international strategic alliances 1
TRANSCRIPT
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INTERNATIONAL STRATEGIC ALLIANCES
Strategic alliances among international businessesare common. Globalisation of business is the order
of the day. But internationalizsation can be a very
expensive process. A firm may discover that it is
short on some of the internal resources necessary
to effectively compete against its rivals
internationality. Therefore, a firm may seek partners
to share these costs. A firm may develop a newtechnology but lack a distribution network or
production facilities in all the national markets it
seeks to serve.
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NATURE OF STRATEGIC ALLIANCES
Strategic alliances are cooperative argeements betweenfirms.
Alliances and/or cooperative agreements can involve
joint research efforts, technology sharing, joint use of
production facilities, marketing one anothers products,
or joining forces to manufacture components or
assemble finished products.
Alliances are formed among actual or potentialcompetitors. ICICI and HLL, for example, have launched
a partnershipproject for contract farming in wheat and
basmati rice in Haryana and Madhya Pradesh.
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A joint venture is a special type of strategic
alliance in which two or more firms join together
to create a new business entity, which is legally
separate and distinct from its parents. Joint
ventures are normally established as stand-alone
entities and owned by the founding parents in
agreed proportions. Many are owned equally,
popularly called 50-50 partnership ventures,
although unequal ownership is not uncommon.
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BENEFITS OF ALLIANCES
Collaborative agreements facilitate entry into foreign
markets.
Yet another rationale for forming strategic alliances is risksharing.
Alliances are formed among firms of developed anddeveloping countries for mutual motivations. The partner
from the developing country seeks the technology, know-
how, or capital from the developed country. The partner from
the developed country seeks an opportunity to benefit from
comparative advantages of the lesser-developed country.
These advantages often include low cost labour and
untapped reserves of raw materials.
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This strategic alliance can provide or attain
costs reductions;
access to complementary skills;
cooperation in supplying a range of products intoopportunity markets that would not be available to asmall volume supplier;
joint contributions to marketing and promotion costsfor entry into new markets;
access to capital and grants;
access to required plant and equipment;
increased bargaining power;
cooperation in undertaking training;
improved performance and efficiency and thus thechances of survival.
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PITFALLS OF STRATEGICALLIANCES
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INCOMPATIBILITY OF PARTNERS
Incompatibility between the partners of a
strategic alliance is a primary cause of
failure in a cooperative agreement. Often
incompatibility can lead to outright conflict.
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ACCESS TO INFORMATION
Access to information is another drawback
of strategic alliance. For collaboration to
work effectively, one partner (or both) mayhave to provide the other with information it
would prefer to keep secret. It is often
difficult to identify information needs ahead
of time.
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DISTRIBUTION OF EARNINGS
This is the most serious problem between alliance
partners. As the partners share risks and cost,
they also share profits. This amounts to over-
simplification of the issue. There are other
financial considerations that can cause conflict.
For example, the partners must also agree on the
proportion of the joint earnings that will be
distributed to themselves, as opposed to being
reinvested in the business.
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POTENTIAL LOSS OF AUTONOMY
Loss of autonomy is another potential drawbackof a strategic alliance. It was for this reason that
the late Dhirubhai Ambani never countenanced the
idea of an alliance. Like Rahul Bajaj, Ambani didnot take partners because he could never play
second fiddle. Just as firms share risk and profits,
they also share control, thereby limiting what each
can do. Most attempts to introduce new products
or services change the way the alliance does
business.
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CHANGING CIRCUMSTANCES
Changing circumstances may also affect the
viability of a strategic alliance. The economic
conditions that motivated the cooperativearrangement may no longer exist, or
technological advances may render the
alliance obsolete.
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SCOPE OF STRATEGIC ALLIANCES
The scope of cooperation between firms variessignificantly as shown in Fig. An alliance may be
comprehensive that is one in which the partners
participate in all facets of conducting business.On the other hand, an alliance may have a more
narrowly defined focus concentrating on any
elements of the business such as R&D. These
latter alliances are called functional alliances. The
degree of collaboration will depend on the basic
goal of each partner.
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SCOPE OF STRATEGIC ALLIANCES
Partner
1
Partner
2
R & D FIN MKTG. PROD. MKTG.PROD. FIN R & D
Production
Strategic Alliance
Marketing
Strategic Alliance
Finance
Strategic Alliance
R & D
Strategic Alliance
Comprehensive
Strategic Alliance
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COMPREHENSIVE ALLIANCES
These include collaborative agreements that cover allstages of manufacture, such as R&D, design,
production, marketing and distribution. These
alliances mainly assume the form of joint venture. A
joint venture is an ideal form of organisation to handlea comprehensive alliance. As an independent entity,
the joint venture can handle all operations without
giving scope for incompatible partners to interfere in
the day-today activities. Maruti Suzuki, automobilemajor in India, is the best example to be cited in this
context.
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FUNCTIONAL ALLIANCES
These are alliances which have narrow scope
and cover production, marketing, finance, orR&D activities. These do not take the form of
joint ventures.
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PRODUCTION ALLIANCE
A production alliance is a functional alliance in
which two or more firms join, each
manufacturing products or providing services
in a shared or common facility. Production
alliances may use a facility already owned by
one partner, or may involve the construction ofa new facility altogether.
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MARKETING ALLIANCE
A marketing alliance is a functional alliance in whichtwo or more firms share marketing services or
expertise. In most cases this involves one partner
introducing its products or services into a market inwhich the other partner already has a presence. The
established firm helps the newcomer by promoting,
advertising and / or distributing its products or
services. The established firm may negotiate a fixed
price for its assistance or may share in the
newcomers profits.
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FINANCIAL ALLIANCE
A financial alliance is a collaborative
arrangement of firms that wish to reduce the
financial risks associated with a project.
Partners may equally share finance or one
partner may contribute the bulk of the finance
while the other partner(s) provides special
expertise of make other kinds of contributions.
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R&D ALLIANCE
In R&D alliance the partners agree to undertake
joint research to develop new products or
services. These alliances are not usuallyformed as joint ventures.
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MAKING ALLIANCE WORK
Many international alliances are ending up in
failure. For example, one study of 49 alliances
found that two-third run into serious financial and
managerial troubles within two years of their
formation, and that although many of these
problems are solved, 33 per cent are ultimately
rated as failures by the parties involved. The
partners in an alliance must address six issues :
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The partners in an alliance must address six
issues :
Assessment of fit with strategy
Partner selection
Alliance structure
Negotiating process
Joint management consideration
Managementof expectations