What motivates a firm to seek an alliance?
Alliances are a strategic tool that, illustrating it on a chart that matches formalization with the degree of commitment, is located between spot sales and vertical integration (Grant, 2002). There are however other, less popular options businesses can take such as implicit contracts. Alliances cover the majority of the firm relationships that lie between the two poles such as informal supplier and customer relationships, vertical partnerships, joint ventures, technology- sharing arrangements, joint research and development, shared manufacturing and joint marketing and distribution arrangements (Grant, 2002).
As early as the 1960i?? s researchers from the Harvard Multinational Enterprise project observed international joint research alliances (Lunden and Hagedoorn, 2001). The number of new alliances has grown by 20 percent every year over the last two decades (Ernst, 2002). They have clearly developed into one of the most commonly employed strategic option employed by managers at the beginning of the 21st century rivalling mergers and acquisitions.
In order to analyse what motivates firms to seek an alliance we will examine the different forms of alliance and how they can be used to achieve competitive advantage. This will be accompanied by short examples and cases to illustrate the points. Next alliances in times of globalisation will be examined and how transaction costs may precipitate strategic alliances. Furthermore the concept of the virtual corporation and transaction costs will be discussed. Costs will be analysed by considering costs literally as well as the drawbacks and shortfalls of alliances.
Finally extended examples will aid to emphasise the arguments put forward in the essay. Alliances: Example types and strategic relevance With the arrival of alliances on the strategic management agenda executives were suddenly presented with three choices. Forming an alliance with a firm complemented the existing options of organic growth and mergers and acquisitions. Brent and Shearer (2002) hold that alliances are a great way to gain access to new products, technology, expertise, and customers all while spreading the risk by partnering with another firm.
They are generally less costly than buying a company, and they can provide increased cash flow, reduced overhead, and improved access to capital. Moreover they are also a good tool for diversifying into new markets, bolstering weaker areas of the company, and strengthening relationships with existing customers and suppliers. Grant (2002) supports this view and states that companies often use alliances to broaden or strengthen their capabilities.
This perception of strategic alliances was first voiced by Hamel (1991) who regards alliances as the prime tool for inter-partner learning that allow parties to trade access to skills resulting in quasi-internalization and eventually de facto internalisation of capabilities. Other researchers study an offspring of the recent increase in alliances which they labelled the virtual corporation. Hagel and Singer (1999) advocate the unbundling of the corporation. They divide firms into three businesses that is to say customer relationships, product innovation and infrastructure.
In brief they argue that a company can only ever be an expert at one of these operations and cover the other two by forming alliances. Teece and Chesbrough (2002) emphasise that the increased flexibility of alliance centred virtual corporations leads to higher risk that is not always rewarded as coordination is vital for survival and cannot always be implemented as planned. Costs could be significantly lowered in distribution, storage and operating (Bowersox, 1990). For many firms these ventures offered opportunities to dramatically improve the quality of customer service.
What differentiates logistics alliances from ordinary outsourcing is the degree of intermingling between the parties which can best be illustrated looking at the case of Drug Transport Inc. (Bowersox, 1990). In order to allow wholesalers to deliver products at a certain time to retailers Drug Transport set up a portfolio of services and prices that are based on guaranteed delivery. Charges are fixed for each delivery based on rate of average shipment weight that is established on a 30 day basis.
Thus the wholesaler receives daily deliveries at a known rate and Drug Transport receives guaranteed and predictable revenue and stable operations for route planning and equipment scheduling (Bowersox, 1990). Another characteristic of these alliances is that they last for years and many of them are founded on informal agreements rather than written contracts. Successful alliances utilise resources to meet customer orders with a relentless drive. Bowersox (1990) cites Procter and Gamble which through its network of suppliers are able to divert a customer shipment from a warehouse to a store on short notice.
Logistics alliances spread the risks among the parties. With written performance contracts they even share the risk of failure. Synergy is created as the number of suppliers by product marketer decreases and limit to the supplieri?? s customer base. After a while both parties in the alliance will try to create business for each other to their mutual benefit. The value added partnership as described by Lawrence and Johnston (1988) is another type of strategic alliance or rather their interpretation of certain co operations.
The concept rests on the value chain (Johnston and Lawrence, 1988). In theory whenever a non integrated firm meets one that completes the next step on the value chain both should benefit. In VAP each small company only concentrates on doing one task on the value chain. This way all aspects of the organization are focused on that particular task. This focus lowers overheads, provides lean staff and has a structure with fewer middle managers. In an organization like this decision making is sped up and executed more quickly which leads to a shorter response time.
Creative ideas are less likely to be suppressed and more employees are exposed to the demands of the market. Information flow in a network of highly specialised companies is much greater and facilitates marketing. Value adding partnerships have some of the advantages of vertically integrated companies as mangers strive towards the success of the partners as well. Due to the partnership structure the knowledge about the competition is greater. VAPs can also secure the benefits of economies of scale by sharing warehouses, purchasing services, research and development centres and information.
Each company in a VAP only cultivates relationships with a few suppliers of critical items and customers. Having too many does not allow for close relationships to develop and there won’t be enough repeat transactions. At the same time over dependence on one partner is avoided. Successful VAPs have found ways to punish opportunism and insufficient cooperation. In the Prato textile area in Italy for instance, late deliveries call for withholding until the problem is rectified. According to Lawrence and Johnston (1988) Value added partnerships combine the best of both worlds.
They have the coordination and scale associated with large companies and the flexibility, creativity and low overhead usually found in small companies. Indeed the rise in the numbers of failed mergers and acquisition has shown that vertical integration is not always the most competitive organizational form. Employment in the Forbes 500 companies declined from 23 million in 1979 to 20. 6 million in 1987 while the average employment in these companies fell from 29000 to 26000. The decline occurred during a time in which total US employment rose and a stream of acquisitions took place.