7 Netscape Communications Customer Linkages F 0 B 7 Mitsubishi Bank F 0 B 7 Eastman Kodak F 0 B 7 Baxter Healthcare F 0 B 7 Xerox Consumer Electronics F 0 B 7 Philips Electronics F 0 B 7 Sega F 0 B 7 Blockbuster Entertainment
F 0 B 7 Nissan Motor Telecommunications F 0 B 7 NTT^ (Value- added Networks) F 0 B 7 Motorola (Mobile data mets)
(256 Megabit chips) F 0 B 7 Toshiba^ (Flash memories)
F 0 B 7 Advanced^ Micro Devices (Microprocessors) F 0 B 7 Silicon Valley Group (Photolithography)
F 0 B 7 Sony
Pre-competitive
Alliances
These partnerships bring two organizations from different, often unrelated industries to work
on well-defined activities. This is often seen in activities such as, mass awareness campaigns
or environmental and social issues. Sometimes inter industry and inter disciplinary
cooperation is necessary for development.
For example, Intel has pre-competitive alliances with software, hardware
and oth
er manufacturers.
Continuum of alliances
The types of alliances range from mutual consortia to value chain partnerships as described below. o Mutual service consortia - A mutual service consortium is a partnership of similar companies in similar industries who pool their resources to gain a benefit that is too expensive to develop alone, such as access to advanced technology. For example, IBM of the United States, Toshiba of Japan, and Siemens of Germany formed a consortium to develop new generations of computer chips.
o Joint venture – A joint venture is a “cooperative business activity formed by 2 or more separate organizations for strategic purposes, that creates an independent business entity and allocates ownership, operation al responsibilities, and financial risks and rewards to each member, while preserving their separate identity autonomy.
o Licensing arrangement – A licensing arrangement is an agreement in which the licensing firm grants rights to another firm in another country or market to produce and / or sell a product. The licensee pays compensation to the licensing firm in return for technical expertise.
F 0 6 F Value-chain partnership^ – The Value-chain partnership is a strong and close alliance in which one company or unit forms a long-term arrangement with a key supplier or distributor for mutual advantage.
Forms of alliances in India
A statistical sample of different strategic alliances in India with number of companies in
different alliances and their percentage is listed in Table 10-2.
Table 10-2 Type of alliances in India
Type of alliance Number of Companies Percentage (%) F 0 6 F Marketing tie ups F 0 6 F Operations handling F 0 6 F Joint ventures F 0 6 F Technology licensing F 0 6 F Manufacturing F 0 6 F MOUs F 0 6 F Services F 0 6 F Supply F 0 6 F Setting^ up^ ne w business
After liberalization, JVs are less since MMCs can set up a 100% subsidiary after 1991.
Therefore Indian market is witnessing breaking up of joint ventures. On the other hand, Indian
firms are going for JV abroad for reasons like.
F 0 B 7 Source of learning and development F 0 B 7 Access to better infrastructure F 0 B 7 Access to greater market share F 0 B 7 Availability of raw materials
Alliances are often used by not- for- profit organization as a way to enhance their capacity to
serve clients or to acquire resources while still enabling them to keep their identity services can
be provided efficiently through cooperation with other organizations them if they are done
alone. Four Ohio Universities agreed to start a new school of international business at a cost of
$ 30 million. This cannot be done singly.
Managing Strategic Alliances
The following guidelines will be of help in successfully managing alliances.
F 0 4 6Have a clear strategic purpose. Integrate the alliance with each partner’s strategy. Ensure that mutual value is created for all partners. F 0 4 6 F 0Find a fitting partner with compitable goals and complementary capabilities 4 6Identify likely partnering risks and deal with them when the alliance is formed. F 0 4 6Allocate tasks and responsibilities so that each partner can specialize in what it does best. F 0 4 6Create incentives for cooperation to minimize differences in corporate culture or organization fit. F 0 4 6Minimize conflicts among the partners by clarifying objectives and avoiding direct competition in the market place. F 0 4 6If^ an^ international^ alliance,^ ensure^ that those managing it should ha ve comprehensive cross-cultural knowledge. F 0 4 6Exchange human resources to maintain communication and trust.^ Don’t allow individual egos to dominate F 0 4 6Operate with long-term time horizons.^ The expectations of future gains can minimize short-term conflicts. F 0 4 6Develop multiple joint projects so that any failures are counterbalanced by successes F 0 4 6Agree upon a monitoring process.^ Share information to build trust and keep projects on target. Monitor customer responses and service complaints. F 0 4 6Be flexible in terms of willingness to renegotiate the relationship in terms of environmental changes and new opportunities. F 0 4 6Agree upon an exist strategy for when the partners’ objectives are achieved or the alliance is judged a failure
Summary
The formation of different alliances is a recent trend in India with globalization and
liberalization. Several strategic alliances are formed by Indian Companies to obtain
technology/and or manufacturing capabilities, to obtain access to specific markets, to reduce
financial risk, to reduce political risk and to achieve or ensure competitive advantage. Several
typologies of strategic alliances are available in business literature. One such classification is
by Yoshino and Rangan- non-competitive, competitive, precompetitive and
procompetitive. The types of alliances range from mutual consortia to joint ventures, licensing
arrangements and value chain partnerships. Marketing tie ups in India include the following:
Operations handling, Joint ventures, Technology licensing, Manufacturing, MOUs, Services,
supply and setting up new business. Managing alliances starts with defining purpose and
making suitable arrangements for venturing.
