MOTIVATIONS FOR ENTERING INTO A STRATEGIC ALLIANCE

Although the reasons and motivations of companies to undertake strategic alliances may evolve and change through the years, most companies use alliances when they are faced with specific circumstances in the external environment. The following are some of the most common motivations for initiating and forming strategic alliances.6

Entering new international markets. Although in the past companies were more comfortable utilizing exporting, wholly owned subsidiaries, or joint ventures to enter new markets, increasingly they tend to utilize strategic alliances. Cooperating with local companies in a target market or other international companies familiar with the political and economic environment of a country, provides an expanding firm with the complementary skills and resources necessary for success. Strategic alliances are especially useful in foreign markets characterized by a high degree of risk and un-certainty.7 The skills provided by a partner in the strategic alliance will allow a company to navigate more safely the turbulent waters of an uncertain environment. Even large multinational companies that usually prefer to operate independently through wholly owned subsidiaries around the globe may decide to locate a partner prior to entering an unfamiliar new market because they may need the complementary skills that only a partner in a strategic alliance is able to provide. For example, The CocaCola Company, which usually prefers to operate through wholly owned vertically integrated subsidiaries, has selected a Greek company, 3E, as a partner in establishing operations in the former communist nations of Eastern Europe and the republics that emerged from the breakdown of the Soviet Union. The Greek company possesses valuable skills and experience in successfully operating in countries with high levels of bureaucratic red tape and corruption. In the past, 3E had established successful subsidiaries in Sub-Saharan Africa and in several politically unstable Balkan countries.

Circumvent foreign market barriers. A firm will partner with a company familiar with the local political, economic, legal, and regulatory risks in order to circumvent the barriers making it difficult for new foreign companies to enter that market. There is a wide range of market barriers that may inhibit a company from successfully expanding in a target market. Trade barriers are the most common and easy to recognize obstacles, but companies also have to face barriers such as how difficult it is to establish a distribution network or the difficulty to obtain attractive real estate locations for an expanding restaurant chain. In many countries, McDonald's, the U.S.-based fast food giant, formed alliances with local partners that possessed access to local real estate. These alliances were particularly valuable in many European countries with old historic city centers, which offered limited attractive restaurant locations. In Japan the high retail fragmentation acts as a barrier to foreign companies attempting to enter the market. An alliance with a local distributor may allow a company to establish itself in Japan at a fairly low cost.

Defend home market competitive position. A very common practice among international companies is to engage in a partnership with another company in order to enter the home market or other markets in which the competitor has a large market share. By entering an important market for a competing company, a firm tries to divert the resources of the competing company in defending its home turf instead of using them in capturing market share in the home market. Wal-Mart, the U.S.-based retailer powerhouse, has formed alliances with local companies in several Latin American countries. The expansion of Wal-Mart in Latin America where its French competitor Carrefour has traditionally been very strong has provided fierce competition for the French company and has stalled any plans that it had to expand to North America.

Extend the product line. Even the largest multinational companies may discover that they have certain gaps in their product line. Engaging in a strategic alliance may provide a company with a quick way to offer new products to its existing or new customers. For many years PepsiCo, the soft drinks giant, had a distribution strategic alliance with the 7UP company to distribute the eponymous product. This alliance benefited both companies because 7UP did not have to invest in an independent distribution system while PepsiCo could offer a product that was competing against Sprite, the brand offered by its archrival Coca-Cola Company in this product category.

Entering new emerging industries. Most established companies have mature products and are constantly looking for new opportunities in emerging industries. Companies may not be able to explore these new industries on their own because they may not have the monetary or other resource base to effectively develop new products. Many companies do not possess the entrepreneurial spirit needed to succeed in new emerging industries. Multiple strategic alliances have been formalized in recent years in the automobile industry, as car companies try to develop new hybrid fuel or electric technologies. Many of these companies prefer to share the cost for the development of the new innovative technology instead of trying to develop the expertise on their own. In the pharmaceutical industries large firms have formed alliances with smaller research companies that have a tendency to be more entrepreneurial and have a track record of developing new innovative drugs.

Changing industry structure. Strategic alliances can totally alter the structure of an industry by bringing together new technologies to radically change the way companies operate in that industry. Large U.S. retailers such as Target have successfully used technology in recent years to form close strategic alliances with their suppliers. Retailers do not have to order new merchandise but new technology provides suppliers with information of when quantities of their products fall below a certain level.

Reduce future competition. Many companies form strategic alliances with potential competitors in order to eliminate the potential of this company becoming a future direct competitor. This is a very common strategy among internationally expanding retailers. When an international retailer expands in a specific market, in many cases it decides form an alliance with a large local retailer. When Gap decided to expand to the Russian market and open local stores, it decided to form an alliance with Fiba Holding, a firm active in the market and that also manages Gap's stores in Turkey and the Ukraine. By forming an alliance with a company active in the local market, Gap Inc. gained local expertise and did not have to compete directly with Fiba Holding Company.8

Increase available resources. Many companies engage in strategic alliances in order to use the manufacturing, distribution, or human resources of their partners. By utilizing partner resources, a firm does not have to make substantial investments in their own proprietary infrastructure. PepsiCo has expanded in many Latin American countries by signing alliance agreements with local companies that possess the manufacturing facilities and the distribution network to reach the market. These agreements have provided the company the resources to reach these markets without having to invest in expensive manufacturing facilities and distribution networks.

Acquisition of new skills. Many companies, when they realize that they lack certain skills, may engage in strategic alliances in order to learn from their partners. Companies in developing countries tend to look for partnerships with more advanced companies that will provide them with technological know-how that they need. General Motors's alliance with Toyota in the early 1980s provided the company with much needed manufacturing technology and allowed it to improve the quality of its cars.

Gaining competitive advantage from alliances. Although almost all companies recognize the importance of alliances in helping them explore new markets, product lines, and technologies, for a variety of reasons relatively few partnerships truly increase the competitive position of a business. According to a recent authoritative study of alliance success rates, more than 60 percent of them fail to meet their goals and objectives.9 A company has to work very closely with its alliance partner in order to maximize the benefits of the partnership and minimize the drawbacks inherent in any cooperative agreement.

Companies engage in strategic alliances in order to gain a competitive advantage or eliminate the competitive advantage gap that separates them from a more successful competitor. The factors that may push companies to engage in strategic alliances in order to gain a competitive advantage usually fall in two major categories: strategic or operational.10 An alliance that serves long-term strategic purposes may assist a company to enter a new market or product category whereas an operational alliance strives to improve an operational function of a company. In international markets strategic alliances allow a company to overcome the disadvantages associated with its status as a foreign firm and compete on equal terms with local companies.11 Strategic alliances tend to enhance the competitive advantage of a company because they provide a company with time to observe, experiment, and try a variety of problem-solving arrangements with other companies while it is in the process of building capabilities.12 Companies may use strategic alliances in order to acquire new knowledge or utilize knowledge from partnerships in directing a company's future mergers and acquisition decisions.13

International alliances contribute to the competitive position of a company by allowing a firm to:

1 Create critical mass in a specific foreign country or region;

2 Expand its specialized skills by exploiting the skills that partners are bringing;

3 Expand its knowledge of foreign markets and quickly become an insider;

4 Introduce new products and services; and

5 Create value through alliance learning.

Although additional benefits of partnering with other companies exist, these are the main reasons that companies engage in alliances. In most industries a critical mass is needed in order to become a serious competitor. Alliances provide you with a quick way to achieve a critical mass, the minimum required size that a company needs in order to be successful in a specific industry. When Delta airlines changed its strategy and decided to focus on the international as well as the domestic market, its international alliances allowed it to service those parts of the world where Delta did not have—or planned to have—a presence. For example, its alliance with Air France enabled it to offer service to many countries of Africa where Air France traditionally had a very strong presence due to the historic ties between France and many African nations. It would have been very difficult for Delta to service these destinations if it was relying only on its own fleet. Similarly, Delta established a strong presence in Latin America through alliances with Aeromexico in Mexico and Gol in Brazil. Through these airlines Delta can offer service to smaller cities in these two large emerging markets of Latin America. It is obvious that no airline by itself can develop the global network that can be provided by strategic alliances. In addition, an airline has to be part of a global alliance in order to participate in the various types of reward programs. The expectation of greater service and the prospect of earning the same rewards from several airlines have made it necessary for even large airlines to participate in a global alliance. This is the main reason that in recent years three alliance systems—Star alliance with 27 members, Skyteam with 15 airlines, and Oneworld with 12 participants—have developed and have dominated the global airline industry.

In addition to creating marketing alliances, which makes it necessary for participants to join a specific alliance, the achievement of a critical mass is very important as industries develop and a common technological standard emerges. The company that succeeds in convincing "alliance" companies to adopt its technology will reap substantial profits. In the 1980s, Microsoft won the personal computer battle because it provided a common platform to a large number of independent companies looking for an efficient operating system for their personal computers. Microsoft operating systems, initially the MS-DOS system and then the various Windows versions, became the dominant technological standard and allowed Microsoft to earn profits by selling complementary products to computer users worldwide. Apple's refusal to share its operating system with other companies, limited the company's ability to capitalize on the popularity of its operating system. Thus Apple computers despite the widespread perception that its products were technologically superior, was reduced to a niche player. It is possible that if Apple had decided to share its technology with other companies and create technical alliances with software developers, it would have succeeded in making the Apple operating system the dominant technology in the market. In recent years, Google has been successful through alliances in making the Android operating system for smartphones and tablet computers, one of the dominant technologies in the market. In an ever changing technological world with rapid technological changes, a company has to be very quick in forming the right alliances that will allow it to establish its own technology as the dominant standard in the market.

Every company regardless of its size lacks certain specialized resources. Other companies that possess these resources make attractive alliance partners. This enhancement of a company's resources through co-specialization is a major reason that firms form partnerships. A local company usually has certain unique proprietary skills that create value to the partnership. There is a wide variety of specialized skills that a company may bring into a partnership. For example, a firm may have an extensive distribution system that it is very hard for other companies to replicate. When the Coca-Cola Corporation entered the Japanese market it decided to invest in an extensive distribution network. In recent years this network has given Coke a competitive advantage in the Japanese market and has made it an attractive partner for companies that want to gain access to Japanese consumers. As a result Coke earns approximately 20 percent of its global profits in Japan although it only sells 10 percent of its products there.14 In other cases, a company may be seeking technological know-how or ability to operate in politically and economically unstable environments. In many emerging markets, alliances with local companies provide access to local politicians. A company with the right experience will be able to navigate complicated regulations that may take years for an outsider.

Although large multinational companies are perceived as all powerful because of their size and technological expertise, in many foreign markets they may have major disadvantages. These shortcomings originate from a lack of political connections, deficient knowledge of the local culture, or the presence of economic nationalism, which may curtail a company's ability to establish a strong presence in many foreign markets. This is the so-called "liability of foreignness" that inhibits companies from expanding abroad. Companies can overcome these obstacles by forming alliances with local companies. These alliances have the ability to turn a foreign company from an "outsider" into an "insider" player in that market. Furthermore, partnering with local companies in many emerging markets is not an alternative that a company has, but it may be the only option to enter a market due to restrictions imposed by the local government. China in recent years has liberalized many of its restrictions on foreign companies entering its market, but regulations still make it mandatory for companies operating in technologically advanced industries to have a local partner. A foreign company has to think very carefully if it wants to partner with a local Chinese company, considering the transfer of technology requirements and potential infringement of patents. However, many companies make the decision that the size and potential of the Chinese market makes the risk of the probable loss of technology worth it.15

With product life cycles becoming increasingly shorter, companies need to constantly introduce new products in order to remain competitive in an increasingly crowded marketplace. As new products are becoming increasingly complex, even large companies find themselves without the required skills to successfully develop groundbreaking products. The lack of necessary skills has increased in recent years due to the tendency of many companies to outsource even essential functions in the production chain. For example, large automakers have formed strategic alliances with their competitors in order to develop new electric cars. In the 1970s, Western companies were amazed to discover the Keiretsu production system in Japan. Japanese companies were operating as alliances of a large number of smaller firms producing products for a large corporation. It appears that as companies in Western countries have abandoned a vertical form of production, where most components of a product were manufactured internally, most of them have created their own Keiretsus. As a result, development, manufacturing, and introduction of new products have become the joint effort of an alliance instead of the work of an individual company.

In the past new knowledge creation tended to be concentrated in certain parts of the world. Most new products and novel production techniques in the early 19th century originated in Great Britain, the birthplace of the Industrial Revolution. However, by the end of the 19th century as the industrial revolution started spreading in other parts of the world, new product creation started occurring also in North America and the rapidly industrialized areas of Western Europe. At the present time as more regions of the planet have adopted free market policies, the development of new products could occur anywhere in the world. For example, in the 1970s, the most exciting incremental improvements in automobile manufacturing were coming out of Japan, a country that until then was known for adopting technology developed elsewhere. As a result of the spreading of innovation across the globe, companies need to be ready to learn new technologies and adopt new products from anywhere in the world. Alliances provide companies with a very efficient way to learn from other companies. It is an efficient way for companies to learn what other firms in faraway countries are doing.