Escolar Documentos
Profissional Documentos
Cultura Documentos
Management 301
Honor Option
Fall 2006
As companies continue the trend towards becoming not only international but
operations. Due to the importance of strategic alliances managers must understand what
they are, what their benefits and/or drawbacks are, what affects they have on operations
and finances, and how to effectively and efficiently create and maintain them. With this
knowledge managers will have the power to add substantial value to their company and
First, this paper will define strategic alliances and what can be considered a
strategic alliance. Then, it will point out the advantages and disadvantages to strategic
alliances. Next, it will show how alliances are formed, how to make them successful, and
what important things to consider are when forming an alliance. Finally, it talks about
long-term formal relationship formed between two or more parties to pursue a set of
agreed upon goals or to meet a critical business need while remaining independent
more organizations agree to cooperate in the carrying out of a business activity where
each brings different strengths and capabilities to the arrangement.” From a management
2
resources and know-how with a foreign company and the two firms share in the rewards
and risks of starting a new venture (Jones).” Any way you define it, a strategic alliance
seems to be a broad term for an agreement between potential or actual competitors (Hill).
There are many different types of strategic alliances. Some types are obvious
while others are still in debate about whether they can be considered a strategic alliance.
The increasing number of alliances that are formed can be attributed to international
expansion and the increase in technology (Hill). Strategic alliances can often be broken
into two groups, contractual forms and equity forms. Contractual forms include licensing,
franchising, joint R&D, management contracts, and turnkey projects. Equity forms
company as new entities, and the purchase of an equity share and an equity swap as
existing entities (Strategic Alliance). Outsourcing and contractual agreements can also be
when one company gives another company permission to use its intellectual property
The downfall to licensing is that by handing out important information to foreign firms,
franchisor licenses trademarks and tried and proven methods of doing business to a
franchisee in exchange for a recurring payment, and usually a percentage piece of gross
sales or gross profits as well as the annual fees (Strategic Alliance).” Franchises are easy
to set up but the owner gives up a certain portion of control over the business. A joint
3
R&D is “a strategic alliance whereby two or more organizations agree to combine their
performs the necessary managerial functions in return for a fee (Strategic Alliance).”
Management contracts are often formed where there is a lack of local skills to run a
short-term arrangements that are appropriate when a formal management structure is not
required (Mosad).
between the outsourcer and its client. The business segments that are typically outsourced
include information technology, human resources, facilities and real estate management,
and accounting (Outsourcing). Many companies also outsource customer support and call
competence, releasing internal resources, both personnel and equipment, sharing risks
4
with partners, quicker time to market, and better strategic flexibility (Mosad). Companies
outsource for many reasons, but the most prominent reason is cost savings. However,
some people believe that companies “are turning to outsourcing so that they can focus on
what really differentiates them from their competitors, not just to save costs (Mosad).”
Some of the drawbacks to outsourcing include the company loses control over resources,
activities, competence, personnel, and day-to-day work (Mosad). The question is how the
balance between what is good and what is bad will benefit the company if it undertakes
outsourcing.
There are several reasons a company should create a strategic alliance. Businesses
development. They are also used to develop new business opportunities through new
products and services, expand market development, increase exports, diversify, create
new business, and reduce costs (Small Business Notes). The main reason most companies
create an alliance is to have the ability to access new capital for growth, for development
of new products or services, or for entry into new lines of business. Strategic alliances
allow firms to share the fixed costs of developing new products and processes. For
Boeing’s latest commercial jet liner was motivated by Boeing’s desire to share the $8
billion investment required to develop the aircraft (Hill). Another important reason to
with a company in another country is often more efficient and successful than attempting
to enter the international market alone. For example, many firms feel that if they are to
5
successfully enter the Chinese market, they need a local business partner who
understands the business conditions, and has good connections (Hill). Having access to
new distribution channels gives the company access to distribution channels that may
otherwise be difficult or costly to penetrate on its own. Entering into a strategic alliance
can even help an emerging company to enhance their credibility and reputation
with high environmental uncertainty and rapidly changing technological innovation. They
allow a company to focus on its core competency while sharing the total risk of the
venture with another party (Paik). For small businesses, strategic alliances are a way to
work together with others towards a common goal without losing their individuality.
According to Small Business Notes, “Alliances are a way of reaping the rewards of team
effort.”
strategic alliances, few succeed (Mosad).” A strategic alliance is attractive, but it is not
simple or easy to create, develop, and support. There are many implementation problems
and strategic alliances often fail. The failure rate of strategic alliances is projected to be
as high as seventy percent (Mosad). One of the major reasons for the failure of many
result from outcome variables, the financial performance of the alliance, relational
competitors a low cost route to new technology and markets. Many people have argued
that Japanese success in the machine tool and semiconductor industries was built on U.S.
6
technology acquired through strategic alliances (Hill). Alliances have risk, and unless a
“Creating and enhancing a sustainable alliance has both a cost and a value. It
takes a long time to develop a new relationship, and the time dimension impacts the
parties' profitability. Thus, the parties involved in such a relationship must have a
philosophy about how they should run their ongoing alliance, recognizing the mutual
interdependence of each partner. Each partner should consider that a poor alliance can
easily be turned into problems. Indeed the best successful customer or business
relationships, like the best marriages, are true partnerships that tend to meet certain
criteria. (Mosad)” A good partner has three characteristics. First, a good partner helps the
firm achieve its strategic goals. Second, a good partner shares the firm’s vision for the
purpose of the alliance. Third, a good partner is unlikely to try to opportunistically exploit
the alliance for its own ends. Thus, firms with reputations for “fair play” will probably
Forming strategic alliances is often unfamiliar territory for managers. They need
to clearly understand the goals, benefits and risks of an alliance, as well as the
alternatives. There are many factors that must be taken into consideration before entering
a strategic alliance, especially since choosing the right partner can either make or break
the alliance. Forming a strategic alliance can be tricky, and since nearly seventy percent
of all alliances fail it is imperative to create and maintain a tight bond with the other
company in the alliance. There are four steps managers should take when forming a
strategic alliance (Reid). First, they must make sure that their information technology
organizations and their company is ready to partner with other companies. To do this a
7
manager must asses whether the company has adequate skills, systems and processes,
support, and governance. Second, managers must analyze whether or not a strategic
alliance is financially right for their company. They do this by estimating quantifiable
benefits such as revenues and savings, and costs such as labor and equipment, and state
intangible benefits and risks in an easily understood format. Third, managers should
create a list of potential partners and then score their viability. To increase the probability
of selecting a good partner the firm should collect as much pertinent, publicly available
information on the potential partners as possible (Hill). They should also ask staff,
salespeople, line managers, customers, consultants, alliance brokers, analysts, etc to give
suggestions about possible partners. Finally, managers should meet with their top
prospect to explore its interest in an alliance and whether it is a good fit for the company
(Reid). It should include face-to-face meetings between senior managers to ensure that
the chemistry level is right (Hill). This is where they should evaluate similarities and
differences. (Reid)
Once a partner has been selected the alliance should be structured so that the
firm’s risks are reduced (Hill). First, the firm can design the alliance to make it difficult
manufacture, and service of a product can be structured to wall off sensitive technologies
and prevent their leakages (Hill). For example, when General Electric and Snecma
created an alliance to build aircraft engines, General Electric walled off certain sections
of the production process to reduce the risk of excess transfer of technology (Hill).
against the risk of opportunism by a partner (Hill).” Opportunism in this case refers to the
8
theft of technology and/or markets. Third, both parties can agree to swap skills and
technologies that the other covets, which ensures the chance for equitable gain. Cross-
licensing agreements are a way to achieve this. Finally, the risk of opportunism can be
reduced if a firm extracts a credible commitment from its partner in advance (Hill).
There are many ways to maintain a successful strategic alliance. Most importantly
the business partners must have a strong motivation for entering the relationship. Keeping
foster an informal management network which can be used to help solve problems arising
in more formal contexts (Hill). The factors to look for in a successful alliance are
individual willingness, motivation, and a strategic fit (Strategic Alliances). The manner in
which the alliance is managed is another important factor (Hill). Each partner should
should have clearly defined responsibilities and be agreed on a good dispute resolution
system. For best survival opportunities the partners should develop ways of operating so
they can work together smoothly. They should also build an effective communication
system among many people at many organizational levels. Strategic alliances must not
abuse the information they gain, they are flexible, and they respect one another (Strategic
Alliances). Finally, they “should show a mutual integrity behavior and attitude towards
one another in honorable ways that justify, enhance and sustain mutual trust and
commitment (Mosad).” The business partners should also have a common long-term goal
and they should want to make the relationship work to achieve that goal (Mosad).
9
Another good thing to look for is complementary assets and/or skills. Basically, neither
company gains from an alliance is its ability to learn from its partner. For example, in a
study of fifteen strategic alliances where the focus was on alliances between Japanese
companies and Western partners, it was found that the Japanese companies emerged from
the alliance stronger than the western partner. This was attributed to the fact that the
Japanese companies made a greater effort to learn from their partners. The Western
companies viewed the alliance as a cost sharing or risk sharing device, rather than an
opportunity to learn. Thus, to maximize the learning benefits from an alliance, managers
must try to learn from its partner and then apply the knowledge within their own
organization. (Hill)
Cultural background has a very important role when deciding to form a strategic
alliance. When the alliance is formed between parties from different cultures, an even
higher level of complexity is usually involved in managing the venture (Paik). Managers
must be aware of cultural differences when dealing with companies in foreign countries.
One of the biggest problems managers face is a difficult juggling act, trying to cope with
the different management styles, and trying to meet the possibly conflicting criteria for
success that companies can impose (Lu). Differences of management style can be
management styles can damage performance. Strategic alliances can face other severe
between teams, and differences in operating procedures and attitudes among partners
(Mosad). Strategic alliances might create a future local or global competitor, lack clear
goals and objectives, lack trust and opportunistic behavior, and have performance risk as
Managers have the ability to inspire, influence, change, and conduct thinking,
attitudes, and behavior of people. They can “impact the alliance outcome through
cultures should create and develop a common ground in the relationship facilitating
to develop its own culture and systems. The presence of a “third culture” facilitates the
relationships. In order to build this “third culture” it should be possible for participants to
negotiate their cultural differences. They should understand the benefits of converging,
individual’s country and behave accordingly (Rodriquez). Values are ideas about what a
society believes to be good, desirable, and beautiful (Jones). Norms are unwritten rules
and codes of conduct that prescribe how people should act in particular situations (Jones).
thoroughly read and considered before putting it away. A good outline to follow when
national culture which describes the fundamental differences that can be found in
cultures.
ethics concern the consideration of moral in corporate decision making. Managers may
these ethical dilemmas include child labor, sweat shops, “cooking the books”, fair
managers can use organizational culture and ethical values to control the performance of
monitor behavior and enforce contracts, the traditional approaches will not work. For this
reason, organizations must use clan control which utilizes social factors, such as
(Daboub). To do this the organization should try to hire people who are compatible with
organizational values and will socialize them in those values. Employees must also
ethics also offer tools for dealing with the problem. These tools include the theory and
economic ethics, and stakeholder learning dialogues as a way to cope with complex,
12
interdependent, "messy" problems (Daboub). Global corporate citizenship deals with the
sense that the business organization becomes a global citizen with global responsibilities.
The integrated social contracting theory of economic ethics deals with the idea that
ethical norms should be binding on human moral agents. Finally, stakeholder learning
dialogues deal with the potential for joint learning as different perspectives on the shared
problem as well as preconceptions about relationships between "selves" and "others" are
partners at the outset and then foster appropriate legal and ethical norms at the individual
level and across the relationship (Daboub). The good reputation of a partner allays the
fear that the partner may be opportunistic, reduces the cost of monitoring an agent, and
lessens the likelihood that a partner may shirk responsibilities (Daboub). “By reducing
costs and the problems of contracting, reputation should have a positive effect on the
in which the interests and the values of the partners coincide. Overall, the most important
thing to have when trying to uphold ethical practices in a strategic alliance is trust.
the common goals and objectives communicated, agreed upon, and held accountable to in
the alliance formation (Paik).” If not, then the alliance is prone to failure. There are many
reasons why an alliance can fail. Recognizing that an alliance is broken and taking steps
to mend the various relationships are vital if a company is to realize its expected return on
investment from the alliance (Eaves). There are two main reasons that alliances fail. First,
13
the business model on which the alliance is based is inappropriate. Second, the
relationship between the alliance partners has broken down which can compromise the
levels of trust. These two factors account for ninety-four percent of failed alliances
(Eaves). In order to prevent these two things from happening managers must look for the
“them” mentality, the failure of team members to communicate critical information, high
attrition rates, and the failure to reach target milestones and timelines (Eaves).
Unfortunately, these symptoms often go unrecognized until it is too late because in many
If the alliance does fail, yet both partners want to keep trying they can renew the
relationship. This is done in a three step process. First, audit the relationship diagnosing
the root causes of the problems. Second, conduct relationship planning, build a joint
and draft a procedural agreement (Eaves). Organizations should mend broken alliances or
terminate them as quickly as possible so that important resources are not eaten up by the
failing alliance. An example of a failure story is the collapse of GM sales of its Pontiac
LeMans in the US market in 1990, down 39 percent from a 1988 peak as a result of the
All companies in strategic alliances are prone to failure, and some can fail for
several reasons. For example, the alliance of Volvo and Renault married the two largest
enterprises in their respective countries for economic objectives that virtually all industry
experts applauded. Three years after its founding, the alliances split apart in a bruising
argument that left observers reassessing the future of alliances and of European
14
integration. Six factors that undermined the Volvo-Renault alliance are identified as
outsourcing, companies will lose their national identities and their autonomy. However,
the future of strategic alliances will always be unknown because outside forces could
arise that would cause the alliance to either fail or succeed. Such forces include political
factors such as war and changes in laws, economic factors such as increased barriers to
entry and economic growth, environmental factors such as natural disasters, technological
forces (Jones).
both parties get to know one another. Then there is a ceremony, or contract to do
business, which binds both parties to certain terms and conditions. Also, there can be
conflicts between the couple. If the relationship becomes unsatisfactory for either party,
there is a divorce. Thus, unhappy relationships, many leading to divorce, are an all too
common outcome, mostly due to undesirable human behavior. (Mosad) When created
and maintained properly strategic alliances can add value and create competitive
Works Cited
Bruner, Renault and Robert Spekman. “The Dark Side of Alliances: Lessons from
Volvo” European Management Journal. London: Apr 1998.Vol.16, Iss. 2 pg. 136.
Eaves, David, Jeff Weiss, and Laura Visioni. “The Relationship Relaunch: How to Fix a
Broken Alliance.” Ivey Business Journal. May-June 2003.
Hill, Charles W.L. “Strategic Alliances.” International Business. 6th ed. New York:
McGraw-Hill Irwin, 2007.
Jones, Gareth R. and Jennifer M.George. Contemporary Management. 4th ed. New York:
McGraw-Hill Irwin, 2006.
Mosad, Zineldin and Torbjorn Bredenlow. “Synergies and challenges: A case of strategic
outsourcing relationship "SOUR". International Journal of Physical Distribution
& Logistics Management. Bradford: 2003.Vol.33, Iss. 5; pg. 449, 16 pgs.
Phatak, Arvind and Habib Mohammed. “How Should Managers Treat Ethics in
International Business?” Thunderbird International Business Review. Mar/Apr
1998. pg.101.
16
“Strategic Alliance.” Wikipedia, The Free Encyclopedia. 31 Oct 2006, 03:57 UTC.
Wikimedia Foundation, Inc. 4 Nov 2006 <http://en.wikipedia.org/w/index.php?
title=Strategic_alliance&oldid=84770117>.