International Strategic Alliances

international marketing marketing  International Strategic Alliances

Cooperation between international firms can take many forms, such as licensing of proprietary technology, sharing of production facilities, co-funding of research projects and marketing of each other’s products using existing distribution networks.

These forms of cooperation are known collectively as strategic alliances – business arrangements where two or more firms choose to cooperate for their mutual benefit

A Strategic Alliance is therefore, a mutually beneficial 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 organizations. It is a synergistic arrangement whereby two or more organizations agree to cooperate in the carrying out of a business activity where each brings different strengths and capabilities to the arrangement. Strategic alliances bring enterprises the following benefits:

  • Increase in capital for research and product development and yet lower risk (Innovation)
  • Decrease in product lead times and life cycles (time pressures)
  • Ability to bring together complementary skills and assets that neither company could easily develop on its own
  • Access to knowledge and expertise beyond company borders (technology transfer)
  • Rapidly achieve scale, critical mass and momentum (Economies of Scale – bigger is better)
  • Expansion of channel and international market presence (enter a foreign market)
  • Building credibility in the industry and brand awareness
  • Providing added value to customers

• Establishing technological standards for the industry that will benefit the firm Strategic alliances come in all shapes and sizes, and include a wide range of cooperation, from contractual to equity forms.

Impetus for international alliances:

There are a number of factors contributing towards the growing trend of forging strategic alliances in international markets.

Technological

  • Rapid technological change exceeds capability of one firm.
  • Technological skills/expertise are more widely dispersed throughout the world than in the past.
  • Shorter product life cycles require rapid technological development
  • Improved information flow worldwide eases alliance formation

Managerial

  • Leverage expertise of foreign firms in their local markets.
  • Tailor products to local needs.
  • Growth in acceptance of cooperation
  • Difficult to maintain competitive advantage alone, without a global perspective

Economic / regulatory

  • Enjoy global economies of scale
  • Open new markets to develop synergies and learning curve benefits.
  • Attractive way to utilize excess capacity given slower growth in domestic markets
  • Local content laws and other countertrade measures firms to conduct business with other firms

Strategic

  • Gain access to otherwise closed markets.
  • Take advantage of synergies due to the emergence of products with a global appeal.
  • Share risks of competing in a certain market.
  • Retaliate / defend against competitors.

Benefits of strategic alliances:

  • Ease of market entry
  • Shared risk
  • Shared knowledge and expertise
  • Synergy and competitive advantage

Scope of strategic alliances:

Comprehensive alliances

  • when participating firms agree to collaboratively perform multiple stages of the process by which goods and services are brought to the market -such as R&D, design, production, marketing and distribution.

Functional alliances

  • Production alliances
  • Marketing alliances
  • Financial alliances
  • R&D alliances

Pitfalls of strategic alliances:

There are many reasons that contribute towards the failure of strategic alliances. International markets need to avoid the following issues in the case of forming strategic alliances;

  • Incompatibility of partners
  • Issues in having access to each other’s information
  • Disagreements over distribution of earnings
  • Issues due to potential loss of autonomy
  • Changes in motivations due to changing circumstances over time
  • For managing alliances successfully in international markets managers need to ensue the following;
  • Selection of right partners
  • Compatibility
  • Nature of the potential partner’s product and services
  • The relative risk of the alliance
  • The learning potential of the alliance
  • Select the right form of ownership of the alliance
  • Joint management considerations
  • Shared management agreement – both partners participate actively
  • Assigned arrangement – one partner takes primary responsibility
  • Delegated arrangement – all the partners delegate management to the joint venture’s executives

• Organizational requirements

  • Setting up a global partnership
  • Organizational learning
  • Provision for exit

Right alliance partner selection:

  • The selection process
    • The selection of a potential partner is the most crucial and difficult decision the foreign firm will make, and one which will have long-term ramifications for its future in the target country
    • Partner selection is crucial because the foreign firm’s expansion and strategic success in a country will depend on the capabilities of the partner, the partner’s willingness to cooperate, and the climate of mutual trust which must be allowed to develop between both
    • Partner selection is difficult because it is usually undertaken at a time when the experience of the foreign firm in the target country is limited and when available information is often unsystematic and sketchy
    • Studies have shown that partner selection in Asia pacific is very ad hoc and that western firms conduct far too little advance planning of the whole process
    • This behavior contrasts sharply with the Japanese approach to foreign markets – as a rule the representative office of a Japanese company will be established far in advance of any investment commitment and will often be staffed with at least one full-time Japanese expatriate manager, whose task is primarily to collect information on market opportunities and potential candidates for partnership and acquisition

    The selection criteria

    • it is difficult to list the features of an ideal foreign country partner, since these will invariably depend on the criteria of the international firm
    • a strategic fit exists when the long-term objectives or motives of the partners are compatible – the most favorable strategic fit occurs when both partners approach the joint venture with a desire to build and develop a new business – this is essentially the matching of two venturing motives
    • there is no guarantee that the partners will not experience serious disagreements within the venture; neither does it imply that both partners benefit equally from their joint undertakings, nor that the partnership is of equal importance to them
    • the foreign country partner should be successful in its home country, but remain open to initiatives from the international partner -the firm should have good contacts with authorities, politically influential but at the same time neutral enough to survive and manage shifts in power, should be aggressive without taking too many risks and (most importantly) be reliable and trustworthy

Partner selection and cultural fit:

  • All empirical evidence on international joint ventures shows that cultural differences lead to numerous problems and conflicts within partnerships – any cooperative venture between Western and Asian partners is bound to run into cross-cultural problems of various kinds
  • The heterogeneity of Asian peoples has prevented the emergence of a monolithic business culture
  • If there is anything all Asians have in common and which differs from the West, it is the high degree of importance attached to personal relationships in preference to contractual ones
  • The establishment of a cultural fit therefore requires the joint venture partners to plan for a more personal involvement by their managers

Partner cultural differences:

• Generally speaking, there are two salient differences between Asian and Western corporate culture

  • in South &East Asia many firms still tend to be over dependent on the decisions of the person at the top, who often is owner or founder of the company
  • local firms (particularly in East Asia), tend to emphasize both the firm’s and the employee’s duty to contribute to society and to strengthen the domestic economy – this nationalistic orientation can make it difficult for Western firms to cooperate with Asian firms on the basis of mutual benefit
  • national and ethnic cultures are also shaped by the differences which arise from sociological, religious and philosophical norms and beliefs
  • a small Asian firm without any procedures will have difficulty in cooperating with a bureaucratically organized Western multinational – the entrepreneur who heads a large Asian conglomerate, accustomed to making all the important decisions himself, will resist negotiating with a middle manager of a Western firm

Negotiating partnership agreements:

  • Negotiating and structuring a partnership agreement is a complex and multifaceted task anywhere in the world
  • Many of the negotiation approaches used in Europe or the USA can be used in Asia as well
  • Good preparation through systematic information gathering and consensus building among all members of the negotiation team about objectives, strategy and tactics are as essential in Asia as elsewhere.
  • There are, however, certain peculiarities of the Asian and Latin American mind which merit special attention.
  • Asians and Latin Americans are reputed to be good negotiators, to enjoy bargaining, and in the process display considerable patience and perseverance in extracting additional information from other side.
  • Rarely is a deal closed without giving in to some extent in order not to let the other party lose face
  • A good relationship will bring a high degree of trust to the negotiation table.
  • It obliges both parties to be reasonable, act in good faith and respect other’s opinion; hence overly contractual to legalistic approach is frowned upon
  • In Asia and many developing countries, agreements are rarely concluded within short time periods – often the need to clear certain issues with the government or other parties invisible at the negotiation table slows the decision process considerably

Managing partnerships:

Managers need to address the following organizational aspects for management of partnerships;

Organizational design

  • initial strategic move of the partnership
  • development of operational capabilities

Staffing

  • need more than technical competencies
  • be part of core international managers group
  • capable of synthesizing and transmitting learning experiences to the institutional memory

Control over strategic alliance

Communication in the alliance partnership

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