international strategic alliances 1

8/3/2019 International Strategic Alliances 1

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INTERNATIONAL STRATEGIC ALLIANCES

Strategic alliances among international businessesare common. Globalisation of business is the order

of the day. But internationalizsation can be a very

expensive process. A firm may discover that it is

short on some of the internal resources necessary

to effectively compete against its rivals

internationality. Therefore, a firm may seek partners

to share these costs. A firm may develop a newtechnology but lack a distribution network or

production facilities in all the national markets it

seeks to serve.


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NATURE OF STRATEGIC ALLIANCES

Strategic alliances are cooperative argeements betweenfirms.

Alliances and/or cooperative agreements can involve

joint research efforts, technology sharing, joint use of

production facilities, marketing one anothers products,

or joining forces to manufacture components or

assemble finished products.

Alliances are formed among actual or potentialcompetitors. ICICI and HLL, for example, have launched

a partnershipproject for contract farming in wheat and

basmati rice in Haryana and Madhya Pradesh.


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A joint venture is a special type of strategic

alliance in which two or more firms join together

to create a new business entity, which is legally

separate and distinct from its parents. Joint

ventures are normally established as stand-alone

entities and owned by the founding parents in

agreed proportions. Many are owned equally,

popularly called 50-50 partnership ventures,

although unequal ownership is not uncommon.


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BENEFITS OF ALLIANCES

Collaborative agreements facilitate entry into foreign

markets.

Yet another rationale for forming strategic alliances is risksharing.

Alliances are formed among firms of developed anddeveloping countries for mutual motivations. The partner

from the developing country seeks the technology, know-

how, or capital from the developed country. The partner from

the developed country seeks an opportunity to benefit from

comparative advantages of the lesser-developed country.

These advantages often include low cost labour and

untapped reserves of raw materials.


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This strategic alliance can provide or attain

costs reductions;

access to complementary skills;

cooperation in supplying a range of products intoopportunity markets that would not be available to asmall volume supplier;

joint contributions to marketing and promotion costsfor entry into new markets;

access to capital and grants;

access to required plant and equipment;

increased bargaining power;

cooperation in undertaking training;

improved performance and efficiency and thus thechances of survival.


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PITFALLS OF STRATEGICALLIANCES


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INCOMPATIBILITY OF PARTNERS

Incompatibility between the partners of a

strategic alliance is a primary cause of

failure in a cooperative agreement. Often

incompatibility can lead to outright conflict.


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ACCESS TO INFORMATION

Access to information is another drawback

of strategic alliance. For collaboration to

work effectively, one partner (or both) mayhave to provide the other with information it

would prefer to keep secret. It is often

difficult to identify information needs ahead

of time.


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DISTRIBUTION OF EARNINGS

This is the most serious problem between alliance

partners. As the partners share risks and cost,

they also share profits. This amounts to over-

simplification of the issue. There are other

financial considerations that can cause conflict.

For example, the partners must also agree on the

proportion of the joint earnings that will be

distributed to themselves, as opposed to being

reinvested in the business.


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POTENTIAL LOSS OF AUTONOMY

Loss of autonomy is another potential drawbackof a strategic alliance. It was for this reason that

the late Dhirubhai Ambani never countenanced the

idea of an alliance. Like Rahul Bajaj, Ambani didnot take partners because he could never play

second fiddle. Just as firms share risk and profits,

they also share control, thereby limiting what each

can do. Most attempts to introduce new products

or services change the way the alliance does

business.


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CHANGING CIRCUMSTANCES

Changing circumstances may also affect the

viability of a strategic alliance. The economic

conditions that motivated the cooperativearrangement may no longer exist, or

technological advances may render the

alliance obsolete.


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SCOPE OF STRATEGIC ALLIANCES

The scope of cooperation between firms variessignificantly as shown in Fig. An alliance may be

comprehensive that is one in which the partners

participate in all facets of conducting business.On the other hand, an alliance may have a more

narrowly defined focus concentrating on any

elements of the business such as R&D. These

latter alliances are called functional alliances. The

degree of collaboration will depend on the basic

goal of each partner.


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SCOPE OF STRATEGIC ALLIANCES

Partner

1

Partner

2

R & D FIN MKTG. PROD. MKTG.PROD. FIN R & D

Production

Strategic Alliance

Marketing

Strategic Alliance

Finance

Strategic Alliance

R & D

Strategic Alliance

Comprehensive

Strategic Alliance


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COMPREHENSIVE ALLIANCES

These include collaborative agreements that cover allstages of manufacture, such as R&D, design,

production, marketing and distribution. These

alliances mainly assume the form of joint venture. A

joint venture is an ideal form of organisation to handlea comprehensive alliance. As an independent entity,

the joint venture can handle all operations without

giving scope for incompatible partners to interfere in

the day-today activities. Maruti Suzuki, automobilemajor in India, is the best example to be cited in this

context.


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FUNCTIONAL ALLIANCES

These are alliances which have narrow scope

and cover production, marketing, finance, orR&D activities. These do not take the form of

joint ventures.


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PRODUCTION ALLIANCE

A production alliance is a functional alliance in

which two or more firms join, each

manufacturing products or providing services

in a shared or common facility. Production

alliances may use a facility already owned by

one partner, or may involve the construction ofa new facility altogether.


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MARKETING ALLIANCE

A marketing alliance is a functional alliance in whichtwo or more firms share marketing services or

expertise. In most cases this involves one partner

introducing its products or services into a market inwhich the other partner already has a presence. The

established firm helps the newcomer by promoting,

advertising and / or distributing its products or

services. The established firm may negotiate a fixed

price for its assistance or may share in the

newcomers profits.


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FINANCIAL ALLIANCE

A financial alliance is a collaborative

arrangement of firms that wish to reduce the

financial risks associated with a project.

Partners may equally share finance or one

partner may contribute the bulk of the finance

while the other partner(s) provides special

expertise of make other kinds of contributions.


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R&D ALLIANCE

In R&D alliance the partners agree to undertake

joint research to develop new products or

services. These alliances are not usuallyformed as joint ventures.


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MAKING ALLIANCE WORK

Many international alliances are ending up in

failure. For example, one study of 49 alliances

found that two-third run into serious financial and

managerial troubles within two years of their

formation, and that although many of these

problems are solved, 33 per cent are ultimately

rated as failures by the parties involved. The

partners in an alliance must address six issues :


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The partners in an alliance must address six

issues :

Assessment of fit with strategy

Partner selection

Alliance structure

Negotiating process

Joint management consideration

Managementof expectations

international strategic alliances 1

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