Company-to-company dealings

A strategic alliance is an agreement between firms to do business together in ways that go beyond normal company-to-company dealings, but fall short of a merger or a full partnership (Wheelen and Hungar, 2000, p. 125). It means strategic alliance is an incomplete contract between the companies where each company has limited control and cannot specify what each company should do under every conceivable condition.

Pressures for globalisation and technological developments have increased the need for the companies to search outside their internal boundaries. Through a strategic alliance it is now possible for the companies to develop the global market presence or build the global competitive capabilities even without producing the goods to be sold. Nike though being the largest producer of athletic foot wears, it does not manufacture a single shoe, Gallo being the largest wine company in the world it does not grow a single grape.

The pace of growth, variety and the forms of strategic alliances has been increasing. The number of strategic alliances has almost doubled in the past ten years and is expected to increase even more in the future (Booz, Allen and Hamilton, 1997). Figures have crossed 20,000 corporate alliances that are formed worldwide over the past two years (Farris, 1999). According to a recently released study conducted by Anderson Consulting, 82 percent of executives believe that alliances will be a prime vehicle for future growth (Kalmbach and Roussel, 1999). The study also predicts that in five years, alliances will represent $25-$40 trillion in value (Kalmbach and Roussel, 1999).

Some of the major motives for which any company would enter into a strategic alliance are:

  • Growth and entering new markets.
  • Obtaining new technology and/or best quality or cheapest cost.
  • Reduce financial risk and share costs of research and development.
  • Achieve or ensure competitive advantage.

It is evident from the research (Kalmbach and Roussel, 1999) that though the strategic alliances amongst the companies are growing every day, 60% of these alliances are a failure, either in the long run or in the short run. There are many problems in forming and making the alliance a successful alliance. Some of the core issues in forming and making an alliance a success are discussed below.

Cultural and human issues:

Making an alliance successful is not only about getting the sums right but also to see to it that the cultural compatibility of the combining organisations and the resultant cultural dynamics is achieved. Often problems like different attitudes towards business, egos, language, chauvinism etc. Communication gap due to language problem followed by difference in organisational culture are the biggest barrier in any alliances. Cultural differences and the cultural distance can inhibit and positively obstruct management attempts to create a cohesive and coherent organisational entity. Alliance between KLM Royal Dutch Airlines and Northwest airlines can be taken into consideration to illustrate the above issue. A culture clash between KLM's cautious approach and Northwest's heavily debt-financed approach soured the relationship. Despite of the fact that Northwest airlines was able to recover from the situation of bankruptcy and KLM's equity also grew from $400 million to $1.6 billion the alliance was a failure as the two cannot agree how much control KLM should have over Northwest. Different cultures operate in different ways "for example, US companies tend to evaluate performance on the basis of profit, market share, and specific financial benefits while Japanese companies tend to evaluate primarily on how an operation helps build its strategic position, particularly by improving its skills" (Daniels and Radebaugh, 2001).

Lack of trust.

One of the root causes for alliance failure is lack of trust in the other partner or the alliance itself or lack of understanding and despondent relationships (Lewis, 1992, p 46). Trust is affected by the degree of openness in communication and a lack in trust is also a root cause for poor communication. Therefore trust is a fundamental issue, being both cause and effect. A sense of commitment must be generated throughout the partnership. Alliance called as Taligent between IBM and Apple computer is the best example to demonstrate the failure of an alliance due lack of trust. At the time when both Apple and IBM had a number of lawsuits against each other for patent and technology infringement. They were both going at it in numerous courts of law simultaneous to the launch of their great, new alliance. Both the companies showed that there was trust and respect for each other, which was not the case and the the vision to create a ubiquitous operating system was a resounding bust, and rather than shut down Taligent, IBM quietly absorbed its failed attempt to re-create Windows. The total amount lost by both companies on the Taligent joint venture is said to exceed $150 million. (nasdaq: AAPL - news - people ).

Lack of clear goals and objectives.

Many alliances are formed for an unclear reason. Some enter into the alliance to combat industry competitors while some of them though having a right and clear reason but have dissimilar objectives. Many managers enter into an alliance without properly researching the steps necessary to ensure the basic principles of cooperation (Lewis, 1992). Top management must articulate a clear link between where it expects the industry's future profit pools will be, how to capture a larger share of those and where, if at all, alliances fit in that plan (Ernst and Stern, 1996). One example of an industry, which in recent years has seen many obstacles and bitter confrontation is the airline industry. An airline may not be able to keep standards consistent when it has a franchise alliance. Consumers will associate the small franchisee with the international airline and expect the same standards (Chen, 1999). When these standards are not delivered this leads to negative repercussions for the brand.

Lack of coordination between management personnel.

Even after the alliances some of the companies remain competitors. In such cases there are often disputes among the subordinates and the top-level managers. If there would not be any coordination between the two, one company would go off on its own and do its own marketing and sell its own product while the other company would for sure be grounds for the two to break up, and they would most likely end up in a legal battle. An example to illustrate the same is Volvo's attempt to merge with Renault in 1993 temporarily destroying shareholders wealth in Volvo (Bruner, 1999). The motive of the alliance was to exploit sizeable potential synergies in purchasing, manufacturing and joint product development. The alliance worked well initially but the French(Renault) tried for acquisition. But the Swedes(volvo) did not agree and left the company in bankrupted position. Now Volvo merged with ford and has gained a lot of reputation from the developed brands of ford.

Risk of intellectual rights and creation of global or local competitor through strategic alliances:

A partner may not cooperate with others in the area of its core competency, reducing the likelihood of creating a new competitor that may threaten its core area of business. A company can insist on contractual clauses that constrain partners from competing against it in certain products or geographic regions (Wildet al., 2000). A company may also enter into alliance to get to know the know-how of technology of the firm. Thus intellectual rights is also at risk. Anamartic, a UK semiconductor firm with a novel technology. undertook a strategy of global alliance with a powerful Japanese partner who locked Anamartic into a trajectory shape. The Japanese partner acquired technological competence and effective control over the intellectual property of the venture.

Solutions:

As stated earlier language, egos, chauvinism being the major barriers in making the alliance success, it is the duty of the senior management to look after the above issues. It should not be the second choice after the wholly owned business. Senior management's commitment to alliances is important not only to ensure the alliances receive the necessary resources, but also to convince others throughout the organization of the importance of the alliance.

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