____of November, 2014
Strategic Alliances in B2B World
Summary
In today’s dynamic B2B marketplace, partnership and collaboration between various market players can be highly beneficial. This research paper addresses one of the most effective forms of business collaboration – strategic alliances, often referred as collaborative relationship between a couple or several independent market players aimed at achieving mutually beneficial goals.
The aim of the research is to describe the evolution of alliances in the business world, to review the existing theoretical knowledge about strategic alliances and also to show the main advantages and issues faced by the companies entering the alliances.
Also the study focuses on key factors that encourage firms to partner on a long-term basis such as new market entry, applying new technologies, facilitating access to the limited resources or market opportunities and shaping the industry evolution.
As the progressive technology plays the significant role in today’s business environment, the specific point of this research is to emphasize sources, types and theories of strategic alliances in high-tech industries. In this paper, several cases of real-world strategic alliances will be described along with reasons and drivers of their success or fail.
The implications of this research will be useful for entrepreneurs, business owners, management professionals and other decision-makers responsible for business strategy formation, business development and growth.
The awareness of nature of strategic alliances, their benefits, risks and drawbacks as well as understanding the situation where entering the alliances is justified can give the business owners and managers an additional advantage of reasonable choice of competitive strategy.
Introduction
Initially, alliances were aimed to exclude the duplication of functions, decrease operational expenses and were limited to one particular market. The development of strategic alliances can be also explained by the rise of hostile takeovers, merger failures, which lead to decrease in management quality all over the Globe.
So, strategic alliances became a convenient alternative to mergers and acquisitions for companiesentering the capital-intensive project through resources of several partners, interested in success of their joint venture. Another major factor facilitating wide spread of alliances is an increase in business transparency, based on mutual trust between partners.
Various studies give the two key sources for the existence of strategic alliances shaping the two major theories: resource-based and transaction-cost. The resource-based theory said that strategic alliances arise to satisfy the need in additional resources the parties can’t obtain in a regular way. And the transaction-cost theory focuses on the ability of strategic alliances to optimize the fixed costs of the participants.
In general terms, the partnership of two or several companies can be called a strategic alliance when the parties unite their efforts for execution of a specific project or for performing commercial operations in the certain field via coordination of both necessary knowledge and resources (Dussauge andGarrette, 1999.)
In the modern dynamic economy,the strategic alliances help businesses to build competitive advantages by accessing their partners’ resourcesand market experience, such as technologies, people, markets, channels and capital. Entering the strategic cooperation allows both parties to increase resources significantly and also to gain necessary market experience, to grow faster in a more effective way. One of the outcomes of an alliance can be the strengthening of the parties’ brands. Strategic alliances can be built within one industry as well as at intersection of sectors or industries.
An alliance created to quickly solve a specific problem can be a problem by itself. Such factors as existence of several command centers, relationships based on dialogue with partners, and also conflict of interest make the organizational structure of an alliance unstable and quickly changing. According to Harrigan (1985), only 40% of alliances survivefor over 4 years, and only 15% overcomea 10 years barrier.
Strategic alliances: formation and classification
During their establishment, the alliances pass several stages. On the initial stage the companies develop their alliance strategy and start looking for partners. While screening their potential partners, the companies assess their own resource, knowledge and technology gaps and potential partners’ advantages. When the partner is found, partnership objectives identified and legal and organizational form of alliance is established, the alliance enters the design stage, assuming skills alignment and staffing decision-making. Then the full-fledged alliance enters the management stage, when relationship are developed and structured, collaboration models and performance assessment implemented.
There are two common types of alliances– link and scale – depending on the outcome the alliance generate (Dussauge andGarrette, 1999.) A common situation for link alliances is the outcome in the form of reorganization of responsibilities and further takeover of activities by one of the partners. It is typical for scale alliance to continue without major changes in distribution of activities and breaking the alliance.Beneficial relationships between companies are possible and can be described depending on the strength of connection, according to the work of Robert Wallace (2004.)
Another basic criterion is based on ownership relationships. According to this criterionstrategic alliances divided into two types – with creation of joint venture or without (Dyer, 2000.) The other names for these types are the alliances with equity participation and non-equity based collaboration, or formal and informal alliance.
The formalization of partnership in some legal form is not always necessary. Faulkner (1995), a formal alliance is a beneficial solution if the companies enter a new market or launch new business direction; when there’re some alliance-specific assets legally independent from the parties; and when “the objectives of using the pooled assetsare measurable.”
Approach proposed by Spekman (2000, p.37)is a bit similar to Robert Walles, but he uses at least two criteria to determine type of alliance: time horizon reflecting attitude of partners to the term of alliance (long-term or short-term) and level of joint control over functioning of alliance (low in case of absence of decision making process, and high in case of careful review of the contract.)
Yasuda (2005) distinguishes the following types of alliances depending on the organizational and legal form of cooperation: technology license; joint technological and financial efforts in research and development; sourcing agreement, joint venture, consortia ad networks.
Weber and Chathoth (2008) give another classification of alliances applied to hospitality industry but also applicable to other industries: supplier–supplier and suppler-provider alliances, management contracts and franchises, marketing, technology-based and competitor alliances. This classification is based on business relations between the parties of an alliance. Sometimes, using the same principle, the alliances are divided into vertical (between suppliers and distributors) and horizontal (between the companies operating in the same area.)
Industry and Other Characteristics that Encourage Firms to Partner
Research of industry structure shows wide occurrence of strategic alliances in high-tech sector (Yasuda, 2005), for example, alliance between HP and Alcatel for expanding the range of managed IT services, and its active usage practically in all industries, including automotive. Strategic alliances in automobile industry actively speeded thanks to consolidation process. Among the factors of success in this industry – ability to mobilize technological and innovation component, for example, to create new models, implement perspective technologies, new quality standards, and management standards.
In B2B e-commerce, relatively new sector of economy, strategic alliances are common. Industry-specific types of alliances, identified by Dai (2003), explain the key drivers of these alliances. For example, functionality alliances give the market players additional opportunities to expand their product proposition; with marketing and connection alliances they gain access to the new markets or target audiences; participation alliances “strengthen the relationship between the B2B e-markets andtheir clients” (Dai, 2003), so, they enable access to so called relational resource.
In airline industry, the strategic alliances (such as Star Alliance, Oneworld or SkyTeam) became a dominant feature and a recent global phenomenon. The alliances in this industry are driven by the following obvious benefits of the partnering companies: decreasing costs and, respectively, prices; increase in aircraft load factor; more flexible and more varied flight schedules valued by the customers; improved quality standards; joint marketing efforts; generating new revenue sources. Most of the benefits of airline alliances are connected with thereinforcement of the competitive advantages and network-building opportunities like hub-spoke network and code share routing (Tugores-García, 2012.)
In telecom industry, the strategic alliances are quite common enabling the partners to access to new geographical areas and share their infrastructural and technological capabilities. The example of such strategic alliance is formed in 2014 strategic partnership between Telehouse (global data center leader) and TW Telecom (provider of Business Ethernet services.) This alliance helped TW Telecom to expand its coverage in New York by connecting its network to one of theTelehouse’s data center.
The other example of telecom companies’ alliances is the partnership between Orange and Akamai. Nowadays, the telecoms gladly enter strategic partnership with the players of other industries, for example, with banks or payment services providers.
In heavy industries strategic alliances help the participants to develop new products, reach new markets and decrease costs. The example is the alliance of American Superconductor Corporation which is a global power technologies giant and Hyundai Heavy Industries.
So, strategic alliances occur in various industries, between the companies operating in different industries and in different geographical markets. The major market players make dozens of alliances to strengthen their competitive advantages (General Electric entered 131 alliances so far, General Motors – 138, Matsushita Electric – 71, Ciba Specialty Chemicals – 68, Siemens – 200, according to Zamir and colleagues, 2014.)
The alliances are common for both traditional industries and fast-growing technological and e-business companies. But in traditional industries the reasons for entering the alliance are more linked to supply-chain (such as cost reduction, geographic expansion, developing new products, etc.) while in hi-tech companies the market players enter the alliances to gain advantages from expanding the range of sales channels, united marketing efforts, and synergy of brands.
Challenges and Risks of Strategic Alliances
Though strategic alliances are critical business partnerships helping the companies to respond the challenges and to manage the risks in a dynamically changing environment, entering the alliance can also bring a risk.
There’re several risk factors defining the potential failure or success of the alliance. These are the following: choosing the right partner (there’re risks of the goals and contribution of the partners to the alliance may be not equal); strategic orientation of the potential partner; trust, confidence and commitment in partnership; communication and collaboration between the parties; and also attitude to possible conflicts within the alliance.
Each factor matters. For example when partners match perfectly in alliance’s goals vision, strategy and resources, there can be insoluble contradiction in internal processes and core values within each organization which makes effective collaboration almost impossible.
Alliances’ Success and Failure: Key Drivers and Case Studies
On the initial stage of the alliance formation it’s vital to define a compatible, complement partner; at design stage the critical success determinant is establishing mutual ownership and management relations; on a managing stage the partners should concentrate on building collaboration, trust and appreciation (Zamir et al., 2014.)
Basic element of relationships between companies in a strategic alliance is confidence. Confidence is a guarantee of long-term joint cooperation aimed to archive strategic goals. Important rule for the functioning of strategic alliances is to allow free exchange of ideas, developments, and model between economic agents that lead to realization of principles of open innovations.
In general, for various industries success stories may vary depending on the form of cooperation and motivation. The primary motivation for high-tech companies to create strategic alliances is a necessity to fill the knowledge gap and gain access to intellectual property, for example, to IT licenses owned by the partner. One great example of such successful alliance is Texas Instruments, which produces calculators well-known among financial analysts. This company signed the license agreement with ARM to fill the knowledge gap to enter next generation wireless handset devices.
Successful strategic alliances may arise in the field of joint research and development activities. Companies appear to be the owners of different resources either technological of financial, and in case of alliance they can combine it and take advantage of the synergy. Today we can see the examples of R&D alliances in smartphone industry. Sony and Samsung are among the brightest combinations of technologies and financial resources.
The sourcing agreement and joint venture presented the other success stories. Outsourcing of some activities presents the major advantage for the companies and allow them to focus on core business. There are some great examples in the banking and finance industry, where core technological servicesand infrastructure supplied by large companies like IBM. Joint ventures arise mainly in the sector of project financing. Sometimes it is difficult for one partner to finance complex real estate project and it signs joint venture agreement to split costs and decrease risks level.
Another great example of successful alliance is cooperation between Starbucks and Kraft on exclusive distribution of Starbucks coffee. Both companies gained their advantages: Starbucks entered quickly over 25 thousand sails point in the U.S., while Kraft entered the coffee segment successfully.
It’s necessary to mention one more successful example of an alliance that boosted innovation potential of its participants: Airbus exchanged technology and skills with Deutsche Airbus in the alliance to develop A-38 airplane and also to make the biggest airline (Zamir et al., 2014.).
Strategic alliance failures are mostly the consequence of different motivation factors and sometimes contradictorily goals. Because partners in most cases are acting and making decisions independently, they are not effective for the alliance in general. Partners are dealing with antagonism, overcome cultural barriers inside the alliance rather than going ahead to benefit from the competitive advantages. Quick review of the sources shows that near half of alliances doesn’t meet the expectation of parties. Partners sometimes may become hostages of their own alliance, sacrificing their benefits.
There’re many examples of failed alliances. Cisco’s two unsuccessful alliances were with Ericsson and Motorola. Both alliances ended up without success for the same reason: the partieshad turned into competitors as a result of acquisitions.
Conclusion
The strategic alliance is a beneficial way for various B2B market players to eliminate resource, funding and knowledge gaps, to combine their innovation, R&D, marketing and distribution efforts and to benefit from economies of scale, decreasing costs, access to the new market segments, opportunities to develop new proposition to the market through the wider range of channels.
The strategic alliances are common in various industries. In today’s World, following the trends of globalization and digitalization, in the key of new technologies and business model arising, the strategic alliances modernize their forms of achieving synergy through partnership and patterns of collaboration.
Though the alliances are highly beneficial for all the participants, there are some risks imposed. The alliances fail because the companies undervalue the risks of choosing incompatible partner, to make the partnership unbalanced and poorly coordinated, to miss the differences in values and strategic orientation as well as in commitment; to miss the influence of interactions with other market players.
On every stage the partners can make such mistakes as lack of efforts and commitment; strategic weakness; rigidity; lack of understanding, high uncertainty level; blurred objectives of cooperation; unrealistic expectations; creating too complex models to manage; overdependence; fail in proper setting of processes, etc.
There’re many success and fail stories regarding alliances. As this research shows, when properly set up and managed, the alliances bring the competition and cooperation at completely new levels, and benefits overcome potential risks sufficiently.
References
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