Business Strategy
Strategic Alliances: A Critical Analysis of Successful Alliances toward Knowledge Creation and Management
Introduction
In today’s business landscape, creating sustainable value for customers and shareholders requires the initiation of an alliance strategy. Strategic alliances are alternative modes of global business operations that small to large enterprises are considering in order to achieve stronger and more effective market presence. Moreover, alliances are a fact of life for business, which needs to align present and future strategy to current radical technological and structural changes, globalization, and increased competitive pressures (Janczak, 2008). Meanwhile, the issues of trust, partner selection, and the benefits of strategic alliances, such as gaining access to and creating knowledge in the process are among the dominant themes explored in many literatures.
Going beyond the current trends in the business literature on strategic alliances, this paper explores ways strategic alliances are helping organizational firms gain competitive edge, more particularly through opening the access to markets and eventually in the creation of knowledge. This is followed by analysis of issues surrounding strategic alliances, current business examples and challenges faced by organizations that form alliances. Finally, we conclude with a brief take on the future direction of strategic alliance and knowledge creation.
The Meaning of Strategic Alliance
There are so many international business literature that already acknowledged a number of positive outcomes to any organization engaged in strategic alliances since it became a trend three decades ago (Todeva & Knoke, 2006). Although supporting organizational competitiveness is its most important goal (Zamir, Sahar, & Zafar, 2014), there is a lack of better and all-encompassing definition of the term.
In their promising review of literature about strategic alliance, Najmaei and Sadeghinejad (2009) explore the different contentions about the definition of the term. They said that while some suggest defining strategic alliance can be formulated based on the strategic actions of cooperation and collaboration, they viewed that defining ‘strategic alliance’ requires tackling other issues relevant to organizational motives, approaches and outcome.
According to Najmaei and Sadeghinejad (2009), these crucial issues involve finding a good strategic partner, willingness of participating firms to share their resources in order to build and hone their capabilities geared toward achieving strategic and business objectives. Then subsequently, the definition provided by Najmaei and Sadeghinejad that strategic alliance as “a cooperative strategy in which firms combine some of their resources and capabilities in order to create a competitive advantage” (Najmaei & Sadeghinejad, 2009, p. 298) is the most appropriate to refer to this when using the lens of resource-based view of the organization.
In almost similar fashion, Akio (2004), whose work on strategic alliances explores why firms actively decide to push for this strategy over mergers and acquisitions and other external approaches, views that corporate alliances must be seen as a form of “alliances” with a content that is “strategic”. He says, clarifying what strategic alliances are would require a clear grasp of the components of corporate strategy and be able to locate alliances within it. He argues that merely basing the explanations for strategic alliances to traditional notions why such cooperative strategy is needed – such as sharing risk, overcoming obstacles to market participation, etc. – is incomplete and need a further threshing out (Akio, 2004).
These issues about strategic alliances cannot be dismissed as nonetheless remote. According to Koleva, Thrane and Mouritsen (2002), this is because even some scholars view the strategic approach to be complex, even describing it as “complex organizational forms that are usually viewed as incomplete contracts” (Koleva, Thrane & Mouritsen, 2002, p. 2). Through strategic alliances, there is the transfer of know-how between organizations, but the same is fraught with ambiguity.
Combining all definitions already ascribed to strategic alliances by different international business scholars, we should arrive at a definition of strategic alliance as a destination or goal reached when two companies working on same horizontal level in the market agreed to jointly share resources to carry out a desired project for which both parties have some common interest (Zamir, Sahar & Zafar, 2014).
Reasons Companies Enter Strategic Alliances
As competition in global business increases day by day, independent companies are entering strategic alliances so as to improve their productivity and market share. Spurred by the growing demand for innovative products and services, as well as other market pressures, strategic alliances are on the rise to support the competitiveness of the activities concerned through forming of innovative and interesting relationships between organizations (Gachengo & Kyalo, 2015). However, these are not the main reasons why companies enter into corporate alliances. Other motivating factors include a growing need to enter new international markets to overcome various barriers (Zamir, Sahar, & Zafar, 2014). Some firms forge strategic alliances as it helps increase distribution networks (Sharma, 2001); diminishes internal and external uncertainties in the market; achieves economies of scale and reaps vertical integration benefits, and; gains new skills, technology and knowledge (Sharma, 2001; Comi & Eppler, 2009; Haworth, Owen & Yawson, 2012), among many others.
Similarly, the team of Cojohari and Bucuresti (2013) tackle the other motivating factors why companies enter into strategic alliances, which include: a) setting new global standards; b) confronting competition; c) overcoming protectionist barriers; d) dividing risks; e) access to market segments; f) accessinh to geographic market; g) accessing technology; h) economies of scale; i) uniting forces, and; j) bridging a gap, among others.
Considering that the motivations why entering strategic alliances are becoming important and popular, Abdi, Lundahl and Patel (2001) as well as Janczak (2008), suggest respectively that the extensive benefits are classifiable into three theories. These are: transaction cost economics, resource dependence theory, and business strategy model. Developed by Williamson (1975), the transaction cost economics model posits that companies band together to minimize the sum of production and transaction costs that compel companies to seek an alternative business approach (Heide & John, 1990).
When viewed through the resource dependence model by Pfeffer and Salancik (1978), strategic alliance helps stabilize the flow of resources of the participating firms to share in the valuable resources that each of them lack. In effect, risks are reduced.
Lastly, the business strategy model is based on Porter’s five forces framework (the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products, and rivalry among firms), and his three generic strategies (cost leadership, product differentiation, and focus). Under Porter’s two popular frameworks, the use of corporate alliances is helpful defense mechanism approaches to topple strategic uncertainty.
Strategic Alliance vs. Mergers and Acquisition
According to Abdi, Lundahl and Patel (2001), there is a merger when two willing firms join together in hopes of forming a new business. The objective is to gain out of the synergism between the two firms sharing common tasks that can lead to reduced unit costs as the level of output is increased. In this case, resources are shared by the two entities to achieve their common objective.
An acquisition, however, occurs when one acquirer or bidder firm secures control of another through voting shares bought. The acquiring company, following the deal, secures itself the rights to implement the strategies it intended to apply to the newly-acquired firm (Abdi, Lundahl & Patel, 2001). The motivations and justifications firms use to pursue mergers and acquisitions can be summed up into four (4) fundamental reasons. Abdi, Lundahl and Patel (2001) identify the four as follows:
Firms yield value out of the synergism formed between the concerned companies. Once companies combine, for instance, their sales forces, the benefits derived of such systems become remarkable and significant in both short and long-term period.
Bigger companies can gain majority or greater control over their company’s destiny. Their resources allow them to invest in new ventures. Also, since bigger firms have higher equity value, they also eventually have an edge that is greater than smaller enterprises.
Bigger companies can control the number of players in the market as well as competition. The additional advantage such move presents is the unlikeliness for the few big players to invest in new capacity that would bring the prices down in their sector.
Share demand for big companies will likely rise due to the attention that analysts and the media will give to the merger transaction. Due to this, capital cost of the company will likely fall, which would allow it to repurchase its own shares in paying for future acquisitions (Pichette & Samek, 2001).
Finally, mergers & acquisitions are said to only deliver minimal cost reductions as a result of the lack of further rationalization from both companies. There is also often a lack of fully realizing the economies of scale due to the limited knowledge about the new business entity by its managers (Harris, 1999). On the other hand, strategic alliance is criticized for giving their market competitors low-cost route access to new technologies and new markets (Hill, 1999). Both strategic alliances and mergers and acquisitions are risky unless the independent companies entering any of the two external methods of development become careful.
Strategic Alliance as Driver of Organizational Knowledge Creation
Apart from other motivations that compel businesses to enter into strategic alliances, scholars also particularly look into knowledge-based issues. In a knowledge-based economy, learning transferring intangibles, and creating knowledge-based resources and capabilities matter in forming corporate alliances (Najmaei & Sadeghinejad, 2009; Grant & Baden-Fuller, 2004). Hence, the wide attention it received lately is logical only for the fact that we are now living in a knowledge economy. According to Bhatti (2011), the importance of knowledge sharing cannot be undermined. It is essential in gaining access to other firms’ capabilities, as well as supporting the exploitation and utilization of the existing capabilities within firms (Grant & Badden-Fuller, 2004; Nakamura, Shaver, & Yeung, 1996).
According to Connell and Voola (2007), two forms of knowledge sharing develop during partnership of firms who jointly enter into this arrangement. The first one is the opportunity for both partners to obtain from each other the technical knowledge and know-how. The second known benefit in view of knowledge sharing is that both parties can learn from each other’s management and business skills, competencies that they formerly lack and can develop during the process. Basing from these knowledge sharing benefits alone, it can be argued that strategic alliances are not ordinary collaborations and partnerships.
As alliances function as a strategic knowledge creation tool, it is thus imperative that superior managerial resources are obtained and utilized competitively and wisely. Akio’s conceptualization of where alliances are most useful, more particularly, when: 1) acquiring managerial resources of other companies and accumulating managerial resources that they lack; and, 2) applying the managerial resources of the firm and those of alliance partners (Akio, 2005). In light of the intensifying knowledge-based rivalries among firms, focusing on the creation and accumulation of knowledge-based competencies must be highly prioritized in order to survive in the long haul (Najmaei & Sadeghinejad, 2009, p. 300).
Strategic alliances are highly-reviewed in literature for the many successful opportunities brought to light by knowledge-creation and knowledge transfer. Other literatures have underscored the importance of the strategy when creating superior value as a pathway to achieve sustainable competitive advantage for the partners concerned. In the realm of startups, strategic alliances contribute in enhancing the participating firms’ innovativeness potential, as well as the performance of technology-driven startups (Baum et al., 2000; Lee, 2007; Stuart et al., 1999; Van Gils & Zwart, 2004). Compared to their firms without partners, startups with partners perform better than their rival startups when offering their shares to the public through the stock market (Stuart et al., 1999).
Meanwhile, there are the new breed of scholars who deem the traditional assumption that collaboration succeed because of complementary of resources is limited (Beamish, 1988). Leading the charge, Nielsen suggested a more dynamic approach as to why firms should band together, for the sake of synergy (Nielsen 2000). He said that it is imperative that different types of alliances are distinguished because doing so can “lead to multiple outcomes in terms of learning and knowledge creation (synergy) for the partners” (Nielsen, 2000, p.17). Nielsen believes that through his Synergistic Knowledge Networks model, new knowledge related capabilities can be created. He added that synergies of knowledge would lead to better performances as an outcome of strategic alliance.
Successful Strategic Alliances and Merger & Acquisition to Achieve Success
1. Cisco and Asystec Big Data Joint Venture – Cisco will $238,000 into the Irish data management company Asystec for the joint venture (Newenham, 2015). Under the alliance, Cisco will provide big data services while Asystec will contribute human resources, marketing and training at the innovation labs in Belfast, Dublin, Limerick and Cork. The main reason the companies entered into a joint venture was neither about getting connected nor the number of connections that create the value. The main objective of both firms relates to the outcomes of the partnership. The strategic alliance is one of the components of the Cisco partnering strategy which aims not only broaden its own solutions. The company is constantly looking at increasing its access to the big data resources of Asystec in Ireland in order to achieve a higher level of customer value.
For its customers, the alliance will deliver the following benefits:
Asystec will use the technology within the two firms first so that they fully understand how certain technology works and why it is important. Then it will leverage the insights and knowledge it obtained in enabling the terms of the big data solutions, business processes and how to measure the results.
Asystec and Cisco will reduce customer risk in the realms of technology, deployment and support.
The strategic group will combine solutions from both providers. Asystec will deliver the required expertise in data analytics and Cisco will provide the big data solutions infrastructure.
2. Etihad Airways Partners Initiative – The commercial partnership inked on October, 2014 was between Etihad Airways and five air carriers, namely Air Berlin, Air Serbia, Air Seychelles, India’s Jet Airways and Darwin Airways. The main strategic objective was to create synergies and efficiencies for the concerned participating carriers, as well as to enhance network choice, service and frequent flyer benefits (Etihad, 2014).
Customers of the group will benefit from the following:
Shared brand recognition will be earned by the partner airliners since the United Arab Emirate Company’s logo is a seal of excellence and global cooperation.
The group will benefit from the shared standards in the air and the ground, as well as benefits beyond pure commercial cooperation. It is expected that there will be enhanced network alignment to maximize flight connectivity for passengers.
Frequent flyer customers will benefit from the partnership as the complexities and confusion that exist within the global alliances will be eased off. Consistent experience and framework for earning and using their miles will be achieved.
Economies of scale and operational cooperation will be achieved as companies benefit from shared sales teams in certain destinations, joint procurement of services and supplies, and shared pilot and cabin crew training at the Etihad Airways facilities in Abu Dhabi.
3. Netto Group in UK – Netto, a Dannish discount grocery retailer, in the UK will form a joint venture group with Sainsbury in a deal that is worth £30 million. The aim is to allow the joint venture company to compete in the UK discount sector’s £20 billion market in five years. Under the agreement, Netto will combine its infrastructure and low-cost operations expertise to the UK company’s grocery, product sourcing and property expertise (J Sainsbury, 2014).
For its customers, the joint venture will bring:
Discount innovation will improve the discounter experience, operating model and systems of the group. Customers, in effect, will have a more convenient shopping experience and great fresh food offer.
Logistics and property excellence of Sainsbury will be useful in delivering fast, efficient and quality discount grocers experience.
4. AB InBev and SABMiller Mega-Merger – Through a merger deal valued at £71 billion between Anheuser-Busch InBev and its rival beer maker SABMiller, the newly-created firm will immediately be comprised of the world’s two largest beer manufacturers. According to BBC News, Budweiser maker AB InBev will acquire SABMiller’s 58% stake in its US joint venture MillersCoors for £44 per share. In addition, MillersCoors will sell its stake to its main business partner Molson Coors, for £7.9billion. Other features of the deal include (BBC News, 2015):
The newly-created firm will produce about 30% of the world’s beer. Their combination will create the first truly global beer company with more choices to beer market outside the U.S.
The merged company will allow them to enjoy sales from their respective brands. AB InBev makes Stella Artois and Corona while SABMiller produces Peroni and Grolsch. However due to stringent competition laws in the European region, the combined company is required to sell its Peroni ad Grolsch, and London’s Meantime brewery to avoid litigation hassles.
The deal will allow both firms to share their resources, such as workforce, which can yield up to $47 billion savings in their operating cost.
The new deal will allow AB InBev to penetrate the African beer sector through its 40 beer brands there and appeal to the growing the sough-after African middle class demographics. AB InBev is largely focused on the Americans and European markets.
Conclusion
The success of knowledge creation through strategic alliances is dependent on how concerned parties commit, oblige to comply with the agreement, and willingly contribute or share their resources and competencies to the initiative. In addition, effective joint activities are also vehicle for knowledge transfer. However, there are still more work required to explore how corporate alliances can better improve the successful transfer of knowledge and yielding of knowledge when such strategic innovation is adopted.
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