Business Strategy
Strategic Alliances: A Critical Analysis of Successful Alliances toward Knowledge Creation and Management
Introduction
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 of strategic partnership and knowledge creation research.
The Meaning of Strategic Alliance
Since becoming a trend three decades ago, several pieces of evidence emerged proving the positive outcomes brought about by strategic alliances (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 who will be committed to building and honing their capabilities, as well as those geared toward achieving strategic and business objectives. Then their definition of strategic alliance appears the most appropriate so far in the field of resource-based framework, because it describes the same as a “cooperative strategy” that involves the process of combining both resources and capabilities to enrich their competitive advantage.
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 firms unite to share resources and complete their respective projects to attain a particular business objective.
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. As consumers demand more innovation from the firm, along with other pressures that are present in the industry, forming an alliance with a key partner to create strategic actions is a move that is necessary to take, as well as creating relationship with a strategic partner (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 other motivating factors on why companies enter into strategic alliances. Partnering for strategic actions help both firms to: a) set and attain new global standards; b) ride out the competition; c) overcome juridical barriers; d) share roles in mitigating risks; e) access wider market segments; f) access to geographic industry; g) access both firms’ technologies; h) achieve economies of scale; and many other reasons.
Some popular and important motivations for firms entering strategic alliances are informed by the benefits derived. Abdi, Lundahl and Patel (2001) as well as Janczak (2008), suggested how the benefits are classified, namely: transaction cost economics, resource dependencies, and business strategy. The transaction cost economics frameworks argues that companies seeking alternative business approach resort to forming strategic alliances in order to cut on production cost and transaction cost (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 which is based on Porter’s five-forces framework that describes how a firm can create a defensible position in the short-run, and his three-generic strategies geared for the long-run to ride out the competition. 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.
In an acquisition, however, a firm with the most holding of voting rights of another company is the majority owner of the same. 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. In such scenario, big players carefully maintain their standing in the market and ability to dictate market prices in order to not influence prices from going down. Hence, it is logical for such firm not to invest in new equipment or talent resources which can cause a decreased market prices.
Share demand for big companies will likely rise due to the attention that analysts and the media will give to the merger transaction (Pichette & Samek, 2001). Due to this, capital cost of the company will likely fall, which would lead to its own shares being repurchased for future acquisitions.
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 criticised since it further give competitors easier and low-cost way to access advanced technologies and new demographics and sectors (Hill, 1999). Both strategic partnership and merger and acquisition 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. Firms establishing corporate alliances in a knowledge-based economy must consider the ways how to create and manage resources (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. In the first one, both partners can share in each other’s technical know-how and skills. The secondary benefits, however, is that one can learn about each other’s management and business skills. These competencies can be harnessed and developed. Briefly then we can say that alliances are complex collaborations and partnership goals.
When used as a strategic knowledge creation tool, firms must tap into high-end managerial resources, using them wisely and competitively. Akio indicated that alliances only become most useful when firms: 1) acquire managerial resources of other companies and accumulating managerial resources that they lack; and, 2) use managerial resources of the firm and their alliance partners (Akio, 2005). Pressed by intense knowledge-based rivalries among firms, firms must focus on creating and getting the knowledge-based competencies, which must be prioritized 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 that its importance is observed when firms are seeking to achieve competitive market position and sustainability through creating superior value out of the partnership. In the realm of startups, strategic alliances contribute in enhancing the participating firms’ innovativeness potential, as well as high-tech startups’ performance (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, saying that partners get to benefit out of the multiple outcomes in terms of knowledge creation and learning the partners receive (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 they share in Asystec’s human resources team, marketing efforts and training to be provided through the same’s innovation labs in Belfast, Dublin, Limerick and Cork. Beyond getting the right connections that will pave the way for both companies to improve their growth value derived out from strategic alliances, it is still the outcomes of the partnerships these companies sought for. 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 from Berlin, Serbia, Seychelles, and India’s Jet and Darwin Airways (Etihad, 2014). 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. United Arab Emirate Company’s branding identity represents its commitment to excellence through the maintenance of 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, which will surely delight passengers demanding better flight connectivity.
Frequent flyer customers will benefit from the partnership because common confusion related to this matter are resolved. These customers will enjoy superb experience from the airliner, such as through the miles reward system to be offered by the partner carriers.
Economies of scale and operational cooperation will be achieved as companies benefit from shared resources and efficiencies of their sales teams in certain destinations, pilot and cabin crew training using the facilities of partner airliners.
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 be selling its own shares to Molson Coors, its partner, for £7.9billion. Other features of the deal include (BBC News, 2015):
Thirty percent of the world’s beer market will be created out of the partnership. Their combination will bring about more choices to consumers outside the U.S. after a first truly international beer company has been formed.
The merged company will allow them to enjoy sales from their respective brands. AB InBev is the maker of Stella Artois and Corona, and SABMiller is the parent firm of Grolsch and Peroni. 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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