Introduction
Strategic alliances involving equity investments by each of the partners tend to be more ambitious and often more enduring undertakings. Moreover, firms undertaking equity-investment alliances usually have a specific purpose or objective in mind for the partnership. The agreement may also cover other types of arrangements, notably the interchange of technology and the supplying or purchasing of each other’s products. Compared to establishing wholly owned enterprises, strategic alliances may involve more modest investments although significantly in excess of those for such other strategies as exporting or licensing ( 1993). Their other characteristics also fall in between these two alternatives, as does the degree of risk, the profit potential, and the degree of control over the resultant products and their manufacturing and sales. Some alliances consist of simple cross-border partnerships, in which the company participates in the foreign market with a local firm. Other alliances are true global ventures, in which multinational corporations cooperate with other global firms at several levels of the organization and in multiple locations, usually with the objective of expanding the operations of both firms on a worldwide level (1993). Strategic alliances are a global phenomenon because of its various effects to businesses. This paper intends to determine the reason why companies want to go into Strategic Alliances. The paper intends to identify how does strategic alliances benefit the company in surviving and competing with it competitors. Moreover the paper wants to determine some of the analytical measuring tools.
Discussion of topic
Business trends
Businesses are like mobiles in a windstorm being blown about by continuously changing gusts of wind. The mobiles’ weights have gone awry and the mobiles shake for a period of time before they can settle into their original positions. When a gust of wind rips off one of the weights, the mobile again shakes and then settles into a new position. In this turbulent windstorm all of the entities that have been shaken about have not yet settled into their new configurations. People are not sure what things will look like or if they will settle down in this lifetime (1994). What people do know is that new forces are at work. Employers and employees will have to be alert in order not to be swept away by the winds. There are different types of winds, crossing and mingling, making the mobiles dance and leaving employees looking for work. These winds constitute the business trends that dictate the new careerism. The increasing globalization of business has resulted in a windstorm of competition, causing companies to try to pare down and revitalize their bloated operations to be faster on their feet. The automatic-elevator, the modern telecommunication systems, and the automatic teller machine (ATM) are examples of how technology has replaced workers ( 1994).
Gone some time ago were the friendly elevator operators. Gone are the switchboard operators. And gone, too, are bankers’ hours and many of the helpful bank tellers. Another wind that has been picking up is the notion of customer service and high speed management. Another wind affecting businesses is often referred to as Total Quality Management (TQM). TQM is shorthand for a number of changes in ways leaders can manage in order to respond to customer needs and improve the quality of the service or product for which the business is responsible. These changes include everything from empowering lower level employees to become involved in problem solving, decision making, and quality control to the introduction of advanced statistical process control strategies that can measure output, waste, rejects, and cycle time (1999).Another wind upsetting the mobiles of business is the force brought about by experience-based learning. It is not an ill wind. It is the kind of fresh breeze any industry welcomes, but it does disrupt the status quo. To keep pace with the changes, it is helpful to have a perspective on the whole range of industries and occupations. Businesses also have available to them the opportunity to learn new ideas and perspectives, as international communication increases and free trade brings increased interchange among national groups. New industries and occupations are blown in by the winds, and industries and occupations with which people have become familiar are blown aside. Recently the terms sunset and sunrise have been used to remind us that while some industries are downsizing or vanishing altogether, others are starting up or growing (1999). There are various business trends ranging from economic in nature, technological in nature or personnel related. To help a company survive the changing business trends sometimes they engage in strategic alliances. The strategic alliances reduce the burden of engaging in a business trend by splitting the cost and minimizing its negative effects.
Key impacts on the business and strategic alliances
The emphasis on financial considerations in the business world is the cause of important omissions. The assessment of strategic decisions has sometimes suffered from this shortcoming, when certain financial criteria imposed subjectively have forced decisions to be studied from a purely financial viewpoint ( 2004). The goal of maximizing corporate wealth also differs from the familiar notion of maximizing profit ( 2004). The paramount goal for most businesses is return. However, within the business, managers are focused on achievement in the two constituent areas of margin and utilization, with specific targets relevant to their area of responsibility. The highly competitive nature of many markets and the likely future prospect of continued economic turbulence as national and global economic fortunes vary, requires that business managers continue to look for opportunities to improve performance. This will primarily be achieved by improving effectiveness in the areas of winning/retaining customers, developing organizational competence and financial control (1998).
Business research has identified key factors for business stability. The key factors involve the management style, concentration on core business, control of costs and resources, understanding product and service profitability, control of working capital, maintenance of realistic stock values, and cash forecasting. The management approach must be relevant to the commercial requirements of the marketplace and the situation of the business. A different approach will be required dependant on the boom or recessionary nature of the market sector and the general economy (1998). There should be no interest in diversification unless this is clearly linked to the business and yields direct cost or competitive advantage. Businesses need to consistently pursue cost reduction/efficiency initiatives and should refrain from the delay of taking action. Moreover a business needs to have a clear and accurate understanding of the actual profit generated by different products/services. To do that a business must have appropriate systems to identify actual costs. There should be rigorous management of stocks, work in progress and debtors to ensure the minimum of finance tied up. There should be valuation of all stocks at the true value. Lastly a business needs to have thorough cash forecasting and good management of cash flow (1998). Aside from returns or profits, businesses there are other factors that create a huge impact to business. This includes the inventory cost, competitions and the problems in distribution of products. The inventory cost or expenses in keeping supplies or materials impact a business greatly because too much expense doesn’t help in the business growth and achievement of goals. High level competition can create huge impact to businesses because the level of competition may force a business to use too many resources. The problems in distribution of products can create huge impact to the business because lower distribution of products may mean lower income, loss of clients, and a tarnished image. Through strategic alliances, the effects of key impacts to businesses will be lessened. Through strategic alliances, initial problems of the key impacts will be given solution.
Why should organizations go into strategic alliances?
There are many motivating factors behind the formation of strategic alliances and other cooperative strategies. Organizations go into joint ventures because of the need for resources, notably, money, skill and manpower. There are three basic motivations for the formation of strategic alliance. One of which is it represents the lowest transaction cost alternative; strategic alliances enables an improved strategic position to be achieved, and it gives an opportunity for organizational learning. These motives may be alternatives, although in some cases all three motivations may apply. A particular motive for adopting a cooperative strategy and entering into alliances is provided by the challenge of entering new international markets ( 1998). The choice is one between exporting, entry via cooperative contracting such as licensing, franchising, counter-trade, and contract manufacture, and investment in the target market through setting up joint ventures with local partners (1998).
Although the formation of alliances and joint ventures is presented as typically the result of unitary decisions in the presence of sufficient information to make them, it is more usually the product of a coalition of views in both partners pointing to the possible advantages of such an alliance, when the actual benefits and costs cannot be known until the alliance has been in operation some considerable time. They are, therefore, as much political as economic decisions depending heavily on the internal corporate political power of their champions, and placed at risk if those champions should lose power in their home organizations strategic alliances are generally formed because each partner feels inadequate in a particular area of its activities and wants to learn from the other partner. Clearly this involves risk if total integrity is absent, as one partner may take and not give fully in return. From an economic perspective, the main argument for alliances is that they are usually formed as a result of an external stimulus or change in environmental conditions to which companies respond with a feeling of internal corporate need that they feel is best met by seeking a relationship with another corporation (2003). A further factor advancing alliance formation as opposed to the alternatives of merger/acquisition or organic development is the need to limit risk. The spreading of financial risk is frequently cited as a fundamental motivation for the formation of strategic alliances. Another motive behind the conclusion of strategic alliances is the need for speed in reaching the market. Alliances are the fastest means of achieving market presence to meet an opportunity. Finally the motivation to cooperate remains high even when the alliance has exposed the partners to the temptation to steal each others’ secret (2003). Strategic alliances are needed by firms because of the changing business scene. Firms need to engage in strategic alliances because of the need for resources, the need for lower transaction cost, a chance to improve its strategic position, a chance for organizational learning, a chance of entering new international markets, the need to prepare for a change in environmental conditions, the need to limit risk, the need for faster market entry, and the chance to gain business secrets.
Implementing strategic alliances
There are many types of alliances, but commitment is what makes alliances strategic. Companies enter a number of more transactional relationships through licensing, joint programs, and sourcing arrangements. Whereas all those are important, they are not considered strategic alliances. Alliances are about growth. Alliances are about capabilities. Alliances are about consolidation. Combining a business’ technology with someone else’s distribution systems gives big advantages to both companies without either one of the business losing their independence. If businesses cooperate well, neither one of them has to deal with the other parts of each other’s business that they don’t understand or need (1998). Capabilities are widely recognized as the key competitive differentiators among corporations. But few companies are the worlds best at more than a handful of capabilities, and rarely on a global scale. One of the most important challenges for growth is to be able to deploy world-class capabilities wherever one conducts their business. So the best companies are searching to obtain capabilities from whatever means available whether it is acquisition, internal development, hiring, and various forms of partnerships and alliances. Alliances are redefining corporate boundaries (1998).
The nature of strategic alliances has shifted from issues peripheral to the core business of the partners to issues squarely in the crosshairs of the firms’ strategy. In a brief ten years; strategic alliances have leaped onto the global business stage as one of the most important vehicles for growth and competitiveness. Alliances have become larger and closer to the strategic core of companies and have become a larger and larger part of the corporate portfolio. The major drawbacks of strategic alliances such as difficulty in negotiating and managing are receiving considerable top-level attention as alliances become an ever-greater part of the corporate portfolio. The United States trails Europe and Asia in alliance skills ( 2002). When comparing their own practices with those of companies that achieved superior alliance results, the self assessment ratings of European and Asian companies were higher than those of U.S. companies. European and Asian companies indicated that their U.S. counterparts were behind in the critical skills of integration planning and implementation. U.S. companies are too quick to think the job is completed when the negotiations are finalized. As the Europeans and Asians know, that is just the beginning. Companies’ best at establishing alliances use a process consisting of four stages: identification, evaluation, negotiation, and implementation (2002). Implementing the strategic alliances starts after the agreement has been reached between two companies. Part of the implementation stage is the gradual integration of some aspects of both businesses. In gradual integration the goal is to assist members of the organizations in adjusting to the alliance. One problem with the implementation of strategic alliances is the resistance to it by some personnel. As long as the firm has plan of action towards the resistance, the implementation stage should proceed smoothly. To manage the implementation of strategic alliances, analytical measuring tools such as KPI should be used by both organizations.
KPI analytical measuring tool
The concept of key performance indicators (KPIs) is a way of formalizing and describing critical success factors (CSF). At the corporate level, a periodic survey of customers would be a key performance indicator, since corporate managers are responsible for the overall corporation effort. Measurable activities that contribute to improvements might be improved product quality, improved customer service and support, improved delivery times, and more customer-suggested product improvements. Each of these activities suggests its own set of key performance indicators (1999). The most important part of this process is that the KPIs are measures that the people responsible for them can actually control and for which they can be held accountable. And because of this combination of responsibility, control, and accountability, these KPIs, including financial ratios, are certain to be relevant and important to the managers assigned to them. The success that the typical company has in attaining its general objectives and measurable short- to long-range strategic planning goals depends on the degree of integration of operations that are critical to its success. A company’s CSF forms the basis for measurement using KPIs and financial ratios (1999).
For a typical company, there are a number of KPIs that are useful in determining viability ( 1997). Typical ones include the ability or inability to make changes to a company’s strategies, increase or decrease in company sales, increase or decrease in market share, increase or decrease in customers’ satisfaction, research on continuing the status quo or bringing new products to market, acceptance or non acceptance of new products and services by customers, increase or decrease in quality of products and services, improved or unacceptable delivery times, increase or decrease in sales and operating expenses and increase or decrease in gross profit and cash flow for a company’s products and services In a similar manner, a number of KPIs can be developed not only for a company’s other functional areas but also for the company as a whole. These KPIs tend to focus on financial ratios. Overall, a company has control over KPIs. The company is able to manage the performance of these areas and make changes when necessary (Sayers 1997). KPI or Key Performance Indicators assist the organization in defining and measuring its progress via comparing the company’s achievements with its organizational goals. KPI will see if the implementation of the strategic alliance is still intact with the organization’s goals. KPIs make use of various factors to assess the current state of a business and then prescribe certain courses of action. KPIs are different and depend on the nature of a certain organization and that organization’s strategy. KPI helps an organization to measure its overall progress compared to organizational goals. It focuses on knowledge-based processes that are difficult to quantify. Critics of KPI describe it as too expensive and difficult. A serious issue in KPI is that once it is created, it becomes difficult to change it yearly because yearly comparisons can be easily lost. Moreover some believe that KPI’s are extremely difficult for an organization to use specially in terms of getting comparisons with other similar organizations.
Case Study
In 2000 Ericsson and Sony established a London-based joint venture, Sony Ericsson, to exploit the opportunities of third generation mobile systems, whose implementation had begun in Japan (2005). Sony Ericsson makes use of its competences to achieve continuous growth and development. The strategic alliance of Sony with Ericsson proved beneficial for both companies; their alliance gained them a unique identity in the cell phone industry. The alliance of Ericsson with Sony helped both companies survive a tumultuous business existence and helped them achieve better profits. Sony Ericsson’s resources come from reliable suppliers and manufacturers. The materials used in creating the products should be recyclable or harmless to the environment. Sony Ericsson’s competences include its highly advanced product, competitive products and concept of sustainability.
Conclusion
The alliance of Ericsson with Sony proved that strategic alliances help companies satisfy their need for resources and their need for lower transaction cost. The alliance of Ericsson and Sony gave both companies a chance to improve its strategic position and gain learning as an organization. Moreover the strategic alliance of Ericsson and Sony paved the way for them to have a chance at entering new international markets. The alliance of Ericsson and Sony proved further that business success can be acquired through engaging in Strategic alliances.
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