Module Number: 10 of 10

Lesson Title/Topic: International Strategic Alliances

Week Number 17 & 18
Intended Learning Outcomes: (specific and measurable, and learner-oriented)

At the end of this unit, the students should be able to:

1. Compare joint ventures and other forms of strategic alliances.

2. Characterize the benefits of strategic alliances.
3. Describe the scope of strategic alliances.
4. Discuss the forms of management used for strategic alliances.
5. Identify the limitations of strategic alliances.

Learning and Teaching Support Materials

1. Module
2. Google classroom
3. Other books
4. Other websites

Lecture Proper and Discussion

International Strategic Alliances

International Corporate Cooperation

Cooperation between international firms can take many forms, such as cross-licensing of
proprietary technology, sharing of production facilities, cofunding of research projects, and
marketing of each other’s products using existing distribution networks. Such forms of
cooperation are known collectively as strategic alliances, business arrangements whereby two
or more firms choose to cooperate for their mutual benefit. The partners in a strategic alliance
may agree to pool R&D activities, marketing expertise, or managerial talent.

A joint venture (JV) is a special type of strategic alliance in which two or more firms join
together to create a new business entity that is legally separate and distinct from its parents. JVs
are normally established as corporations and are owned by the founding parents in whatever
proportions they negotiate. Although unequal ownership is common, many are owned equally
by the founding firms. A JV, as a separate legal entity, must have its own set of managers and
board of directors. It may be managed in any of three ways. First, the founding firms may jointly
share management, with each appointing key personnel who report back to officers of the
parent.
Second, one parent may assume primary responsibility. And third, an independent team of
managers may be hired to run it. The third approach is often preferred because independent
managers focus on what is best for the JV rather than attempting to placate bosses from the

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founding firms. Other types of strategic alliances may be managed more informally—for
example, by a coordinating committee, composed of employees of each of the partners,
which oversees the alliance’s progress.

Benefits of Strategic Alliances

Ease of Market Entry

A firm wishing to enter a new market often faces major obstacles, such as entrenched
competition or hostile government regulations. Partnering with a local firm can often help it
navigate around such barriers. In other cases, economies of scale and scope in marketing and
distribution confer benefits on firms that aggressively and quickly enter numerous markets.7
Yet the costs of speed and boldness are often high and beyond the capabilities of a single
firm. A strategic alliance may allow the firm to achieve the benefits of rapid entry while keeping
costs down.

Shared Risk

Today’s major industries are so competitive that no firm has a guarantee of success when it
enters a new market or develops a new product. Strategic alliances can be used to either reduce
or control individual firms’ risks.

Shared Knowledge and Expertise

Still another common reason for strategic alliances is the potential for the firm to gain knowledge
and expertise that it lacks. A firm may want to learn more about how to produce something, how
to acquire certain resources, how to deal with local governments’ regulations, or how to manage
in a different environment—information that a partner often can offer.12 The firm can then use
the newly acquired information for other purposes.

Synergy and Competitive Advantage

Firms may also enter into strategic alliances to attain synergy and competitive advantage. These
related advantages reflect combinations of the other advantages discussed in this section: The
idea is that through some combination of market entry, risk sharing, and learning potential, each
collaborating firm will be able to achieve more and to compete more effectively than if it had
attempted to enter a new market or industry alone.

Scope of Strategic Alliances

The scope of cooperation among firms may vary significantly, as Figure 13.2 illustrates. For
example, it may consist of a comprehensive alliance, in which the partners participate in all
facets of conducting business, ranging from product design to manufacturing to marketing. Or
it may consist of a more narrowly defined alliance that focuses on only one element of the
business, such as R&D. The degree of collaboration will depend on the basic goals of each
partner.

Comprehensive Alliances

Comprehensive alliances arise when the participating firms agree to perform together
multiple stages of the process by which goods or services are brought to the market: R&D,
design, production, marketing, and distribution. Because of the broad scope of such alliances,
the firms must establish procedures for meshing such functional areas as finance, production,
and marketing for the alliance to succeed. Yet integrating the different operating procedures
of the parents over a broad range of functional activities is difficult in the absence of a formal
organizational structure. As a result, most comprehensive alliances are organized as JVs. As an
independent entity, the JV can adopt operating procedures that suit its specific needs, rather than
attempting to accommodate the often incompatible procedures of the parents, as might be the
case with another type of strategic alliance.
Functional Alliances

Strategic alliances may also be narrow in scope, involving only a single functional area of the
business. In such cases, integrating the needs of the parent firms is less complex. Thus,
functionally based alliances often do not take the form of a JV, although JVs are still the more
common form of organization. Types of functional alliances include production alliances,
marketing alliances, financial alliances, and R&D alliances.

 Production Alliances. A production alliance is a functional alliance in which two or

more firms each manufacture products or provide services in a shared or common facility.
A production alliance may use a facility one partner already owns.
 Marketing Alliances. A marketing alliance is a functional alliance in which two or
more firms share marketing services or expertise. In most cases, one partner introduces
its products or services into a market in which the other partner already has a presence.
The
established firm helps the newcomer by promoting, advertising, or distributing its products or
services. The established firm may negotiate a fixed price for its assistance or may share in a
percentage of the newcomer’s sales or profits. Alternatively, the firms may agree to market
each others’ products on a reciprocal basis.
 Financial Alliances. A financial alliance is a functional alliance of firms that want to reduce
the financial risks associated with a project. Partners may share equally in contributing
financial resources to the project, or one partner may contribute the bulk of the financing
while the other partner (or partners) provides special expertise or makes other kinds of
contributions to partially offset its lack of financial investment.
 R&D Alliances. Rapid technological change in high-technology industries and the
skyrocketing cost of staying abreast of that change have prompted an increase in
functional
alliances that focus on R&D. In an R&D alliance, the partners agree to undertake joint
research to develop new products or services.

Selection of Partners

The success of any cooperative undertaking depends on choosing the appropriate partner(s).
Research suggests that strategic alliances are more likely to be successful if the skills and
resources of the partners are complementary—each must bring to the alliance some
organizational strength the other lacks. A firm contemplating a strategic alliance should consider
at least four factors in selecting a partner (or partners):

 Compatibility The firm should select a compatible partner that it can trust and with whom
it can work effectively. Without mutual trust, a strategic alliance is unlikely to succeed. But
incompatibilities in corporate operating philosophies may also doom an alliance.
 Nature of a Potential Partner’s Products or Services. Another factor to consider is the
nature of a potential partner’s products or services. It is often hard to cooperate with a
firm in one market while doing battle with that same firm in a second market. Under such
circumstances, each partner may be unwilling to reveal all of its expertise to the other partner
for fear that the partner will use that knowledge against the firm in another market.
 The Relative Safeness of the Alliance. Given the complexities and potential costs of
failed agreements, managers should gather as much information as possible about a
potential
partner before entering into a strategic alliance.
Form of Ownership

Another issue in establishing a strategic alliance is the exact form of ownership that is to be
used. A JV almost always takes the form of a corporation, usually incorporated in the country in
which it will be doing business. In some instances, it may be incorporated in a different country,
such as one that offers tax or legal advantages. The Bahamas, for example, are sometimes seen
as a favorable tax haven for the incorporation of JVs.

The corporate form enables the partners to arrange a beneficial tax structure, implement
novel ownership arrangements, and better protect their other assets. This form also allows
the
JV to create its own identity apart from those of the partners. Of course, if either or both of the
partners have favorable reputations, the new corporation may choose to rely on those, perhaps
by including the partners’ names as part of its name. A new corporation also provides a neutral
setting in which the partners can do business. The potential for conflict may be reduced if the
interaction between the partners occurs outside their own facilities or organizations. It may also
be reduced if the corporation does not rely on employees identified with either partner and
instead hires its own executives and workforce whose first loyalty is to the JV.

Public-Private Venture A special form of JV, a public-private venture, is one that involves
a partnership between a privately owned firm and a government. Such an arrangement may be
created under any of several circumstances. When the government of a country controls a
resource it wants developed, it may enlist the assistance of a firm that has expertise related to that
resource.

Similarly, a firm may pursue a public-private venture if a particular country does not allow
wholly owned foreign operations. If the firm cannot locate a suitable local partner, it may invite
the government itself to participate in a JV, or the government may request an ownership share.
Public-private ventures are typical in the oil industry. In assessing the opportunities and
drawbacks of such a venture, a firm should consider the various aspects of the political and legal
environment it will be facing. Foremost among these is the stability of the government. In a
politically unstable country, the current government may be replaced with another, and the firm
may face serious challenges. At best, the venture will be considered less important by the new
government because of its association with the old government. At worst, the firm’s investment
may be completely wiped out, its assets seized, and its operation shut down. However, if
negotiations are handled properly and if the local government is relatively stable, public-private
ventures can be quite beneficial. The government may act benignly and allow the firm to run the
JV. It may also use its position to protect its own investment—and therefore that of its partner—
by restricting competing business activity.

A firm entering into a public-private partnership should ensure that it thoroughly understands the
expectations and commitments of both the host country’s government and its prospective
business partner.

Joint Management Considerations

Further issues and questions are associated with how a strategic alliance will be managed.34
Three standard approaches are often used to jointly manage a strategic alliance (see Figure 13.3):
shared management agreements, assigned arrangements, and delegated arrangements.
Under a shared management agreement, each partner fully and actively participates
in managing the alliance. The partners run the alliance, and their managers regularly pass on
instructions and details to the alliance’s managers. The alliance managers have limited authority
of their own and must defer most decisions to managers from the parent firms. This type of
agreement requires a high level of coordination and near-perfect agreement between the
participating partners. Thus, it is the most difficult to maintain and the one most prone to conflict
among the partners.

Under an assigned arrangement, one partner assumes primary responsibility for the operations
of the strategic alliance.

Under a delegated arrangement, which is reserved for JVs, the partners agree not to get
involved in ongoing operations and so delegate management control to the executives of the JV
itself. These executives may be specifically hired to run the new operation or may be transferred
from the participating firms. They are responsible for the day-to-day decision making and
management of the venture and for implementing its strategy. Thus, they have real power and
the autonomy to make significant decisions themselves and are much less accountable to
managers in the partner firms.

Pitfalls of Strategic Alliances

Regardless of the care and deliberation a firm puts into constructing a strategic alliance, it still
must consider limitations and pitfalls. Figure 13.4 summarizes five fundamental sources of
problems that often threaten the viability of strategic alliances: incompatibility of partners, access
to information, conflicts over distributing earnings, loss of autonomy, and changing
circumstances.

Incompatibility of Partners

Incompatibility among the partners of a strategic alliance is a primary cause of the failure of such
arrangements. At times, incompatibility can lead to outright conflict, although typically it merely
leads to poor performance of the alliance. Incompatibility can stem from differences in corporate
culture, national culture, goals and objectives, or virtually any other fundamental dimension
linking the and beliefs about strategy. The manner in which the managers are able to work
together during such a meeting may be a critical clue to their ability to cooperate in a strategic
alliance. Obviously, if the partners cannot agree on such basic issues as how much decision-
making power to delegate to the alliance’s business unit, what the alliance’s strategy should be,
how it is to be organized, or how it should be staffed, compromise will probably be difficult to
achieve and the alliance is unlikely to succeed.

Access to Information

Limited access to information is another drawback of many strategic alliances. For a

collaboration to work effectively, one partner (or both) may have to provide the other with
information it would prefer to keep secret. It is often difficult to identify such needs ahead of
time; thus, a firm may enter into an agreement not anticipating having to share certain
information. When the reality of the situation becomes apparent, the firm may have to be
forthcoming with the information or else compromise the effectiveness of the collaboration.

Conflicts over Distributing Earnings

An obvious limitation of strategic alliances relates to the distribution of earnings. Because the
partners share risks and costs, they also share profits. However, there are other financial
considerations beyond the basic distribution of earnings that can cause disagreement. 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, the accounting procedures that will be
used to calculate earnings or profits, and the way transfer pricing will be handled.

Loss of Autonomy
Another pitfall of a strategic alliance is the potential loss of autonomy. Just as firms share
risks 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, or introduce any
other significant organizational change first must be discussed and negotiated.

Changing Circumstances
Changing circumstances may also affect the viability of a strategic alliance. The economic
conditions that motivated the cooperative arrangement may no longer exist, or technological
advances may have rendered the agreement obsolete.

Assessment: Discussion Questions

1. What are the basic differences between a JV and other types of strategic alliances?
2. Why have strategic alliances grown in popularity in recent years?
3. What are the basic benefits partners are likely to gain from their strategic
alliance? Briefly explain each.
4. What are the basic characteristics of a comprehensive alliance? What form is it
likely to take?
5. What are the four common types of functional alliances? Briefly explain each.
6. What is an R&D consortium?
7. What factors should be considered in selecting a strategic alliance partner?
8. What are the three basic ways of managing a strategic alliance?
9. Under what circumstances might a strategic alliance be undertaken by public
and private partners?
10. What are the potential pitfalls of strategic alliances?
Suggested Teaching-Learning Activities
 Article Critiques
 Inductive Reasoning
Assessment Tasks/Outputs
1) Answering workbook exercise
2) Quiz through google forms
3) Reflection paper
Readings and Other References
Griffin, R. W., & Pustay, M. W. (2015). International Business: A Managerial Perspective Eight
Edition. Texas: Pearson.
Retrieved from: www.freebookslides.com Hult, G. M., & Hill, C. W. (2019). International
Business: Competing in the Global Market. New York: McGraw-Hill Education.
Retrieved from: www.freebookslides.com