Strategic Alliances: Advantages, Risks, and Partner Selection

Advantages of Strategic Alliances

Technology Exchange

This is a major objective for many strategic alliances. Many breakthroughs and major technological innovations are based on interdisciplinary and/or inter-industrial advances. As a result, it is increasingly difficult for a single firm to possess the necessary resources or capabilities to conduct its own effective R&D efforts. This is further perpetuated by shorter product life cycles and the need for companies to stay competitive through innovation. Some industries that have become centers for extensive cooperative agreements are:

• Telecommunications
• Electronics
• Pharmaceuticals
• Information Technology
• Specialty Chemicals

Global Competition

There is a growing perception that global battles between corporations will be fought between teams of players aligned in strategic partnerships. Strategic alliances will become key tools for companies that want to remain competitive in this globalized environment, particularly in industries with dominant leaders. For example, smaller cell phone manufacturers need to ally to remain competitive.

Industry Convergence

As industries converge and the traditional lines between different industrial sectors blur, strategic alliances are sometimes the only way to develop the complex skills necessary in the required time frame. Alliances become a way of shaping competition by:

• Decreasing competitive intensity
• Excluding potential entrants
• Isolating players
• Building complex value chains that can act as barriers

Economies of Scale and Reduction of Risk

Pooling resources can contribute greatly to economies of scale, and smaller companies, especially, can benefit greatly from strategic alliances in terms of cost reduction because of increased economies of scale. In terms of risk reduction, in strategic alliances, no one firm bears the full risk and cost of a joint activity. This is extremely advantageous to businesses involved in high-risk/high-cost activities such as R&D. This is also advantageous to smaller organizations, which are more affected by risky activities.

Alliance as an Alternative to Merger

Some industry sectors have constraints on cross-border mergers and acquisitions. Strategic alliances prove to be an excellent alternative to bypass these constraints. Alliances often lead to full-scale integration if restrictions are lifted by one or both countries.

International Competitiveness and Company Internationalization

Strategic Alliances

Risks of Competitive Collaboration

Some strategic alliances involve firms that are in fierce competition outside the specific scope of the alliance. This creates the risk that one or both partners will try to use the alliance to create an advantage over the other. The benefits of this alliance may cause an imbalance between the parties. Several factors may cause this asymmetry:

• The partnership may be forged to exchange resources and capabilities such as technology. This may cause one partner to obtain the desired technology and abandon the other partner, effectively appropriating all the benefits of the alliance.
• Using investment initiative to erode the other partner's competitive position. This is a situation where one partner makes and keeps control of critical resources. This creates the threat that the stronger partner may strip the other of the necessary infrastructure.
• Strengths gained by learning from one company can be used against the other. As companies learn from each other, usually by task sharing, their capabilities become strengthened. Sometimes this strength exceeds the scope of the venture, and a company can use it to gain a competitive advantage against the company they may be working with.
• Firms may use alliances to acquire their partner. One firm may target a firm and ally with them to use the knowledge gained and trust built in the alliance to take over the other.

Disadvantages

• Difficult to find a good partner
• Risk of unequal partnership
• Loss of control
• Relationship management across borders

Choosing a Partner for International Strategic Alliances

• Strategic Compatibility: The partners need to have the same general goal and understanding in forming a joint venture. Differences in strategy produce more conflicts of interest later in the partnership.
• Complementary Skills and Resources: Another important criterion is that the partners need to contribute more than just money to the venture. Each partner must contribute some skills and resources that complement the other.
• Relative Company Size: Different sizes of companies may cause the domination of one firm or an unequal agreement, which is not favorable for the long-term.
• Financial Capability: The partners must be able to generate sufficient financial resources to maintain the venture's efforts, which is also important for a long-term partnership.

Other factors like compatibility between operating policies, trust and commitment, compatible management styles, mutual dependency, communication barriers, and avoiding anchor partners are also important for partner selection but less critical than the first four.