STRATEGIC ALLIANCES

Meaning of Strategic Alliance 

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A Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed-upon goals or to meet a critical business need while remaining independent organizations. During the past decade, companies in all types of industries and in all parts of the world have elected to form strategic alliances and partnerships to complement their own strategic initiatives and strengthen their competitiveness in domestic and international markets. This is an about-face from times past, when the vast majority of companies were content to go it alone, confident that they already had or could independently develop whatever resources and knowhow were needed to be successful in their markets.

But the globalization of the world economy, revolutionary advances in technology across a broad front, and untapped opportunities in national markets in Asia, Latin America, and Europe that are opening-up, deregulating, and/or undergoing privatization have made partnerships of one kind or another integral to competing on a broad geographic scale. 

Many companies now find themselves thrust into two very demanding competitive races:-

1. The global race to build a presence in many different national markets and join the ranks of companies recognized as global market leaders. 
2. The race to seize opportunities on the frontiers of advancing technology and build the resource strengths and business capabilities to compete successfully in the industries and product markets of the future.

Reasons for Strategic Alliances 

• Entering New Markets:- A company that has a successful product or service may wish to look markets. Doing so on one's own capabilities may seem to be difficult. 
• Reducing Manufacturing Costs:- Strategic alliances are used to pool resources to gain economies of scale or make better utilization of resources to reduce manufacturing costs. 
• Developing and Diffusing Technology:- Strategic alliances may be used to develop technological capability by leveraging the technical expertise of two or more firms; an act which may be difficult to perform if these firms act independently. 
• Obtain Technology and/or Manufacturing Capabilities:- Strategic alliances can be used for obtaining new technologies. For example, Intel formed a partnership with Hewlett-Packard to use HP's capabilities in RISC technology to develop the successor to Intel's Pentium microprocessors. 
• Reduce Financial Risk:- It reduces the risk of the business. For example, because the costs of developing a new large jet aeroplane were becoming too high for any one manufacturer, Boeing, Aerospatiale of France, British Aerospace, Construcciones Aeronautics of Spain and Deutsche Aerospace of Germany planned a joint venture to design such a plane.
• Reduce Political Risk:- Strategic alliance help in creating a good political condition. For example, to gain access to Srilanka while ensuring a positive relationship with the often sensitive Srilankan government, Indian Oil Corporation formed an MoC (Memorandum of Collaboration) with Ceylon Petroleum Corporation for Indian Oil's entry into the downstream petroleum sector.
• Achieve or Ensure Competitive Advantage:- For achieving a competitive advantage. For example, General Motors and Toyota formed Nummi Corporation as a joint venture to provide Toyota with a manufacturing facility in the United States and GM access to Toyota's low-cost, high-quality manufacturing expertise. 
• Vertical Integration:- Trying to attain the benefits of vertical integration (without the costs of doing it alone) is a critical reason why many firms enter strategic alliances. Vertical integration is designed to help firms enlarge the scope of their operations within a single industry. Yet, for many firms, expanding their set of activities within the value chain can be an expensive and time-consuming proposition. Engaging in full vertical integration is especially risky for companies that compete in fast-changing industries. Alliances can help firms retain some degree of control over crucial supplies at a time when investment funds are scarce and cannot be allocated to backward integration. Also, alliances can assist firms to achieve the benefits of vertical integration without saddling them with higher fixed costs and risks. This benefit is especially appealing when the core technology used in the industry is changing quickly. 
• Shaping Industry Evolution:- Strategic alliances can help shape what industry may look like in the future. In the semiconductor and biotechnology industries, many firms have formed alliances to define emerging standards or new products.

Types of Strategic Alliances 

Based on Directions of Alliances:- Like M&As collaborative ventures can be categorized as vertical backward (or upstream), vertical forward (or downstream), horizontal or diversified. The company must always retain control of its core strategic assets and activities but can outsource other activities to partners. Following are the types of strategic alliances: 

⇉Diversification Alliances:- Alliances between businesses in unrelated areas are often used by one or more of the businesses to take them into a new competitive arena. This form of the alliance is viewed as important from a portfolio perspective in so far as the key advantage of diversification is to broaden product and market portfolio to reduce the risk of trauma in any one sector. 

⇉Vertical Networks and Alliances:- These can be upstream in the supply chain toward suppliers or downstream toward distributors and customers. These alliances produce the following potential benefits 

   a) The ability for each collaborating business to concentrate on its own core competence, while at the same time benefiting for the core competences of the other businesses in the alliance, creating synergy; 

    b) Improved responsiveness if just-in-time management techniques are employed; 

    c) Creating of new barriers to entry; 

    d) Production of logistical economies of scale; 

    e) Generation of superior information on activities at all stages of the supply chain; and 

    f) Tying in of suppliers, distributors, and customers to the business. 

Based on the Extent and Timescale of Collaboration:- There are several other methods than can be used to distinguish alliances, which are as follows: 

  i) The extent of Cooperation Focused and Complex Alliances:- It is possible to distinguish alliances by where they are positioned concerning the number of areas in which the parties cooperate with each other. Some alliances are set-up between businesses to collaborate in only one area of activity, such as joint purchasing, shared research, or shared distribution. A continuum exists between the two extremes of fully focused (collaboration in one activity only) and complex (collaboration in all activities - the parties act in concert to the point where they appear to be one single organization). As with all continua, the majority of real-life cases fall somewhere between the two extremes. 

  ii) Timescales of the Collaboration:- Another way in which alliances can be sub-divide is by asking how long they are intended to last. Some are set-up for a specific project only and are referred to as 'joint ventures' - time-limited arrangements for the joint accomplishment of a shared aim or project. Others can last for many years and are intended to enable both (or all) parties to intensify the strength of their strategic position on an ongoing basis. Longer-term alliances tend to be more common when the partners are from different countries, as the interpenetration of markets can take many years to achieve and consolidate.

 iii) Consortiums:- One particular type of (usually) short to the medium-term alliance is the consortium. Consortiums are often created for time-limited projects, such as civil engineering or construction developments. The channel tunnel was constructed by several construction companies in a consortium that was called Trans Manche Link (TML). TML was dissolved on completion of the project Camelot, the first U.K. National Lottery operator was another example of a consortium.

Advantages of Strategic Alliances 

• Capabilities:- An enterprise may want to produce something or to enquire certain resources that it lacks in the knowledge, technology, and expertise. It may need to share those capabilities that the firms have. Thus, a strategic alliance is an opportunity for the enterprise to achieve its objectives aspect. Further to that, in later time the enterprise also could then use the newly acquired capabilities by itself and for its own purposes. 
• Easier Access to Target Markets:- Introducing the product into a new market can be complicated costly. It may expose the enterprise to several obstacles such as entrench competition, hostile government regulations, and additional operating complexity. There are also the risks of opportunity costs and direct financial losses due to improper assessment of the market situations. Choosing a strategic alliance as the entry mode will overcome some of those problems and help to reduce the entry cost. For example, an enterprise can license a product to its alliance to widen the market of that particular product. 
• Sharing the Financial Risk:- Enterprises can make use of the strategic arrangement to reduce their individual enterprise's financial risk. For example, when two firms jointly invested with an equal share on a project, the greatest potential that each of them stand to lose is only half of the total project cost in case the venture failed. 
• Winning the Political Obstacle:- Bringing a product into another country might confront the enterprise with political factors and strict regulations imposed by the National Government. Some countries are politically restrictive while some are highly concerned about the influence of foreign firms on their economics that they require foreign enterprises to engage in the joint venture with local firms. In this circumstance, a strategic alliance will enable enterprises to penetrate the local markets of the targeted country. 
• Achieving Synergy and Competitive Advantage:- Synergy and competitive advantage are elements that lead businesses to greater success. An enterprise may not be strong enough to attain these elements by itself, but it might be possible by joint efforts with another enterprise. The combination of individual strengths will enable it to compete more effectively and achieve better than if it attempts on its own.

Problems/Disadvantages of Strategic Alliances

The high incidence of failure of collaborative arrangements reportedly, 60% of alliances fail, is typically linked to the risks associated with collaborative organisational forms; risks associated not only with the lack of cooperation among partner firms but also with performance failure despite full cooperation.

1. Lack of Clarity:- When we have a common objective inside within two organisations that cooperate and the corporation leaders fail to clarify their philosophy/objectives, thus the businesses will collide and will fail. 
2. Infighting:- Between the senior managers of the collaborated organisations. They may battle because of their corporate strategy or because of the management philosophy differences or even for their top position in the hierarchy 
3. Culture of Secrecy:- When the cooperated companies are holding secrets from the other one like general information, performance, new product plans, operating issues, organisational structures, etc. 
4. Misaligned Incentives:- When the incentive or rewarding system is not aligned between the two cooperated companies.
5. Excessive Performance:- When the managers are pushed to catch the managers are pushed to 'catch' impossible figures or any impossible performance. That is happening when we have two different companies cultures, mentalities and learning schools. 
6. Insulation on Performance:- When the one organisation pressures its people and the other one prevents that pressure. 
7. Mistrust:- Undermines any cooperation as good this cooperation could be. Especially when one company believes that the other one is trying to take advantage of her. Either in know-how (in learning) or in power. So, if mistrust exists in collaboration and each company is defensive, we have bad cooperation and the whole atmosphere becomes untrustworthy.