Next Step Marketing
Research Paper

Strategic Alliances
Ali Alaoui

Paper Outline

I. Introduction.
II. Why Alliances? (Main reasons why companies need partners)
III. Criteria in choosing the right partner: (This is the first step for a successful alliance)
IV. How to successfully manage a strategic alliance? (Key factors to make it work in the long run)
V. Case Study: Fuji-Xerox alliance
VI. Conclusion: Long term challenges.

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I. Introduction:

In today’s global environment, domestic and cross-cultural business alliances are becoming a competitive necessity. Advanced technology is eroding the control of industrial nations over knowledge and information. The entire world is becoming a single market where all suppliers are competing to gain new market share. Boundaries no longer exist except on Geography books. Whatever the duration or objectives of alliances, being a good partner has become a key corporate asset called “collaborative advantage”.

Yet, successful partnership should be able to manage the relationship in the long run, not just the deal. It is like a marriage story where the real challenge is to make it work and last for good. In practice, many alliances fall apart: 55% within 1 to 2 years. The
remaining 45% had a short life expectancy of just 3.5 years. Too often, top executives
devote more time and energy to screen potential partners based on financial terms only.

They neglect the managerial, cultural, and human terms. They worry more about
controlling the relationship not managing it.

Relationship between companies begins, grow, and develop or fail just like relationship
between people.

This Research Paper will address the following issues:
1. Alliances: a competitive strategy or just an opportunistic tactic?
2. How companies should screen and choose the right partner.
3. What are key factors to successfully manage a strategic alliance?
4. Case study: Fuji-Xerox alliance.
5. Long term challenges.

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II. Why Alliances?

“An alliance is a relationship that is strategic or tactical, and that is entered into for mutual benefit by two or more parties having compatible or complementary business interests and objectives.” (1)

Cooperative arrangements between companies can range from weak and distant alliance to strong and close one: in “ Mutual service consortia”, similar companies in similar industries pool their resources together to gain a benefit like the access to an advanced technology. In “joint venture” companies pursue an opportunity that needs resources from each of them: the technology of one and the market access of the other.
The joint venture can operate independently. Finally, the strongest and closest collaborations are “value-chain partnerships”: companies with similar or complementary products (or services) link their capabilities to create value for ultimate users. Commitments in those relationships tend to be high.

In every case, a business alliance is more than just a deal. It is commitment, trust, and mutual agreement to benefit both parties.

Like romances, alliances are built in 5 steps:

1. Courtship: two companies meet, are attracted, and discover what they have in common.
2. Engagement: they agree on plans and close the deal.
3. Set up: like couples establishing housekeeping, the newly partnered companies discuss all possible scenarios and ideas on how they should operate.
4. Rules and responsibilities: the partners develop mechanisms and techniques to get along and define what is expected form each party.
5. Development or failure: couples can remain married or get divorced, outcome
   depends on how successfully or poorly they manage the relationship in the long run.

Such analogy between alliances and marriages is very appropriate. In deed, successful companies relationship always depend on comfortable personal relationship between the senior executives.

“Strategic alliances are the strategy that will propel our company into the new millennium. It is time for us to break out of the ‘not invented here’ culture that has demanded that we develop all technology in-house. The reason for the latest organizational change is to develop divisional responsibility, which gives each one of you the power to develop alliances that contribute to the strategic strength and direction of our company. It is time for us to re characterize ourselves as flexible, proactive, and solution-oriented company.” Stan Meridian, CEO of Stanford Products, Inc. (2).

The CEO’s statement includes the main reasons for companies to establish alliances.
Some of the other motives are:

1. Market expansion:
One major tool to increase sales level is to reach new markets. Ford’s alliance with Mazda was a key element in its efforts to penetrate the emerging Asian markets.

2. Technology advancement and Research costs:
Company’s prime challenge is to cope with new technology discoveries. It requires huge amount of resources. GE (USA) and Snecma (France) could not engage in the Aircraft business with out establishing a 50-50 joint venture.

3. Increased competition:
Any company from any country is becoming a potential competitor because of the globalization phenomenon. E-commerce is creating virtual stores accessible from every corner of the planet. Firms are forced to join forces to give consumers the best and most attractive packages.

4. Product development and continuous innovation:
Companies that first introduce a new product enjoy a dominant market position before competition arrives and drives prices down. Siemens, Toshiba, and IBM alliance allowed them to develop and introduce a new dynamic random access memory chip. Together, they saved time, money, and they were first in the market. That is win-win situation.

5. Establish world class capabilities:
According to a Ford executive:” many Western firms take a narrow view of alliances. Management tends to focus on the operating objective only. Yet, what companies fail to realize is that collaborative projects offer a unique opportunity to observe and learn a competitor’s tactics. Venture employees need to keep their eyes and ears open to learn as much as possible, and what ever new knowledge or skills an employee may acquire, bring the know-how back to parent headquarters and spread it around”. (3)

6. Cope with the market trends and customer’s changing needs:
Customers now prefer “system solutions” where one single company provides all the needs. Products firms are expected to provide installation, support, and maintenance services as well. Therefore, there is a big need to establish alliances in response to this business environment change.

7. Global standards:
IBM and Apple coordinate their efforts and resources to develop a uniform computer operating system to reach more consumers worldwide. In an other case, Philips and Sony established compact disc technology as the world standard.

8. Costs reduction:
A company planning to enter the global market will incur heavy fixed costs, R&D costs, branding costs, and distribution costs. Alliances can help reduce these costs while increasing sales and profits.

9. Overseas market expansion:
Many alliance strategists look for local partners to reach foreign markets. It is a successful move to overcome market barriers and trading blocs. It also reduces risk and uncertainty caused by local bureaucracy and instability.

10. Lack of financial resources:
Alliances allow partners to reduce risk by providing limited assets in their new ventures. With alliances, firms can do more for less.

Finally, it is important to distinguish between “strategic” and “tactical” alliances:
Strategy is the process of planning operations before engagement. At this level, managers should answer the following question: “where is the company going?”
This is very crucial step needed to choose the right partner.

Tactic is the process of organizing operations during engagement: “How are we going to get there?” It includes all techniques aimed at reaching the common objectives of both partners.

To sum up: “The major rationales for alliances are to gain access to the market, exploit complementary technologies, and reduce the time taken for innovation” (4)

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III. Criteria for choosing the right partner:

The selection process is the first step towards a successful alliance. It can work well if companies consider the following criteria:

1. Self analysis:
Relationships get a good start when partners know themselves and their industry. They also should assess the changing business conditions. Deciding to seek an alliance must be justified and evaluated based on current situation and statistical forecast. Self-analysis will also help the company know which alliance form to pursue.

2. Chemistry:
A good personal rapport between executives creates a strong supportive and communicative environment. Signs of the leader’s interest, commitment, and respect are highly appreciated. In Asia, company suitors give “Face”(which means honor and respect) to a potential partner’s decision makers by investing the personal time of their leaders. In some Middle-East cultures, it is impolite to start talking business before establishing a good personal relationship.

3. Capability:
Executives should evaluate all potential partners. Capabilities of each candidate are very important. “In general, what companies look for in a partner is the ability to contribute complementary strengths and resources to the alliance. Alliance makers seek a partner that can help a company overcome any weaknesses that prevent or inhibit the ability to achieve its objectives.” (5).
Some firms establish a multifunctional team just to analyze each candidate strengths and weaknesses, and deeply investigate all claims. Many companies present themselves in the best possible picture. Like in marriage, firms should not be easily attracted by the first good-looking prospect. Any over or underestimation can put the venture at end: a former ICI executive recall the company’s experience with a Spanish joint venture in basic chemicals: “ Although we had an excellent working experience with our Spanish partner, the venture still collapsed. We had overestimated the market potential for the venture’ products and the speed for reaching the plant capacity, and we underestimated the capital requirements” (6).

4. Commitment:
Both partners should be willing to invest time, energy, and all resources to make it work, especially at the time of difficulties. They can show signs of long-term commitment by devoting financial and other resources to their relationship. For example, three large food retailers in Europe (Ahold in the Netherlands, Argyll in the United Kingdom, and Group Casino in France) formed a successful alliance. To strengthen their relationship, they bought certain amount of one another’s stock and expanded their collaboration into other areas such as insurance, data processing, and personnel development. Commitment is a good measurement of trust and long-term engagement.

5. Compatibility:
This is the most important criterion for a successful alliance. It includes common experience, values and principles, and hopes and goals in the future.
“Compatibility of goals is also necessary. This is seen with the alliance of Nypro, an American injection molders of precision parts, and the Japanese company Mitsui in the plastic resin industry. Nypro wanted to enter the Japanese market and vice versa. They formed an alliance and set up Amitech to achieve these goals. Their success is due to a convergence of goals” (7).
Like in marriage, compatibility and flexibility to resolve conflicts are key factors to long-term relationship. Differences and frictions are always present. The outcome depends on the way the issue is resolved. Many couples broke up for a stupid small problem because they lack this ability to overcome conflicts and emergencies.

How can a company find the most compatible partner?

1. “A good first step when looking for a compatible partner is to examine existing relationships. Forging an alliance with a company with which you have already done business has many advantages” (8). Some of these advantages are: Personal ties already established, full knowledge of the partner’s capabilities, and pass experience that can highlight strengths and weaknesses. On common mistake to avoid is restriction of possible options to one choice: an existing partner is not necessarily the right one for all types of business ventures.
   
2. Size and capabilities fits: companies must seek partners similar in size and capabilities: “Making an alliance with a company stronger than you in a strategic fit is like dancing with a bear” (9)
   
3. Corporate culture: every organization has its own culture. Yet, partners should be flexible to adjust and minimize differences. Managers should weight similarities against differences.
   
4. Market perceptions and market share: this includes products rank in terms of quality and image, market share and sales level, and customer service policies.
   
5. Financial analysis: it is the bottom line: companies need to evaluate their prospect partner financial policies: risk, dividends, currency management, profitability, and shareholders.
   
6. People: many alliances fall apart just because people involved did not get along. Chemistry between executives and corporate cultures is very crucial to establish communication, support, comfort, and most importantly trust.
   

To sum up: companies will successfully choose the right partner if they address the following questions

• What do you need: technology, market access, or distribution capabilities?
• Can you extend an existing partnership?
• What type of corporate culture will fit yours?
• Is there any conflict of interests?
• Does your partner provide you with complementary capabilities?
• Do you have the same objectives?
• What are the benefits and costs?
• Will it be an opportunistic tactic or a long-term alliance?
• What is the price of failure?

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IV. Key factors to successfully manage a strategic alliance:

As partners begin to live together, day-to-day reality replace the romance face where everything look beautiful and smooth. Problems and differences start to surface, as involvement gets deeper. A well-defined agreement can provide a solid base for long-term management of alliances. It should address the following issues:

1. Agreement structure:
Many failures in alliances can be traced to poorly designed arrangement. It should clearly state objectives, scope of cooperation, responsibilities, decision-making, terms, and mechanism to resolve problems. The legal and management structure should be clearly defined.

2. Financing consideration:
It includes tax concerns, obligations, accounting practices, and budgeting reports. The agreement must specify each partner’s share of control and responsibilities in terms of dividends, reimbursement, and all earning formulas.

3. Assets evaluation:
The value of each partner’s inputs must be calculated in quantitative and qualitative terms. Some common mistake is to ignore the value of the brand name or reputation.
According to the director of global markets at Fujitsu: ”calculating the price of intellectual property is almost impossible. I essentially base the price of our technology on opportunity costs.” (10).

4. Flexibility character:
The agreement must allow a certain degree of flexibility and changes. It should allow both partners to renegotiate the deal in case some externalities happen. The surprising business environment occurs mostly with foreign partners: the exchange rate is the most common example.

5. Just in case scenario:
The possibility of failure is always present even at 1% chance. The agreement must include a legal framework in case of “divorce”.
“Divorce clauses are a good and necessary evil of any contract” (11)

Levels of Integration:

The most successful alliances manage five levels of integration:

1. Strategic Integration:
Top leaders must continuously discuss broad goals or changes in each company. The more contact they have, the more changes they will notice, the more chances they will have to work things out. Many chief executives do schedule a monthly meeting to monitor their alliances.

2. Tactical Integration:
It brings middle managers and professionals together to develop plans and projects based on the alliance objectives. The size of such groups depends on the level of joint programs as well as the diversification of the projects. Many firms assign a specific team to overseas the alliance activities only.

3. Operational Integration:
Which provides ways for people to carry out day-to-day operations. Information and resources needed to accomplish tasks must be available and updated.

4. Interpersonal Integration:
Strong relationships help build trust and deep engagement. Like in marriage, it is a very basic foundation for long-term relationship. Joint programs and projects can not develop until many people from both companies know one another personally and become more involved beyond the business transactions. Many strong interpersonal relationships helped resolve big conflicts, and kept the alliance alive. Many poor interpersonal relationships caused the alliance to collapse at the first problem.

5. Cultural Integration:
It requires both partners to have good communication skills and cultural awareness.
Managers must play two roles: Teacher and Learner. This is the only way to show interest, tolerance, and respect.

Integration in all five dimensions (strategic, tactical, operational, interpersonal, and cultural) requires that each party is willing to take the risk of change. In fact, productive relationships stimulate changes within the partners. It is inevitable that each will influence the other. That is why managers must be empowered to adapt and make new adjustments in response to the alliance requirements. Staff involved needs more skills and knowledge because they need to accommodate both company’s goals and the alliance objectives. This is not an easy task; it takes time, effort, and communication.

Many firms fail to establish cultural integration because of internal barriers to communication and flow of information. The exchange of ideas can bring lessons and innovations from partners.

Managing the trade-off:
There are limits to how much change a company should make to accommodate the demands of an alliance. The potential benefits of the relationship must be weighted against the remaining activities. One common mistake to avoid is the conflict of interests. Like marriage, business alliances are complex to manage: they are easier to manage at the very first levels of engagement. Tighter control or dominance can break it apart. That is why; a key ingredient to successful alliance is flexibility and being open to new possibilities or adjustments.

Conflicts management:
Conflicts can still appear during the alliance lifetime. They can also be managed in such way to limit costs and preserve the relationship:

1. “Shoot the messenger” strategy:
According to a formal legal counsel at Chrysler: ”when partners reach an impasse, we suggest a dispute resolution in which both partners must send a deadlock notice to senior management…what happens is that no executive wants to be the messenger of bad news.. consequently, alliance executives will work unbelievably hard to solve any disagreement.” (12)

2. Jointly set specific operating milestones:
By being involved from the beginning, executives can show more flexibility when resolving conflicts.

3. Alliance independence:
A venture must operate independently from parents. Conflicts and confusions can be avoided. “ Every time there is an international competition, all the project managers are there, contesting head-on with each other. Not only does the tension make managing the venture and relations with the parents strenuous, it can hamper productivity. Nobody want to share information or development.” (13)

4. Training:
Firms must offer training on how to manage alliances, minimize problems, and resolve them. A basic set of operating rules can help prevent conflicts. Weekend programs or seminars can be very helpful.

5. Product Overlap:
In addition to removing conflicting goals, partners must eliminate any product or service overlap before engaging in partnership. Ventures cannot have competing products. We mentioned it in the compatibility criteria.

6. Mediation:
Experienced and trusted people can always help diffuse tension and resolve conflicts. When enemies can rely on mediators to find a solution, it is easier for partners to reach the same goal.

The effective management of alliances requires managers to be sensitive to political, cultural, organizational, and human issues. In today’s global economy, inter-company relationships are a key business asset. Knowing how to manage it is an essential skill.

Why some alliances break-up?
55% of alliances fall apart. One effective way to make an alliance work is to avoid mistakes and analyze previous partnerships. The main reasons for breaking up can be:

1.Changes in corporate leadership:
In fact, a change in top management precedes new strategic plans and new ambitions. Alliances need high-level commitment to survive. A new CEO must really want the alliance. Personal ties between leaders maintain cooperation. Usually, CEO chooses to terminate the alliance before departing or retiring.

2. False expectations:
The lack of deep investigation is the reason for overestimation of the partner’s capabilities. The overall objective of alliances is to join efforts for better results. The outside picture of the partner fouls many firms. A financial analysis, market position, and all resources must be assessed correctly to make the right judgment about partners.

3. Incompatibilities:
Partners can suffer from incompatible agendas: two people can’t ride the same plane until their destination is the same. Conflicting ambitions and objectives is a serious problem whose only outcome is separation.

4. Rigidity:
Many firms lack the flexibility to cope with different corporate culture. This is the most challenging issue because it is an intangible one. Each firm does have its unique culture. Diversity can be a plus if well managed. Otherwise it causes confusion, miscommunication, and breakup. Very often, this problem occurs in alliances involving foreign firms.

5. Unrealized sales expectations:
The real objective behind alliances is to increase the market sales. Many partners fail to achieve this goal. Therefore they see no reason or benefit out of the alliance.

6. Opportunistic behavior:
Many firms look for partners just to achieve certain goal that they cannot achieve by themselves. Very typical example is the desire to enter new foreign market. A well-experienced local partner can be very helpful to avoid bureaucracy and many administrative rules. It also cost less and reduces risk.

Summing up: In managing strategic business alliances, Firms must deal with different aspects at the integration level, process of alliance, and stages of relationship. There are many factors to the success: commitment, trust,compatibility, and integration at all levels.

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V. Case Study: Fuji-Xerox Alliance

In 1988, Fuji and Xerox established a joint program called “TQC benchmark program” or the total quality control program. They boost competitiveness by sharing information and experience. They achieved high quality standards with international recognition. Their success was a result of the following activities:

1. Leadership:
A total quality manager was charged with assisting different Xerox divisions with their quality programs. He also serves as a primary liaison to insure continuous communication and the concepts of quality control at all levels.

2. Exchange Programs:
Fuji Xerox and Xerox exchange from 70 to 100 engineers every year to encourage the flow and the exchange of new ideas: innovation is the prime result of such program.

3. Continuous evaluation and feed back:
Both CEO’s provide feedbacks and supervision: constructive criticism helped correct mistakes and introduce new concepts.

4. Information exchange:
The easy flow of information strengths the relationship. The typical information traded includes: benchmarking concepts, customer satisfaction improvement, and quality level evaluation.

5. Clients visit:
Fuji Xerox has sponsored training sessions for many clients. This is an example of customer-focus approach to business.

6. Teamwork for quality implementation:
Mainly to ensure quality control and the pool of different skills. The team meets at least four times a year to encourage close contact and to facilitate the information exchange.

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VI. Conclusion:

Many firms are considering alliances for different reasons and to achieve different goals. Whether an alliance is a long-term strategy or just short-term solution, whether successful ones are the exception or the rule, firms need to consider many issues:

1. Balance:
One key issue is the degree to which a firm should rely on alliances. Too much reliance can be counter productive. Independence within the alliance always provides flexibility and alternatives in case of negative results. “You have to kiss many frogs before kissing a princess” many partners are opportunistic. They can bring more harm than good.

2. Collaboration versus competition:
Many partners can become fierce competitors in the future. Both partners must maintain their equality in strength and decision-making. Management rotations can help keep things under control.

3. Government factor:
Partners must be aware of the government’ involvement in the private sector. New policies can affect the alliance future. An anti-trust law, safety regulations, embargoes, and trade restrictions are some of the tools available to uncle Sum.

4. Reengineering:
Reengineering is a companion activity to alliance development. It is reinvention of the way the business operates in order to meet the demands of a changing economy. It is not necessarily a downsizing process. Alliances can than be seen as a form of reengineering.

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Notes:

1. Larraine Segil: Intelligent Business Alliances (Times Business. 1996). P7
2. Larraine Segil: Intelligent Business Alliances ( Times Business. 1996). P4
3. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P8
4. Shiva Ramu: Strategic Alliances (Response Books 1997). P21
5. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P20
6. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P21
7. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P69
8. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P14
9. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P16
10. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P70
11. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P71
12. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P110
13. Gauley De La Sierra: Managing Global Alliances (E.I.U 1995). P111