Benefits and Disadvantages of Strategic Alliances - Coursework Example

Strategic Alliances Name Course Lecture Date Introduction Strategic Alliances are used in most sectors to bridge technology and resources gaps experienced by firm. These alliances can take various forms. Through Strategic Alliances firms are able to gain expertise and secure better market positions in a new market in comparison to firms that decide to go it alone. Bensanko et al (2013) notes that strategic alliances come in handy when diversifying into a new industries, new geographic locations and new markets. Changes in the market like technological developments, new customer needs and external shocks means firms have to keep adapting. For firms to survive they have to constantly look and exploit new opportunities. However, firms may lack resources or technology to discover and exploit these new opportunities. Strategic alliances are one of the strategies firms use to cover the resource gap needed to adapt to a business environment that is constantly in flux. However, Strategic Alliances are more likely to fail than other forms of growth strategies but they remain in common use. According to Besanko et al (2013), 61 percent of strategic alliances resulted in outright failures. On the other hand, half of strategic alliances destroy shareholder value, while only 42 per cent were able to create substantial value for shareholder (Kale, Dyer and Singh 2002). There are a number of reasons why strategic alliances are problematic. According to Kale, Dyer and Singh 2002, the high failure rates of strategic alliances is caused by having unrealistic expectations, lack of diligence, opposing corporate cultures, among other reasons. According to Besanko et al (2013), failure to pay enough attention to the integration process is the most powerful contributor to failed strategic alliance. Benefits of Strategic Alliances   Access to Supplementary Services   Strategic alliances enable a firm to complement its service offering with those of the partner (Wiklund and Shepherd 2009). In so doing businesses are able to avoid being jacks of all trade and concentrate on one core business. For example Lenovo is able to offer product service to its consumers through co-operation with IBM. Opportunity to Reach New Markets   A new strategic alliance enables a business reach a larger customer base (Wiklund and Shepherd 2009). A strategic partner offers access to its own customers to the business. In most cases strategic partners are engaged in providing complementary services that provide an opportunity for firm to offer its products to complement the existing range. This way the strategic partners avoid overshadowing each other businesses. Businesses come up against various challenges while introducing their products to new markets (Besanko et al 2013). These challenges may include complex operating environment, entrenched competition or unfriendly government regulations. On the other hand, businesses may lose out on capital invested if they assessment of markets is inaccurate. Entering a new market through a strategic alliance allows a business reduced entry costs and avoids some of the risks of entering new markets. Increased Brand Awareness   Strategic partnership is an opportunity for partners to increase brand awareness. According to Besanko et al (2013), constant growth of brand awareness is a key element that determines brand success. He argues that a business where people are not becoming aware of a brand is not growing. Therefore, a strategic alliance allows businesses to reach a broader audience with their brand message. Access to New Clientele Businesses are engaged in the search for new customers, always trying to come up with new ways to increase their clientele (Besanko et al 2013). A strategic partnership allows customers to access a customer base that they would not otherwise access. New competitive capabilities Through strategic alliances a business is able to access expertise, knowledge and technology it needs to stay ahead of the competition in the market. A strategic partner with these capabilities shares them out with its partners (Neil, Pfeiffer and Young 2001). In most cases, strategic partners provide technology and expertise training to enable their partners use the new technology. The receiving firm can later on use the acquired capabilities in its operations. Sharing the financial risk The individual financial risk of partners in strategic alliances is reduced by sharing the risk among the two partners. Where firms jointly invest in a project and contribute an equal share of the project, in case of failure, the firms on lose half the cost of the whole project. On the other hand, sharing of risk increases the attractiveness of the alliance when it comes to accessing credit. According to Neil, Pfeiffer and Young (2001), it easier for joint proposals to go through than in cases where the companies are presenting their proposals separately Overcoming Political barriers In most countries foreign companies face more policy barriers than home countries in their operation. In some countries foreign companies are not allowed to operate in some sectors of the economy (Neil, Pfeiffer and Young 2001). China for example is highly concerned about the influence of foreign firms in their economy and requires foreign firms to enter into joint ventures with Chinese firms as precursor to operating in China (Besanko et al 2013). In such circumstances, joint ventures are a strategy for overcoming the political barriers to business. The Power of Synergy The rules of synergy suggest that two businesses are stronger together than they are when operating on their own. According to Rigsbee (2000), joint efforts among businesses enable them have greater control over the market. Combined strengths of businesses enables them compete more effectively than when they are facing the market on their own. For example, obtaining space in the world’s major airport is a costly and time-consuming process. However, an airline that enters the British market in alliance with British Airways is able to access the companies lounge’s in the UK’s major airports. In return, British Airways is able to access similar facilities where the strategic partner has secured them. Disadvantages of Strategic Alliances Loss of control over proprietary Information The co-operation environment in strategic alliances requires companies to share information that is normally tightly controlled (Besanko et al 2013). In some cases, alliances are formed to share patented technology which off course passes on to the strategic partners. In some cases, the company receiving the information steals patents and trade secrets of their strategic partners. Wiklund and Shepherd (2009) further notes that the complex, ambiguous transactions which cannot be controlled by contract law are what make alliances more attractive. The sharing of proprietary information and technology sets the stages for conflict over products that are made during the life of a strategic alliance (Cullen and Parboteeach 2005). Complexity in coordination of activities Due to the lack of a formal mechanism to make decisions and resolve disputes, co-ordination between the cooperating firms is compromised. According to Besanko et al 2013) this was the problem that plagued the IBM/Apple strategic alliance in the 1990. The two firms were supposed to co-operate in building a several technology projects. Free rider Problem One of the partners in the alliance may benefit from the management competence of its partners, while playing no active role in the management of the joint initiative (Wiklund and Shepherd 2009). In such a circumstance the managing firm does not capture the full benefit of managing the joint venture. In most cases both firms become less vigilant in monitoring the alliance increasing the possibility of the alliance failing. However, some firms are keen to create an impression that they are good strategic partners and are thus very vigilant in their strategic alliances. Undue benefits Other partners benefit from the reputation of their partners while they do not compensate their partners for these added benefits (Besanko et al 2013). Ego and Turf issues According to Andreosso and Leninah (2008) ego and turf issues are one of the disadvantages of strategic alliances. The ego of individual leaders and the collective pride of organizations is a barrier to the success of strategic alliances and form a basis for resistance of changes. A partner that is preeminent in size and scope expects to plays a dominant role in the partnership. Dominance over partners may imperil the survival of a strategic alliance. Costs of setting up alliances The cost of setting up an alliance makes them unattractive to some organizations. According to Rigsbee (2000), partners incur expenses in paying for financial auditing, legal fees and organizational profiling fees. The attention, time and energy devoted to development of relationship can be considered an opportunity cost for the formation of strategic alliances (Niosi 2003). Severance fees for jobs that become redundant once the alliance is up and running are one of the major costs associated with strategic alliances. Other costs include system integration costs, new taxes and the costs of rebranding. Cultural Differences There is bound to be a cultural difference between two organizations that are in a strategic alliance. According to Rigsbee (2000), impending alliances are a cause of stress among employees who think the new organizational culture will affect them negatively. Cultural differences are particularly a disadvantage where strategic partners are from different countries. Therefore organizations are supposed to pay particular attention to cultural integration as cultural conflict can endanger board and staff morale. Lenovo/IBM strategic Alliance: A successful Alliance On April 30th 2005, Lenovo acquired the PC operation of IBM an American company involved in the manufacture and sale of computer hardware (Lau 2005). As part of the agreement, Lenovo acquired IBM’s notebook and desktop business including research and development centers, marketing networks, manufacturing plants and service centers (Lau 2005). Lenovo also acquired the right to use the IBM brand names including the iconic ‘Think’ trademark. On the other hand, Lenovo entered into an agreement were IBM became the preferred provider of channel financing and customer leasing services to its strategic customer. Through this strategic alliance Lenovo became the world third largest PC retailer. According to Musthaler (2005), the strategic alliance between Lenovo and IBM was necessitated by a number of factors. First, IBM was finding it hard to secure new opportunities for growth and its development had stagnated. On the other hand, Lenovo PC business was concentrated in China, but Lenovo’s ambition was to become a truly global firm. Furthermore, competitive pressure from Dell and IBM was denting Lenovo’s margin in China; by 2003, Lenovo was behind Dell and HP in market share (Lau, 2005). Other problems at Lenovo included financial problems in 2004 when it failed to reach internal revenue collection targets. The value of Lenovo shares had also fallen by 60 per cent in 2004 (Lau, 2004). According to Lau (2004), Lenovo was able to access IBM well-developed worldwide distribution network and therefore quadruple its sales. In the deal, IBM sales team was to push Lenovo’s products to its customers and finance the purchase of Lenovo’s products. In the views of Lau (2004), Lenovo is now able to serve direct buyers of computers among them small and medium sized companies across the world. Lenovo is also able to make use of IBM advanced and specialized skills in sales and marketing. Lenovo was also able to increase its R&D capability by acquiring IBM R&D centres and obtained talented R&D staff (London and Dickie 2005). Other benefits to Lenovo in the deal include access to the US market and use of the world most popular laptop designs. Both Lenovo and IBM benefit from brand awareness secured as a result of the strategic alliance. According to Lau (2004), Lenovo was little known beyond its Chinese home market. Usage of IBM iconic brand name and the Think pads trademark, Lenovo’s worldwide brand presence improved. On the other hand, IBM brand presence in the World largest IT market also improved. According to Zhijun (2006), the Chinese market is hard to penetrate and IBM’s alliance with Lenovo, offers IBM an advantage in penetrating the Chinese market. The management of Lenovo and IBM needed to pay particular attention to the Cultural integration issues (Williams 2002). However, through understanding and appreciation of the national and corporate culture, values and assumptions, the two firms were able to successfully integrate their different cultures. Both management teams take note of the difference in power distance between western and Eastern cultures. Volvo-Renault Strategic Alliance The strategic alliance between Volvo a Swedish automobile company and Renault a French company in the same sector was formed in 1990 through a complex scheme of cross-shareholding , R&D agreements and joint production (Bruner and Spekman 1998). The motives for the alliance were cited as synergies in joint manufacturing and product development, quality and purchasing. The companies were also supposed to share core competencies leading to additional benefits to both firms. According to Bruner and Spekman, (1998), Renault and Volvo had complementing competencies in terms of market position and geographical reach. The causes for the failure of the Renault-Volvo alliance are analyzed by (Bruner and Spekman 1998). According to Bruner and Spekman, (1998), Renault and Volvo were not aligned at the operational level, while success in alliances can only be guaranteed by alignment both at the strategic and operational levels. The way Swede and French middle and senior managers dealt with outside stakeholders were distinctly different. The two groups of managers perceived alliance challenges differently because of differences in locus of focus. In effect, the problem led to slowdown in decision making and a slow-down in the merger proceeding to full merger. For example, the Alliance failed to react to change in strategic factors that almost doomed Volvo’s car business. Furthermore, the cultural and language difference between the Swedes and the French also caused alliance problems in the Volvo-Renault alliance (Bruner and Spekman 1998). Although, English was chosen as the medium of communication, effective communication between the two organizations was still not possible. Turf wars and ego also affected the Volvo-Renault when Volvo started to perceive that the health of its business was better than the overall health of the alliance (Bruner and Spekman 1998). Volvo was recovering financially and starting to prosper in its business, thus its managers began to think they were more superior to Renault in the alliance. Therefore, the failure of the strategic alliance can be credited to lack of cultural integration and failure to mend the strained relations between the middle managers. Conclusion If well managed, strategic alliances can be effective growth strategy for firms, especially those aiming to internationalize their operations. Motivated by these benefits IBM and Lenovo came together in a strategic alliance. IBM and Lenovo were able to benefit from the alliance by having access to each other complementary services. Lenovo were able to access the American PC market while IBM could market its services in China. Lenovo also benefited from IBM expansive distribution network and competencies in the market. The success of the alliance was however guaranteed by alignment of focus and a more effective management of the cultural integration process. In contrast the Renault-Volvo strategic alliance failed because of the inability of the two firms to effectively manage the cultural integration process and align their objectives. Ego and turf wars were also factors in the disintegration of the relationship between Volvo and Renault. References Andreosso, H & Leninah, H 2008, Networking: A Question of Firm Characteristics. The Case of the Shannon Region in Ireland. Entrepreneurship & Regional Development, vol 20, pp 561-580. Besanko, D., Dranove, D., Shanley, M., Schaefer, S 2013, Economics of Strategy. 6th edition, Hoboken, NJ: Wiley, p. 148. Bruner, R., & Spekman, R 1998, The dark side of alliances:: Lessons from Volvo–Renault. European Management Journal, vol 16, no 2, pp.136-150. Cullen. JB & Parboteeach, KP 2005, Multinational Management: A Strategy Approach. (3rd Ed.). Australia: Thomson South-Western. Kale, P., Dyer, J. H., & Singh, H 2002, Alliance capability, stock market response, and long‐term alliance success: the role of the alliance function. Strategic Management Journal, vol. 23, no. 8, pp. 747-767. Lau, J 2004b, COMPANIES INTERNATIONAL: Lenovo Chiefs Pay Heavy Price. FINANCIAL TIMES. Available at: http://search.ft.com/ftArticle?queryText=lenovo&y=0&aje=true&x=0&id=040726000949&page=14> Accessed 20 October 2013 Lau, J 2005, Lenovo Profits from IBM Unit Purchase. FINANCIAL TIMES. Available at: http://search.ft.com/ftArticle?queryText=lenovo&y=0&aje=true&x=0&id=05081000537&page=9> Accessed 20 October 2013 London, S, and Dickie, M 2005, Lenovo Begins Full Integration of IBM PC Unit. FINANCIAL TIMES.,Available at: http://search.ft.com/ftArticle?queryText=Lenovo&y=0&aje=true&x=0&id=050930001347&page=5> Accessed 20 October 2013 Musthaler, L 2005, IBM PC Sale Makes Sense. NetworkWorld 37. Available at: http://www.networkworld.com/columnists/2005/012405musthaler.html> Accessed 20 October 2013 Neil J.D., Pfeiffer G.M., and Young, Y 2001, Technology R&D Alliances and Firm Value, Journal of High Technology Management research, vol. 22, pp 227-237. Niosi, J 2003, Alliances are not Enough Explaining Rapid Growth in Biotechnology Firms, Research Policy, vol 32, pp.737-750. Rigsbee, E 2000, Developing Strategic Alliances, First Edition, Library of Congress Cataloging-in Publication Data. Wiklund, J. & Shepherd, DA 2009, The Effectiveness of Alliances and Acquisitions: The Role of Resource Combination Activities. Entrepreneurship Theory and Practice, vol 33, pp. 193-212 Williams, S 2002, Making better business decisions: Understanding and improving critical thinking and problem solving skills, Sage Publications, Thousand Oaks, CA: Zhijun, L 2006, The Lenovo Affair: the Growth of China’s Computer Giant and its Takeover of IBM-PC, Economist, June 17. Read More