International Strategic

Alliances
Partnership & Cooperation

Chapter-7

Strategic Alliance

International strategic alliance is a strategic

cooperative agreement , or agreements
between two or more firms , from at least
two different countries, which involves
exchange, sharing or co development for
achieving strategically significant objectives
that are mutually beneficial and beyond
what a single firm could achieve alone.
Example: alliance between Motorola and
Toshiba, Philips and Matsushita.

Strategic Alliances

The term strategic alliance is often

used loosely to embrace a wide
range of arrangements between
actual or potential competitors
including:

cross-shareholding deals
licensing arrangements
formal joint ventures (e.g. Fuji-Xerox)
informal co-operative arrangements.

Strategic Alliances
Motives for entering strategic alliances are varied,
but often include market access; hence the
overlap with the topic of entry mode.
In many respects, the entry modes of licensing,
franchising and joint ventures are strategic
alliances.
However, strategic alliances tend to involve much
more than market access, for example, they can
also involve the transfer of technical and
managerial know-how between partners and
sharing
the
fixed
costs
of
new-product

Joint Venture
A joint venture is a special type of
strategic alliance in which two or more
firms join together to create a new
business entity that is legally separate
and distinct from its parents
A joint venture entails establishing a
firm that is jointly owned by two or more
otherwise independent firms. Ex FujiXerox

Joint Ventures

Advantages:

Benefit from local partners knowledge.

Shared costs/risks with partner.
Reduced political risk.

Disadvantages:

Risk giving control of technology to partner.

May not realize experience curve or location
economies.
Shared ownership can lead to conflict

Drivers of International SA

Globalization

Technological Factors

Types of Alliance

Vertical Relationship:
suppliers and buyers

formed

between

Horizontal Relationship: formed between

rival firms.

Motives

Fierce competition
Rapidly changing technologies
Shorter product life cycle
High R&D cost
Economize on production and research cost
Access intangible assets - managerial skills,

knowledge of different markets more cheaply and faster.

Now days it is difficult for firms to have competitive

advantage single handedly in each and every step of the
value added process in all the national market.

Strategic Alliances

Advantages:

Facilitate entry into market

Share fixed costs
Bring together skills and assets that neither
company has or can develop
Establish industry technology standards

Disadvantages:

Competitors get low cost route to technology

and markets

Strategic Alliances: Advantages

1. May facilitate entry into a foreign market.
Motorola gained access to the Japanese cellular telephone
market through alliance with Toshiba, in the mid 1980s, to
build microprocessors.
As part of the deal Toshiba provided Motorola with
marketing help, including some of its best managers.
This helped Motorola in the political game of securing
government approval to enter the Japanese market and
getting radio frequencies assigned for its mobile
communications systems.

Strategic Alliances: Advantages

2. Strategic alliances allow firms to share the fixed
costs, and associated risks, of developing new products
or processes.
Motorolas alliance with Toshiba was partly motivated by a
desire to share the high fixed costs of setting up an operation
to manufacture microprocessors.
The microprocessor business is so capital intensive - Motorola
and Toshiba each contributed close to $ 1 bn to set up their
facility - that few firms can afford the costs and risks by
themselves.
Similarly, the alliance between Boeing and a number of
Japanese companies to build the 767 was motivated by
Boeings desire to share the estimated $ 2 bn investment
required to develop the aircraft.

Strategic Alliances: Advantages

3. An alliance is a way to bring together complementary

skills and assets that neither company could easily
develop on its own.
e.g. (i) the alliance between Frances Thomson and Japans JVC to
manufacture videocassette recorders.
JVC and Thomson are trading core competencies:
Thomson needs product technology and manufacturing skills
JVC needs to learn how to succeed in the fragmented European
market.
Both sides believe that there is an equitable chance for gain.

Strategic Alliances: Advantages

4. It can make sense to form an alliance that will help
the firm establish technological standards for the
industry that will benefit the firm.
e.g. Philips formed an alliance with its competitor Matsushita
to manufacture and market the digital compact cassette
(DCC) system Philips had developed.
Philipss motive was that this linking with Matsushita would
help it establish the DCC system as a new technological
standard in the recording and consumer electronics
industries.

Strategic Alliances: Advantages

The issue is important because Sony has developed a
competing minicompact disc technology that it hopes to
establish as the new technical standard.
Since the two technologies do very similar things, there is
probably room for only one new standard.
The technology that becomes the new standard will be the
one that succeeds. The loser will probably have to write off
investments in the billions of dollars.
Philips sees its alliance with Matsushita as a tactic for winning
the race.

Pitfalls of Strategic Alliances

Regardless of the care and deliberation a firm puts
into constructing a strategic alliance, it still must
consider limitations and pitfalls.
There are five fundamental sources of problems
that often threaten the viability of strategic
alliances:
Incompatibility of partners
Access to information
Conflicts over distributing earnings
Loss of autonomy
Changing circumstances

Strategic Alliances: Disadvantages

Some commentators have criticised strategic

alliances on the grounds that they give competitors
a low-cost route to new technology and markets.
Reich and Mankin (HBR 86) have argued that:
strategic alliances between US and Japanese firms
are part of an implicit Japanese strategy to higherpaying, higher value-added jobs in Japan while
gaining the project engineering and production
process skills that underlie the competitive success
of many US companies.

Strategic Alliances: Disadvantages

They argue that Japanese successes in the
machine tool and semiconductor industries were
largely built on US technology acquired through
various strategic alliances. And that, increasingly,
US managers are aiding the Japanese in achieving
their goals by entering alliances that channel new
inventions to Japan and provide a US sales and
distribution network for the resulting products.
Although such deals may generate short-term
profits, Reich and Mankin argue, in the long run
the result is to hollow out US firms, leaving them

Strategic Alliances: Structure

Making Alliances Work
The failure rate for international strategic
alliances is relatively high - estimates range from
30% to 70%.
The success of an alliance seems to be a
function of three main factors:
partner selection
alliance structure
the manner in which the alliance is

Selecting & Managing

Partner

Partner related criteria:

Partner characteristics
Compatibility
Motivation
Commitment
Reliability

If two firms approach an alliance with radically

different agendas, the chances are great that
the relationship will not be harmonious, will
not flourish, and will end in divorce. E.g. the
alliance between GM and Daewoo.

Selecting & Managing

Partner

GM wanted to use Daewoo as a source of cheap labour

to produce cars for the Korean and US markets.

Daewoo wanted to use GMs know-how and distribution

systems to grow Daewoos business not just in Korea
and the US, but also in Europe.

Different perceptions over the strategic role of the

venture ultimately helped contribute to the dissolution
of the alliance

Selecting & Managing

Partner

(iii) Unlikely to try to opportunistically exploit the alliance for

its own ends
i.e. to expropriate the partners competencies while giving
away little in return.
Firms with reputations for fair play to maintain probably
make the best partners.
e.g. IBM is involved in so many strategic alliances that it
would not pay it to trample roughshod over individual
alliance partners.
Such action would tarnish IBMs reputation of being a good
partner and would make it more difficult for IBM to attract
alliance partners in the future.

Selecting & Managing Partner

To increase the probability of selecting a good partner, the firm
should:
1.Collect as much pertinent, publicly available information on
potential allies as possible.
2. Collect data from informed third parties.
These include:
firms that have had alliances with the potential partners
investment bankers who have had dealings with them
some of their former employees.
. Get to know the potential partner as well as possible before
committing to an alliance.
This should include:
face-to-face meetings between senior managers (and perhaps

ISA & Fit

Strategic fit: strategic fit requires all partners to

have similar resources and capabilities and to

contribute same amount or resources and
capabilities
Operational fit: compatibility of processes, of
information system, of profitability and cash flow.

Cultural fit:

corporate cultural fit: mgt style: employee

participation, delegation of responsibility,
decision making
National cultural fit: long term vs. short term
orientation

Emerging Economies

Developed economies:
Purpose: access to cheap labor, raw
material, increasing customer base,
experience
Emerging economies
Purpose:
access to financial assets,
technical
capabilities,
modern
technologies.

Alliance Structure
Having selected a partner, the alliance should be structured so the
firms risks of giving too much away to the partner are reduced to an
acceptable level.

Structuring the Alliance to

Reduce Opportunism

Walling off
critical technology

Establishing
contractual
safeguards

Opportunism by partner
reduced by:

Agreeing to swap
valuable skills
and technologies

Seeking credible
commitments

Alliance Structure
1. Alliances can be designed to make it difficult (if not
impossible) to transfer technology not meant to be
transferred.
The design, development, manufacture and service of a
product manufactured by an alliance can be structured so as to
wall off sensitive technologies to prevent their leakage to the
other partner (Harrigan - bleedthrough).
e.g. in the alliance between Boeing and the Japanese to build
the 767
Boeing walled off research, design, and marketing functions
considered central to its competitive position, while allowing
the Japanese to share in production technology. Boeing also
walled off new technologies not required for 767 production.

Alliance Structure
2. Contractual safeguards can be written into an alliance
agreement to guard against the risk of opportunism by a
partner.

Opportunism includes the theft of technology and/or markets.

e.g. making self-disbelieved statements.
e.g. TRW Inc., has three strategic alliances with large Japanese
car component suppliers to produce seat belts, engine valves,
and steering gears for sale to Japanese-owned car assembly
plants in the USA.
TRW has clauses in each of its alliance contracts that bar the
Japanese firms from competing with TRW to supply US owned car
companies with component parts.
By doing this TRW protects itself against the possibility that the
Japanese companies are entering into the alliances merely to

Alliance Structure
3. Both parties to an alliance can agree in
advance to swap skills and technologies that
the other covets, thereby ensuring a chance for
equitable gain.
Cross-licensing agreements are one way to achieve
this goal.
e.g. In the alliance between Motorola and Toshiba
Motorola licensed some of its microprocessor
technology to Toshiba
Toshiba has licensed some of its memory chip
technology to Motorola.

Alliance Structure
4. The risk of opportunism by an alliance
partner can be reduced if the firm extracts a
significant credible commitment from its
partner in advance.
e.g. The alliance between Xerox and Fuji to build
photocopiers for the Asian market.
Rather than enter into an informal agreement
licensing arrangement (which Fuji Photo initially
wanted), Xerox insisted that Fuji invest in a 50-50 JV
to serve Japan and East Asia.

This venture constituted such a significant investment in

people, equipment and facilities that Fuji Photo was
committed from the outset to making the alliance work in
order to earn a return on its investment.
By agreeing to the JV, Fuji essentially made a credible
commitment to the alliance. Given this Xerox felt secure in
transferring its photocopier technology to Fuji.

Risk

Relational risk: the probability and

consequences of not having satisfactory
cooperation'.
Opportunistic behaviors include:
appropriating the partners resources,

distorting information,
harbouring hidden agendas,
and
delivering unsatisfactory products
and services'.

Relational risks are an avoidable-and quite

problematic-element of strategic alliances.

Risk

Performance

risk:

Likelihood that an
alliance may fail even when partner firms
commit themselves fully to the alliance.
This could be due to external factors such as:
Unprecedented fierce competition,
Political change,
Government policy change,
Wars, strikes
Internal
factors such as lack of
competence in critical areas.

Managing the Alliance

Task facing the firm is to maximise its benefits from
the alliance.
As in all international business deals, an important
factor is sensitivity to cultural differences.
Many differences in management style are
attributable to cultural differences, and managers
need to make allowances for these in dealing with
their partner. Beyond this maximising the benefits
from an alliance seems to involve:
building trust between partners
learning from partners.

Trust
Part of the trick of managing an alliance
successfully seems to be to build interpersonal
relationships between the firms managers.

E.g. the alliance between Ford and Mazda.

They set up a framework of meetings within
which their managers not only discuss matters
pertaining to the alliance, but also get to know
each other better through non-work time
provided in the meetings. Belief is that the
resulting friendships help build trust and
facilitate harmonious relations between the two
firms.

Trust
Belief is that the resulting friendships help build trust
and facilitate harmonious relations between the two
firms.
Personal
relationships
foster
an
informal
management network between the two firms. This
network can then be used to help solve problems
arising in more formal contexts (such as in joint
committee meetings between personnel from the two
firms).

Learning
Learning from Partners
A major determinant of how much a company gains
from an alliance is its ability to learn from its alliance
partner (Hamel et al, 1989).
Hamel et al, found that in every case in which a
Japanese company emerged from an alliance
stronger than its Western partner, the Japanese
company had made a greater effort to learn.

Learning
Few Western companies seemed to want to learn from their
Japanese partners. They tended to regard the alliance
purely as a cost sharing or risk sharing device, rather than
as an opportunity to learn how a potential competitor does
business.
e.g. alliance between General Motors and Toyota to build
the Chevrolet Nova formed in 1985 and still operating today.
Toyota quickly achieved most of its objectives from the
alliance, learning about US supply and transportation and
gaining the confidence to manage US workers.
That knowledge was quickly transferred to Georgetown,
Kentucky, where Toyota opened a plant of its own in 1988.
In contrast, it may be that all GM got was a new product,
the Chevrolet Nova.

Learning
Some GM managers complained that the knowledge they
gained through the alliance with Toyota has never been put to
god use inside GM.
They believe they should have been kept together as a team to
educate GMs engineers and workers about the Japanese
system. Instead they have been dispersed to various GM
subsidiaries.
To maximise the learning benefits of an alliance, a firm must
try to learn from its partner and then apply the knowledge
within its own organisation.
It has been suggested that all operating employees should be
well briefed on the partners strengths and weaknesses and
should understand how acquiring particular skills will bolster
their firms competitive position.
This tends to be standard practice among Japanese companies.

Alliance dissolution

Reasons behind terminations:

The collaborative relationships might

break down in partner disputes that cant
be resolved
the alliance may accomplish its mission
and therefore outlive its purpose
Partner strategies may change eliminating
the needs of alliance
Adverse action by regulatory authorities
force the alliance to break up

Summary

Strategic alliances, in which two or more firms

agree to cooperate for their mutual benefit, are
becoming increasingly popular in international
business.
Strategic alliances facilitate market entry, allow
the partners to share risks, and make it easier
for each partner to gain new knowledge and
expertise from the other partner/s.
The decision to form a strategic alliance needs
to be based on a number of different
considerations.
Partners in a strategic alliance must be aware of
several pitfalls that can undermine the success
of their cooperative arrangement.