Strategic Alliances
halramadhan
module--interactive-lecture.pdf
Competitive Advantage in the Global Economy
Module 10: Strategic Alliances: Part I
Module Introduction
Readings
Required
Chapter 7 in Global Strategy Gupta, A. (2013). Strategic alliance: International business strategy (https://csuglobal.idm.oclc.org/login?url=https://searchebscohost com.csuglobal.idm.oclc.org/login.aspx? direct=true&db=buh&AN=92741860&site=ehostlive). Asia Pacific Journal of Research in Business Management, 4(7), 1.
Recommended
Gammelgaard, J., Kumar, R., & Worm, V. (2013). Cultureled discrepancies and negotiating conflicts in strategic outsourcing alliances (https://csuglobal.idm.oclc.org/login? url=https://searchebscohostcom.csuglobal.idm.oclc.org/login.aspx? direct=true&db=bth&AN=89806134&site=ehostlive). Thunderbird International Business Review, 55(5), 563578. doi:10.1002/tie.21570
For Your Success
Strategic alliances are a foolproof method for entering the global market… or, are they? While strategic alliances and partnerships lower risks and help companies work in unfamiliar cultures and locations, they demand that the partners fully resource the endeavor and create a plan for moving forward together.
For this week, you will review a case involving the Russian oil industry and examine the reasons why a company may choose a strategic alliance to enter this specific market. Think about the various political and economic factors at play and how they affect the risk calculations on the part of the oil companies. There will also be a Live Session this week. Your faculty will provide further details.
Learning Outcomes
Learning Outcomes
1. Explain why a firm may want to enter an alliance with a foreign firm. 2. Differentiate cooperation from competition and explain the benefits of each. 3. Describe the strategic rationale of cooperating at different points in the business process.
1. Defining a Strategic Alliance
Global business today is expanding, as we have been extensively discussing over the last several weeks. And as you have read before, a new business that ignores the global market does so at its peril. And, we need to dig deeper to understand exactly how a new business, or an existing business, can take its operations overseas. Last week we began to look at some models for expansion, including exporting, franchising, and opening foreign distribution networks. This week we need to consider another key factor in the expansion process – partnerships and strategic alliances.
A strategic alliance is a partnership between two or more firms to work together to confront the competition and expand each other’s market share, without actually entering into a formal partnership or joint venture agreement. This could be something simple, like a firm subcontracting part of its product development or distribution to another firm, or it could be something more substantial whereby each company invests substantially in the other, making their success dependent upon what the other does.
Review the many benefits as well as potential problems related to strategic alliances.
Benefits
First, the alliances’ partners share costs and hence, the upfront investments needed are reduced. Strategic alliances also will reduce and share risks. Moreover, by partnering with a local firm, your customers are more likely to view you as a local entity.
Potential Problems
There also are potential problems with strategic alliances. The costs associated with this model tend to be higher exporting, licensing, or franchising options. Additionally, there may be integration problems between two corporate cultures.
Take a look at this video of an interview with Michael Porter, the creator of the five competitive forces model:
Porter takes an interesting view of strategic alliances and partnerships. He points out that rivalry with your competitors can be turned into something positive. Many business people view competition as a zerosum game that is, there will be a winner and many losers. The only winner in a zerosum game is the consumer, as the competitors end up in a price war. Porter, however, discusses the concept of positive sum competition. In this model, companies compete on different attributes and characteristics of the products and services and target different customer segments. So, instead of aggressively competing for a share of the pie, the idea is to grow the pie so that
(Source: https://www.youtube.com/watch?v=mYF2_FBCvXw)
An Interview with M. E. Porter, Professor, Harvard University. Porter's five competitive forces is the basis for much of modern business strategy. Understand the framework and how to put it into practice.
The Five Competitive Forces That Shape Strategy
So, instead of aggressively competing for a share of the pie, the idea is to grow the pie so that competitors can each carve out a piece. In a positive sum environment, strategic alliances will help companies expand globally and team with companies that may be competitors, but who act more like allies because all partners will benefit from the arrangement.
According to Czaja (2014), there are many successful partnerships across the globe. Take, for example, Eli Lily:
Eli Lily demonstrates how one company can create many partnerships on different continents with different purposes.
Eli Lilly partners with the Belgiumbased company Galapagos to develop treatments for osteoporosis. Eli Lilly also partners with Canada's BioMS medical group in a licensing and development agreement for a novel treatment for multiple sclerosis. In Japan, Eli Lilly is partnering with Kyowa Hakko Kogyo Co., Ltd., to bring a targeted cancer treatment to market. Eli Lilly will have the exclusive license to develop and sell the product worldwide except in Japan, and the two companies will share rights in certain Asian countries.
2. Why Enter a Strategic Alliance?
Most firms, and especially small firms, lack the expertise, resources, or manpower to do everything that it takes to get their product or service to market. For instance, imagine you are setting up a small business that is going to sell a new ebook reader that fits into your shirt pocket. You came up with the idea and have some resources to invest in designing the product for market. What else might you need? You need a design company, perhaps a patent attorney to register the design, a manufacturer to build the product, parts from various places in the world, marketing materials, and
a distribution network, just for starters.
Rather than trying to take on all of this by yourself, you would likely be more successful in partnering with other companies that specialize in each of these areas. But not only that—you may find that some of these companies operate overseas with significantly lower labor and overhead costs, making your ebook reader cheaper to design and sell. You may quickly end up with the electronics portion of your product being developed in Malaysia, the software written in South Korea, the packaging designed and produced in Djibouti, and the marketing strategy put together by a company in the United Arab Emirates (U.A.E).
As your recommended reading this week stated, strategic partnerships like this benefit both parties, offering each an opportunity not only to participate in the development of a product, but also to exchange technology and knowledge that can be used in the development of other products. Of course, this can create a risk that the technology will be used to develop products that will compete with yours. For this reason, it is wise to try to keep the proprietary technology within the partnership and include contract language that would prevent it from being used to create competing products or sold to other manufacturers.
Whitler (2014) points out that forming the partnership actually is the easy part. The hardest part of strategic alliances, according to Whitler, is managing them over time. She writes:
Often times strategic alliances fail because: they are not resourced properly and fully; the partners do not spend enough time making sure that all partners are satisfied; and the partners never formalize a joint, strategic plan. So while strategic alliances make a lot of sense for a company that is new to the global market, there are many aspects to consider when entering into one. Whitler (2014) sums it up well:
In a recent study conducted by The CMO Council (for a complimentary report, click here (http://www.bpinetwork.org/thought leadership/studies/51)), 85% of respondents viewed partnerships and alliances as essential or important to their businesses. In today’s more complex world, where expertise is often gained through strategic relationships, this isn’t surprising. However, what was unexpected was that although strategic partnerships were rated as important, almost half reported high failure rates (failure rate of 60% or more). (para. 2)
Take, for example, technology giant IBM. In 2012, this American company entered into a strategic alliance with Saudi telecommunications company Etihad Etisalat, better known as Mobily. According to the IBM website (n.d.),
The IBM Mobily Alliance is a joint collaboration aimed at bringing proven IBM intellectual capital, solutions, stringent processes and delivery capabilities to the Kingdom of Saudi Arabia. The Alliance brings cloudbased solutions that have been built in the Kingdom and designed to address the needs of clients in Saudi Arabia. To cover the need of larger enterprises, the Alliance will be able to deliver tailormade solutions to cover specific client demands. (paras. 12)
Mobily gains access to IBM’s technology and best practices, and IBM expands its global reach and strengthens its presence in the Middle East in general, and Saudi Arabia in particular.
While all of this sounds simple, the likely issue is that employees and leaders are overwhelmed. They know how to develop strategic plans and manage relationships. But is there enough time in the day to get it all done? That’s why the first, most important question of leadership has to be whether the relationship is critical. If it is, it must be prioritized and resourced accordingly. (para. 12)
Test yourself on the key concepts covered in Module 10 in this brief quiz.
Click Here to Begin
Check Your Understanding
References
Czaja, J. (2014). Examples of successful strategic alliances. Chron. Retrieved from
Czaja, J. (2014). Examples of successful strategic alliances. Chron. Retrieved from
http://smallbusiness.chron.com/examplessuccessfulstrategicalliances13859.html
IBM. (n.d.). IBM Mobily Alliance. Retrieved from http://www935.ibm.com/services/sa/en/it
services/mobilyalliance.html
Whitler, K. A. (2014). Why strategic alliances fail: New CMO Council report. Forbes. Retrieved
from http://www.forbes.com/sites/kimberlywhitler/2014/10/24/whystrategicalliances
failnewcmocouncilreport/
