Managing Strategic Alliances

1 COURSE: L301 (INTERNATIONAL BUSINESS ENVIRONMENT) INSTITUTE OF BUSINESS ADMINISTRATION (IBA), UNIVERSITY OF DHAKA INSTRUCTOR: PROF. ABU YOUSUF MD. ABDULLAH, PHD

Strategic Alliance
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The term Strategic Alliance refers to cooperative

agreements between potential or actual competitors. Strategic alliances run the range from formal joint ventures, in which two or more firms have equity stakes, to short-term contractual agreements in which two companies agree to cooperate on a particular task (such as developing a new product)

Strategic Alliances: Advantages

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Strategic alliances can have several advantages: 1) They may facilitate entry into a foreign market, eg, Motorola allied with Toshiba to enter the Japanese market. 2) It allows them to share the Fixed Costs(and associated risks) of developing new products or processes, eg, Boeings alliance with several Japanese companies to build the 767 by raising the estimated $2 billion. 3) It brings together complementary skills and assets that neither company could easily develop on its own, eg, the alliance between Frances Thomson and Japans JVC to develop VCRs. 4) It can help the firm develop technological standards for the industry that will benefit the firm, eg, in 1992 Philips NV allied with Matsushita to manufacture digital compact cassettes (DCCs).

Strategic Alliances: Disadvantages

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Strategic alliances have certain disadvantages: 1) They can give competitors a low cost route to new technology and markets. This may result in one firm retaining higher paying, higher value added jobs and at the same time gain production process skills from the other company. 2) Competitive advantage is lost while market access is given away.

Making alliances work

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Partner selection Its important to select a good partner, and as such, they should have three characteristics: a) The partner can help the firm achieve its strategic goals b) A good partner shares the firms vision for the purpose of its alliance. c) A good partner is unlikely to try to opportunistically exploit the alliance for its own ends To select a partner with these characteristics , a firm should: i) Collect as much information as possible on its potential allies ii) Collect data from informed third parties iii) Get to know the potential partner as well as possible before committing to an alliance.

Making alliances work (Cont.)

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Alliance structure Having selected a partner, the alliance should be structured so that the firms risks of giving too much away to the partner are reduced to an acceptable level. So the following safeguards can guard against opportunism: a) Alliances can be designed to make it difficult to transfer technology not meant to be transferred. b) Contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner. c) Both parties to an alliance can agree in advance to swap skills and technologies that the other covets, thus ensuring a chance for equitable gain. d) A credible commitment can be sought from the partner in advance.

Managing the alliance

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Building trust Trust needs to be built between the firms managers. This way, not only can matters pertaining to the alliance be discussed, but they can also get to know each other personally, which in turn can help build a strong network on the basis of friendship, eg, alliance between Ford and Mazda. Learning from partners Alliances can lead to learning from each other and mustn't only be treated as a cost/risk sharing device. To maximize learning benefits from an alliance, a firm must try to learn from its partner and then apply the knowledge within its own organization.