Strategic alliance

Ch. No 1. Introduction MEANING A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. This form of cooperation lies between Mergers & Acquisition M&A and organic growth. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.

DEFINITION Strategic alliances are agreements between companies (partners) to reach objectives of a common interest. Alliances are among the various options which companies can use to achieve their goals; they are based on cooperation between companies. The description “strategic” limits the field to alliances that are important to the partners and have broad horizons1. Using a broad interpretation, strategic alliances are agreements between companies that remain independent and are often in competition. In practice, they would be all relationships between companies, with these exceptions: a) transactions (acquisitions, sales, loans) based on short-term contracts (while a transaction from a multi-year agreement between a supplier and buyer could be an alliance); b) agreements related to activities that are not important, or not strategic for the partners, for example a multi-year agreement for a service provided (outsourcing). With this interpretation, the spectrum is wide. It goes from a sub-supplier contract to franchising and licensing; from R&D partnership contracts to joint venture and consortium investments, to participation in capital stock.

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According to a more restrictive interpretation, strategic alliances would be limited to long term agreements based on the conferral of resources and participation in capital stock. Agreements based on contracts would not be considered alliances. Whatever the definition, alliances have some distinctive characteristics. Two or more organizations (business units or companies) make an agreement to achieve objectives of a common interest considered important, while remaining independent with respect to the alliance. If A and B create an alliance C, A and B remain independent both between themselves and with respect to C. The partners share both the advantages and control of the management of the alliance for its entire duration. As we will see, this is the most difficult problem. The partners contribute, using their own resources and capabilities, to the development of one or more areas of the alliance (important for them). This could be technology, marketing, production, R&D or other areas. Alliances which are now called “strategic” are not new. Westinghouse Electric and Mitsubishi were allied for seventy years.

Alliances yield better results under certain conditions. 1. When each partner recognizes the need to have access to capabilities and competencies it cannot develop internally. 2. When a gradual approach is preferable in accessing resources, capabilities and competencies. Uncertainties about the future evolution of demand and technology often advise flexibility. The alliance can provide this. 3. When the acquisition of another company is not a possibility in achieving particular development goals. It is a fairly common belief that the management of an alliance must have qualities different at least in part from those of the parent company (the partners). The reason is simple. The management of a strategic alliance is profoundly different from that of a company that acts independently.

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Seven features of successful strategic alliances 1. Values: To be successful in an alliance the organisations need to hold a shared set of values about the cause they are championing and about ways of working together. These values will influence the way the parties approach the alliance and how they work together. 2. Leadership: Partnerships require champions in each of the participating organisations, and these individuals need to take direct responsibility for achieving the partnership goals. Partnerships also require the unequivocal support of the leaders of the participating organisations. 3. Clarity of mission and strategy: Strategic alliances need a compelling mission, realistic objectives and a clear strategy for achieving them. Each partnership needs to have great clarity over its goals, achievable objectives with win-win opportunities for both organisations. 4. Board commitment: The boards of all participating organisations need to be strongly committed to the partnership and willing to support it through the good times and the difficult times. 5. Resources: Strategic alliances need to be properly resourced and there needs to be great honesty and realism about the time and financial commitments each organization will have to make to the partnership. When it comes to reporting on how the resources have been applied, the financial reports need to be tailored to the needs of the partnership and not to necessarily follow the standard reporting formats of the participating organisations. 6. Open and honest communications: Managers need to recognize that many different stakeholders such as funders, board and committee members, staff, chapters and volunteers, may be affected by a strategic alliance. Each requires regular and thorough communication. Formal communications should be supported by plenty of informal communication, ideally at board, senior management and staff levels.

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7. Commitment to good faith negotiations: When the alliance is being established there should be three ground rules. Without prior agreement of all partners:  there should be no material changes in the partnership proposition  negotiators must be named and there should be no changes during negotiations  there must be no negotiations with other external parties.

Goals of alliances Alliances include a wide variety of goals which companies are completely or partially precluded from achieving when confronting competition on their own. Setting new global standards Entering into an alliance can be the best way to establish standards of technology in the sector. • PHILIPS-SONY. In the late 80’s, Philips was in essence pushed out the VCR market, when Japanese producers managed to impose their standards. To avoid new defeats, Philips created various alliances with Japanese rivals to assure technological compatibility among European and Japanese products. The compact disc (CD) was designed with a global standard by virtue of a series of alliances: 1) between Philips and Sony, which not only contributed to the planning of the CD and sound reproduction, but with its presence in the alliance dissuaded other Japanese producers from seeking alternative solutions; 2) to spread usage of the CD and the standard, Philips ceded the production licensing in exchange for modest royalties; 3) Philips and DuPont made a 50-50 joint venture to produce and sell optics components for the audio-video market; 4) Philips and Sony jointly launched the mini-CD. Confronting competition. When a high-volume producer decides to attack a new geographic market, defense is difficult if it does not have comparable size. Alliance between companies is a response which has often led to positive results. It is equally valid to attempt an attack on a leader that has consolidated its own positions.

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• CLARK-VOLVO In the earth-mover sector, neither Clark Equipment nor Volvo had enough production volume (the former in the United States, the latter in Europe) to take on the global leaders Caterpillar and Komatsu. In the mid-80’s they decided to create an alliance. Overcoming protectionist barriers. Alliances can allow companies to avoid controls on importation and overcome barriers to commercial penetration. For example, in Japan many companies have established that the best and fastest way to achieve success in the market is to make an alliance with a local company. In fact, the distribution system is controlled by a tightly-woven network of producers, distributors and importers. Only an alliance with one of these can open the road to the final buyer. Alliances can also be a way to respect the bonds posted by the “host” country regarding value-added local content and participation in the capital of local businesses. Dividing risks. For certain projects, risks of failure are high, and even higher when investments are elevated. CFM International. The alliance (50-50 joint venture) between General Electric and Snecma was made to plan, develop and produce a new airplane propeller. Over ten years of R&D work and more than two billion dollars were necessary to sell the first engine. Economy of scale. There are many alliances designed to divide fixed costs of production and distribution, seeking to improve volume. The alliances between airlines to manage reservation systems (Computer Reservation Systems) jointly are among the most notable examples. • COVISINT. Every year, Ford, General Motors and Daimler Benz buy component parts and services together for $250 billion. The auto companies give strategic importance to economies on the acquisition side. Covisint – that is, the synthesis of collaboration, vision and integrity – is a B-to-B that at first integrated exchanges of parts and services made within Ford and GM and then – after the entry of Daimler Benz – connected over 50 thousand potential suppliers. Through a common platform, participants in the alliance aim to develop and standardize online transactions. According to the authors of COVISINT, with the complete realization of the network, planning of a new car model could decrease from 40 to 15 months. • NESTLE’-HAAGEN DAZS. When in the summer of 1999 Nestlè and Haagen-Dazs (part of the Diageo group) announced an alliance for production and marketing in the United States (not the rest of the world), many were shocked. In the past, Nestlè had rarely made alliances with the competition. The only notable exception was made to enter into a new product line: breakfast cereals. A joint venture with General Mills was formed called Cereal Partners Worldwide. In the United Sates, Nestlè sought to build critical mass in the ice cream sector and a way to reduce costs by operating its plants in California and Maryland at full

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capacity. “We believe we can grow better together than separately” said a Diageo spokesperson. Nestlè would contribute its frozen dessert technology, while Haagen Dazs would contribute to distribution through the network of points of sale with its name. (Beck E., “Nestlè, Haagen Dazs to create venture”, Wall Street Journal, 20-21 August 1999). Access to a market segment. In mature segments, a company often wants to develop in a market segment where it is not present through an agreement with another company. • SMART. An alliance was created between Daimler-Benz and the Swiss microelectronics company SMH. “Smart-ville” was inaugurated in October 1997, in Lorena, not far from the German border. Access to a geographic market. A strategic alliance is often a way to enter a market that is protected by (national) tariff and other barriers, or dominated by another company with particular competitive advantages. • MOTOROLA-TOSHIBA. For a long time, Motorola encountered serious obstacles to entering the cellular phone market in Japan. In the mid 80’s, it publicly declared the existence of commercial barriers (state protection). The shift happened in 1987 when an agreement was made with Toshiba to produce microprocessors. Toshiba contributed access to the distribution network (difficult to penetrate for a foreign company) and its existing relationships with the governing authorities. Motorola was authorized to operate in Japan and also obtained a radio frequency for its own mobile communications system. (Economist, “Asia Beckons”, May 30, 1992). Access to technology. Convergence among technologies is the origin of many alliances. It is increasingly more frequent that companies need to appeal to their competition in different sectors if they want to realize a product line. • GENERAL INSTRUMENTS, MICROSOFT, INTEL. In the “information gateway” alliance, General Electric brought its experience and market share in converter boxes; Microsoft contributed its software and Intel its microprocessors. Uniting forces. Some projects are too complex, with costs that are too high, to be managed by a single company (military supplier contracts, civil infrastructure construction).

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Ch. No 2 Types of alliance Strategic alliances can be considered on a spectrum ranging from informal collaboration (which hardly merits the term strategic alliance) to group structures and finally merger. Alliances at the left hand end of the spectrum allow organisations to maintain a great deal of autonomy. Moving across the different types (to the right) requires greater commitment and leads to greater integration. The type of alliance chosen for a particular venture needs to suit the circumstances. It is useful to distinguish among types of alliance in order to understand various characteristics and make choices. But every alliance is different and has its own story. It adapts its needs to specific situations. After deciding to form an alliance and with whom, the best form of collaboration needs to be established. There are numerous distinctions to be made. Three of these merit examination for their ability to illustrate the advantages and disadvantages of alliances and thus make the choice based on the different strategic needs of the partners: 1. alliances based on contracts as opposed to those based on ownership of capital; 2. relationships between the degree of involvement of the partners in the alliance and ownership of capital; 3. management of the resources conferred in the alliance, their separability and the risk of other partners appropriating these resources. Contracts/ownership of capital One of the most prevalent and effective distinctions (regarding problem management) is that between alliances based on contracts and alliances based on ownership of capital. Using this interpretation, strategic alliances would be

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contracts of partnership, investments in the capital of already existing organizations and investments for the creation of new organizations (joint ventures and consortia). To clarify this concept of alliance, it is useful to look at what an alliance is not (if this interpretation is accepted).  Mergers and acquisitions are not considered strategic alliances, in that they involve two or more entities that do not remain independent.  For the same reason, the acquisition of control of a company’s total capital by another company is excluded in discussion of an alliance.  Whether a joint venture is or is not a strategic alliance depends on the features of the agreement. To be a strategic alliance, the agreement must be important for the partners. It is not a strategic alliance if it simply represents a tool to update  Periodically the database for a market or system of suppliers. It can be strategic if it concerns an agreement to distribute products in a market where penetration by a foreign company is difficult.  Similarly, sharing technology in exchange for royalties is not strictly speaking a strategic alliance, unless it deals with “core competencies.” All the more reason a franchising contract is not considered a strategic alliance. Involvement/ownership of capital Others interpret the concept of alliance more restrictively. Harbison and Pekar (1998), for example, distinguish relationships between companies by two criteria. On one side, the degree of involvement, which ranges from a simple transaction (sale) to the long term and a permanent relationship (for example a cartel or keiretsu). On the other side is ownership of capital, which goes from no ties between the partners at all to total control of the capital by one or more of the partners (e.g. the 100% acquisition of Jaguar by Ford). The two authors cited limit strategic alliances to long-term agreements based on conferring resources and financing and on stock participation (including cross participation). They do not consider relationships based on transactions regulated by contracts, such as agreements on marketing collaboration or the cooperation between distribution and licensing to be strategic alliances. They exclude (on the grounds of their permanence) cartels, which aim to restrict competition and fix price structures, and keiretsu, which aim to give stability to the vertical structure of service and product suppliers. They also exclude joint ventures based on the ownership of capital.

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 Resource management, separability, risk that a partner will appropriate resources We have already discussed how strategic alliances are based on a wide variety of agreements. On one hand there are extremely formalized alliances based on contracts and the control of capital; on the other are alliances based on informal agreements between organizations, without any control of property. The reasoning at the base of these different forms of alliance is varied, but more often than not involves the nature of resources (assets) involved in the alliance. “Resources” is a broad concept, ranging from the availability of financial resources to the availability of plants, from access to a market to intellectual property and the availability of professional capabilities (skills). A classification of strategic alliances and the motives at their origin is based on the weight given to: 1) the management of resources; 2) separability of the resources; 3) the risk that one partner will appropriate the key resources.  Asset management: the extent to which the assets (resources) can be managed jointly.  Asset separability: the extent to which it is possible to separate the assets (resources) between the partners.  Asset appropriation possibility: the extent to which a risk exists that one of the partners involved could “appropriate” the assets (resources).

Types of alliance Alliances assume many different configurations.

Joint ventures:These are the results of agreements based on which the partner companies remain independent and decide to create a new organization that is legally distinct. The share of participation in capital can be 50/50, 49/51, 30/70. Most joint ventures limit collaboration to specific functions. For example, only R&D, not product development and distribution. Joint ventures that cover all possible functions of a company are rare. EASTERN EUROPE- In two different periods, joint ventures were the preferred tool of operations in the economies of Eastern Europe. During the Cold War they were the only means of being present in these markets. The political regimes did not admit foreign property of means of production. As a consequence, the only possibility was a joint venture between

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the western company and a local organization. Western participation was almost always as a minority. In the early 90’s and beyond, the joint venture has represented the best way to set up collaborations between western companies and Eastern European ones. The former supplied technology and financial means, the latter supplied low-cost labor, entry into the markets and production facilities (which almost always needed modernization). Consortia. These involve two or more organizations, both public and private. Their objective is a particular initiative or a particular project. The most significant examples are in construction or large infrastructure, like the Channel Tunnel, or aerospace construction, like the European Airbus consortium. AIRBUS INDUSTRIES- It was founded in 1969 by the governments of Great Britain, France, Germany and Spain. At the beginning it was a consortium for the marketing of the airplanes of the four partners: Aerospatiale, Daimler Benz Aerospace, British Aerospace and Costrucciones Aeronauticas. Contract of partnership in specific functions. One or more companies decide to collaborate in one or more functions, such as marketing, R&D, production, distribution, or other functions, without starting a new, legally distinct entity. The partners set contracts or make formal agreements among themselves. They remain independent. Often, they are competitors. Ownership of capital. The alliance can be based on stock participation of one or more of the partners by other partners. Networks. These are agreements in which two or more organizations collaborate without formal relationships, but through mechanisms that provide reciprocal advantages. “Code sharing” agreements among airlines can be considered networks. These are agreements through which passengers can fly with one ticket, using several airline partners. Franchising. This is an agreement in which a company (franchiser) allows another (franchisee) the right to sell its products or services. An exclusive franchise is when the agreement is made with a single company; a non-exclusive franchise when it is made with a number of companies. A franchising contract is set for a specific period of time. The franchisee pays a royalty to the franchiser for the buying rights. The most notable examples are Coca Cola and McDonald’s. In these cases, the franchisee carries out a specific activity such as production, distribution or sales, while the franchiser is responsible for the brand, marketing, and often the training. In the fast food sector, and in clothing distribution, franchises are quite common: Burger King, Kentucky Fried Chicken, Tie Rack, Dyno-Rod. Franchising is a type of alliance that offers advantages to both parties. The franchiser is offered the possibility of quickly developing sales over a wide territory, often worldwide, without having to invest serious resources. There can also be advantages of entrepreneurial motivation of the franchisee, who prefers to operate under the

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brand name of a large organization. All generally have to contribute an initial investment in tangible activities, therefore having a personal interest in the success of the initiative. The franchisee can gain the advantage of acquiring sales methods from the franchiser’s technical assistance, specialized equipment and global advertising campaigns.

Licensing This is an agreement in which a company allows another (exclusive licensing) or multiple others (non-exclusive licensing) the right to use its technology, distribution network or to manufacture its products. Licensing is based on a contract, generally stipulated for a specific period of time, in which the licensee pays a fixed amount and/or a royalty or fee for the rights that are ceded to it. For an innovative company with limited resources, licensing offers the possibility of presence in multiple markets and recuperating investment capital quickly. The risk is that the company, ceding its own know-how to current or potential competitors (for a long period), therefore loses control over its core technology. To address this risk, and to widen the collaboration in the technology field, the companies can decide to collaborate exchanging expertise or technology. They create a cross-licensing agreement that brings a certain expertise from A to B and licenses another expertise complementary to the first from B to A. MOTOROLA-TOSHIBA- The two companies made a cross-licensing alliance. Motorola ceded part of its microprocessor technology to Toshiba. In exchange, Toshiba allowed Motorola part of its memory chip technology.

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Ch. No.3 The Implementation of Strategic Alliances Alliance implementation issues include the choice of governance mechanisms, enhancing trust and reciprocity between partners, managing the integration of project staffs from different organizational cultures, and resolving conflicts that arise among partners with divergent expectations about and contributions to their collaboration. Relational Contracting Some firms engaging in repeated long-term transactions may attempt to use hierarchical governance forms to safeguard the specific assets that evolve during their exchanges. Hierarchical governance mechanisms include empowering one firm’s decisions over another’s; creating a neutral body with authority and power to control specific issues; and implementing standard operating procedures within the alliance. As alternative to hierarchical governance, it is proposed that relational contracting could counteract the uncertainties associated with arm’s-length contracts. Relational governance forms rely on such diverse coordination mechanisms as reciprocity norms, inter organizational trust, and social capital embedded in multiplex exchanges and social interactions. As a theoretical perspective, the concord that implicitly underlies relational contracting contrasts with the opportunism explicitly presumed in both agency theory and transaction cost economics (Borsch 1994). Relational contracting embraces not only unspecifiable terms and conditions in complex and open-ended contracts, but also collective interorganizational strategies for eliminating rivalry through tacit coordination. Pursuing a collective strategy typically depends on unanticipated future conditions that cannot be explicitly written into formal contractual agreements. Hence, successful strategies require basic trust, mutual understanding, unrestricted learning, and interorganizational knowledge-sharing to achieve a high level of joint decision making at both strategic and operational levels. Operationalized these processes as “open solicitation” and “seeking domain consensus,” where the relational partners continually elaborate on their mutual objectives, capabilities, resources, and tasks. Achieving a well-documented consensus would then serve as a foundation on which relationally contracted firms could subsequently announce and implement a formal strategic alliance. A central issue remains how best to manage the balance between interdependence and control, with the alternative strategic alliance governance forms discussed above serving as particularly important mechanisms for resolving conflicts and preserving the partners’ relationship. Social capital, in the form of interpersonal and inter organizational trust, is indispensable to reducing the costs of negotiations between partners.

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Moreover, many analysts treat trust as both an alliance outcome variable and a predictor of alliance success. Managing Alliance Formation Once organizations decide to form a strategic alliance, the partners face serious challenges of turning their good intentions into a viable enterprise at all levels, from routine activities to strategic policies. This implementation phase typically requires that two autonomous firms pool some human resources and material assets; develop a practical governance structure with sufficient power and control; and learn how to cooperate for mutual benefit. The inevitable misunderstandings and conflicts arising in a collaborative undertaking demand that partner firms and their employees master new management skills, especially coping with complex lateral relationships spanning legally autonomous entities. When two firms simply attempt to work together according to an agreement, the clean authority lines of a corporation hierarchy typically are supplanted with disorderly parallel command-and-report systems. The managers delegated by the partners to implement the joint project may be initially uncertain about who is really in control and possesses final decision making authority. Careful attention must be paid to selecting staff and leaders for liaison management, “the required continual linkages among partners and between partners and the alliance”. Creating a formal separate subsidiary having its own board of directors and internal authority hierarchy, with equity stakes legally dividing ownership and control among the partners, may help to clarify the venture partners’ ultimate rights and expectations vis-à-vis one another. But, even the most meticulous contractual safeguards provide no guarantees against the uncertainties, ambiguities, and disputes that constantly surface during daily operations. Several social control processes, such interorganizational trust, reciprocity, and confidence, loom large as mechanisms for sustaining alliances during their precarious implementation phase. Generating trust among alliance participants is crucial to overcoming competitive rivals’ initial suspicions about possible partner opportunism, which may prevent effective implementation of their collaborative agreement. Imbalances in organizational power, indicated by disparities in the resources contributed and controlled by each partner organization, can impede trust creation due to the partners’ unequal capacities to fulfil their obligations . Initial alliances among previously inexperienced partners (“virgin ties”) often begin with formal contractual linkages that expose the partners only to small risks. Because both organizations still have few grounds for trusting one another, equity-based contracts predominate as legal protections against potential opportunism (so-called “hostage-taking” purportedly limits each firm’s capacity

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to act in disregard of the partner’s interests). Once both partners gain mutual confidence through continual testing, then “informal psychological contracts increasingly compensate or substitute for formal contractual safeguards as reliance on trust among parties increases over time” (Ring and Van de Ven 1994:105). Repeated strategic alliances among experienced partners are more likely to rely on inter organizational trust than on formal safeguards against potential partner opportunism.

Prior Alliances Using a 1980-89 panel of 166 corporations operating in three worldwide sectors (U.S., Japanese, and European new materials, industrial automation, and automotive products firms), Gulati (1995b) conducted event-history analyses on a variety of dyadic alliances ranging from licensing agreements to closely intertwined equity joint ventures. He found strong evidence that formal equitysharing agreements decreased with the existence and frequency of prior ties to a partner. Domestic alliances less often involved equity mechanisms than did international agreements, supporting claims that trust relations are more difficult to sustain cross-culturally. Strategically interdependent firms (i.e., companies operating in complementary market niches) formed alliances more often than did firms possessing similar resources and capabilities. Previously allied firms were more likely to engage in subsequent partnerships, suggesting that over time, each firm acquired more information and built greater confidence in its partner. However, beyond a certain point, additional alliances reduced the likelihood of future ties, perhaps reflecting fears of losing autonomy by becoming overly dependent on a partner. Indirect connections within the social network of prior alliances also shaped the alliance formation process: previously unconnected firms were more likely to ally if both were tied to a common thirdparty, but their chances of partnering diminished with greater path distances.

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Gulati (1995b: 644) concluded that “the social network of indirect ties is an effective referral mechanism for bringing firms together and that dense colocation in an alliance network enhances mutual confidence as firms become aware of the possible negative reputational consequences of their own or others’ opportunistic behavior.” His results reflected a logic of clique-like cohesion rather than status-competition among structurally equivalent organizations. Trust and Reciprocity Andrea Larson’s (1992) ethnographic exploration of dyadic alliances illuminated the role of trust and reciprocity norms during the alliance implementation phase. She conducted in-depth interviews in the mid-1980s with informants from seven partnerships created by four small entrepreneurial companies (a telephone distributor, a retail clothing company, a computer firm, and a manufacturer of environmental support systems). Although mutual economic gain was a necessary incentive for an alliance to emerge, sustaining the relationship required a trial period, lasting between six and 18 months, during which the partners incrementally built stable and predictable structures to govern their collaboration. Key features of this critical trial phase were the institutionalization of implicit and explicit rules and procedures, and the evolution of clear expectations that became taken-for-granted by managers in both companies. As a relationship solidified over time, organizational actions grew more integrated and mutually controlled through intertwined operational, strategic, and social mechanisms.

Ch No. 4 Alliances for specific functions 15 V.E.S College of ARTS, Science &Commerce

For each partner, the alliance is a means to overcoming a weakness. Each wants to bolster its own capabilities, in technology, finance, marketing, etc., to ally itself with partners that are strong where it is weak. Many alliances deal with specific functions. Two or more companies decide to cooperate in one or more functions: R&D, marketing, production, distribution, etc.  Research and Development This is a collaboration for the development of new products and technologies. The alliance is generally limited to research. The partners then develop the production and distribution on their own. R&D alliances are an important strategic option when the costs for researching innovations are high and when shortening the life cycle of products creates pressure to be among the pioneers of product innovation and the production process, which also greatly increases risk factors. The alliance also offers the advantages of having access to work groups with elevated professional skills, avoiding duplication of costs and accelerating the introduction of the product to the market. Generally, this type of alliance is limited to a specific project or market segment. It almost always involves only one aspect of technology. The organization of alliances is quite varied. Sometimes the partners carry out the research in their own laboratories or with their own equipment, then exchange information and personnel (Philips-Siemens), or they develop distinct branches of the R&D process (Tanabe-Glaxo) or one part of the product (Philips Du Pont Optical).  Production The advantages of an alliance in production are mainly in the economy of scale and the possibility of absorbing excesses in operational capacity during periods of declining demand.  Distribution This is one of the most common and oldest forms of alliance. It gives a company the possibility of broadening its range of products and services offered on the market, adding the products and services of another company to its own. The greatest successes happen when the alliance is made for products that are compatible or complementary, so that they can be sold as part of a coherent line. Alliances for distribution are often integrated with other alliances. For example, in exchange for an agreement to combine production capacity, one of the partners offers the other or others its own distribution structures (logistics, channels, relationships with individual distributors and distribution chains).

Why alliances are more common now 16 V.E.S College of ARTS, Science &Commerce

The drive to create alliances has evolved quickly over the last few decades. In the 70’s, the main factor was the performance of the product. Alliances aimed to acquire the best raw material, the lowest costs, the most recent technology and improved market penetration internationally, but the mainstay was the product. In the 80’s, the main objective became consolidation of the company’s position in the sector, using alliances to build economies of scale and scope. In this period there was a true explosion of alliances. The one between Boeing and a consortium of Japanese companies to build the fuselage of the passenger transport version of the 767; the alliance between Eastman Kodak and Canon, which allowed Canon to produce a line of photocopiers sold under the Kodak brand; an agreement between Toshiba and Motorola to combine their respective technologies in order to produce microprocessors. In the 90’s – according to Harbison and Pekar (1998) – collapsing barriers between many geographical markets and the blurring of borders between sectors brought the development of capabilities and competencies to the center of attention. It was no longer enough to defend one’s position in the market. It became necessary to anticipate one’s rivals through a constant flow of innovations giving recurrent competitive advantage. It is easy to predict that various factors will contribute to the diffusion of alliances in the coming years.  Acceleration of the rhythms of technological innovation and shortening of product life cycles.  The convergence of technologies and the “permeability” of borders between sectors and between markets.  Progress in telecommunications.  Strong improvements in R&D costs, new product launches, tools and systems.  The collapse of many barriers to competition, on account of deregulation, privatization and globalization.  The interest of governments in attracting foreign capital and technologies without ceding control of local companies to foreigners.

Four Steps to a Successful Merger 17 V.E.S College of ARTS, Science &Commerce

Four essential steps contribute to a successful merger: 1. Define ‘the prize’ The prize is the vision of a merged organisation, for example assisting more people, mounting stronger campaigns and providing better quality and more integrated services. The prize should become the touchstone which everyone can hold on to when negotiations become difficult. 2. Establish a process and timescale for negotiations Timescales are important. They should be neither too long nor too short. The ideal is 4 – 6 months. Organisations should identify all the issues that might arise at the first meeting and then agree which ones need to be solved before the merger can proceed. The proposed process should anticipate that there will be difficulties and should therefore include a mechanism for resolving insuperable obstacles. 3. Address the biggest obstacles early on in the process Two common difficulties are the name of the merged organisation and who fills the key roles of Chair and Chief Executive. Inability to agree on any of these can bring the whole process to a grinding halt. These issues need to be raised early in the process, but not before good personal relationships have been established. 4. Recognize that cultural integration is the greatest challenge There is ample evidence that a significant reason why mergers fail is the inability of the two organisations to integrate at a cultural level. People bring their own organization cultures to the negotiating table and expect others to share their point of view, not realising that their organization has different beliefs and norms. Managers negotiating a merger need to be acutely aware of different ‘ways we do things’, to surface those differences and encourage discussion about what might be best for the newly merged organization.

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Strategic Alliances - an important part of most business models A strategic alliance is an agreement between two or more players to share resources or knowledge, to be beneficial to all parties involved. It is as way to supplement internal assets, capabilities and activities, with access to needed resources or processes from outside players such as suppliers, customers, competitors, companies in different industries, brand owners, universities, institutes or divisions of government. Different forms of Strategic Alliances Strategic Alliances can take different forms, occur within an industry or between actors in different industries, and can range from simple agreements to mergers or equity joint ventures. There are basically three types of generic strategic alliances: Non-Equity Strategic Alliances, Equity Strategic Alliances, and Joint Venture Strategic Alliances.  Non-Equity Strategic Alliances Non-Equity Strategic Alliances can range from close working relations with suppliers, outsourcing of activities or licensing of technology and IPRs, to large R&D consortia, industry clusters and innovation networks. Informal alliances without any agreements, or based on "Gentlemen’s agreement", are common among smaller companies and within university research groups. Another form of informal non-equity alliances are geographic clusters where concentrations of interconnected players, industries, universities and government agencies co-exists, increasing local competition and productivity.  Equity Strategic Alliances In Equity Strategic Alliances agreements are supplemented by equity investments, making the parties shareholders as well as stakeholders in each other. The investments are passive so each firm retains fully its decision power. The cross-shareholding of companies may result in a complex network where company A owns equity in company B that owns equity in C, creating direct and indirect ownership. Intuitively, when firms share profits the incentives for competing are reduced and are often done to enhance control and make takeovers more difficult.

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 Joint Venture Strategic Alliances Joint ventures are distinguished from Equity Strategic Alliances in that the participating companies usually form a new and separate legal entity in which they contribute equity and other resources such as brands, technology or intellectual property. The parties agree to share revenues, expenses and control of the created company for one specific project only or a continuing business relationship. Reasons for entering a Strategic Alliance Firms entering strategic alliances often have multiple objectives, some of them listed below:                          

Access to intellectual property rights Access to knowledge Access to new technology Access to new markets Access to distribution skills Access to manufacturing capabilities Access to marketing skills Access to management skills Access to capital Create critical mass Create common standards Create new businesses Create synergies Diversification Improve agility Improve quality Improve R&D Improve material flow Improve speed to market Influence structural evolution the industry Inhibit competitors Reduce administrative costs Reduce R&D costs Reduce risk and liability Reduce cycle time Utilize by-products

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Main risks identified in the literature There are several risks and limitations using strategic alliances. Failures are often attributed to unrealistic expectations, lack of commitment, cultural differences, strategic goal divergence and insufficient trust. Some of the risks are listed below:            

Activities outside scope of original agreement Hidden costs Inefficient management Information leakage Loss of competencies Loss of operational control Partner lock-in Partner product or service failure Partner unable or unwilling to supply key resources Partner's quality performance Partner take advantage of its position Partner experiences financial difficulties

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Ch No.5 Stages of Alliance Formation A typical strategic alliance formation process involves these steps:  Strategy Development: Strategy development involves studying the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.  Partner Assessment: Partner assessment involves analyzing a potential partner’s strengths and weaknesses, creating strategies for accommodating all partners’ management styles, preparing appropriate partner selection criteria, understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner.  Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high 22aliber negotiating teams, defining each partner’s contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.  Alliance Operation: Alliance operations involves addressing senior management’s commitment, finding the 22aliber of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance.  Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocates resources elsewhere.

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Benefits of Strategic Alliances and Partnerships Associations enter into a strategic alliance or partnership with other associations or for-profit entities for many reasons. Typically, the objective is to exchange or publish information, hold joint meetings and/or trade shows, offer education and training programs, sell products and services, promulgate industry standards, and/or monitor policy issues. Partnerships and strategic alliances can help to make an international program more successful. These partnerships can be informal, such as using the expertise of a counterpart organization or government agency to strengthen your association’s own capacities such as attracting international attendees to a meeting you sponsor. Or, they can be more formal (and perhaps on-going) alliances to help distribute, for example, one or more of your association’s products on a worldwide basis. Potential partners include counterpart associations, government agencies, publishers, association management companies, universities, or other for-profit entities. The most common way to grow internationally is through the formation of a strategic partnership network. Strategic alliances can take different forms and have different objectives depending on the nature of the association, its products, services, and resources. The nature of a strategic alliance is also highly influenced by the local market conditions including the state of the competition. By and large strategic partnerships are designed to achieve one, or a combination, of the following goals: 1. To distribute products or services to a set of customers. This represents a straightforward distribution or licensing deal. 2. To jointly develop products and services for the local market. In this model, the association will find organizations that have products, services or skills complementary to theirs and join forces to develop products for the local market. Although it is not uncommon to see this model apply to contentbased products, it is more often seen in the organization of events such as a tradeshow. 3. To work with local or regional counterparts to drive a common agenda. This model, also known as co-opetition (collaborating with your competition), is often seen when the two associations are joining forces to push forward an aggressive advocacy or legislative agenda for the benefit of both association’s members.

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A partner in another country can offer local contacts, language capabilities and knowledge of the cultures, protocols and business styles. To most effectively form and utilize these alliances, however, the organization should determine some initial goals. Many other ideas for joint ventures are also possible based on your association’s interests, contacts and creativity. In general, here are some of the most common benefits and cautions of strategic alliances and partnerships: Benefits  Can capitalize on the individual strengths of each participating organization.  Can provide local contacts and links to local communities/stakeholders who may be critical to the success of the program you want to launch or implement.  Involves shared responsibility for the development and execution of a particular program or service.  Limits a participating organization’s liability to the scope of project involved.  Provides reduced-cost opportunities and expertise for each participating organization. Disadvantages  Some cautions or challenges that an organization may encounter in pursuing strategic alliances or partnerships include:  Usually limited in scope to the objectives of the alliance or partnerships  Can become ineffective if one partner doesn’t perform at the expected level or fulfill its obligations to the agreement.  Can consume more human and financial resources than were anticipated.  Can require a significant time investment to develop an effective alliance or partnership.  Can result in a loss of flexibility for the organization to take quick action in another area that may be in the organization’s better interests than the area they are pursuing with a given partner.

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QUESTIONS TO ASK: Before entering into a strategic alliance or partnership, ask: ? Does it extend the association’s reach by opening up and developing new markets? ? Does it help members gain access to additional industry intelligence and knowledge of other markets? ? Does it increase the association’s revenue? Will it contribute to the bottom line? ? Will it amplify the association’s resources? Will it leverage or reuse an already existing resource? ? Does this alliance have relevance for the association and its mission? Will it increase the value of the association within the industry or profession The effects of formal contracts on opportunistic behavior in strategic alliances Collaboration between organizations is crucial to remain capable of meeting the desires of the demanding customer of today. Organizations are aware of the fact that focusing on their core competences is the most effective way to sustain competitive advantage. Many firms are involved in high-tech alliances and their importance for firm performance is growing. Alliance forming is a way of achieving competitive advantage and alliances are important for the innovative performance of the firm. In the Netherlands, about a third of innovations is developed in collaboration and estimate is that about 25% of research and development funds are invested in alliances. Despite the advantages of alliances for both parties the failure rate is remarkably high, around 50%. One reason for failure of alliances is the opportunity of alliance partners to behave opportunistic. Firms could enter an agreement with a secret agenda. These firms do not participate in the cooperation for mutual benefits, but have the incentive to absorb the other partner’s knowledge, skills and other assets. For that reason contracts are important instruments to mitigate contemporaneous and future risks. The focus of this literature research is on strategic alliances, and the role formal contracts play in this form of inter-firm collaboration. The main research question that is being answered in this research is:

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 What is the effect of formal contracts on opportunistic behavior in strategic alliances? The contribution of this literature research is that it increases the understanding of the effect of detailed formal contracts on opportunistic behavior in strategic alliances. Opportunism in inter-firm relationships is a major issue and an important reason for the high rate of failure of strategic alliances. Therefore it is important to increase the understanding of how to avoid opportunistic behavior. Many scholars see formal contracting as the appropriate governance mechanism to avoid opportunistic behavior. But this research will make clear that the effect of formal contracting on opportunism entails not always the desired effect. The first part of this article deals with alliance failure. After this the proposed positive effect of formal contracts on opportunism is explained. This is followed by the effect of formal contracts on trust, which is an unambiguous effect. The following part deals with the fact that it seems situation dependent whether formal contracts really prevent against opportunistic behavior.

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Ch. No. 5 EXAMPLE ICICI Bank and Vodafone India through its 100% subsidiary, Mobile Commerce Solutions Ltd. (“MCSL”) have finalized plans to launch mobile payment services this year, under the brand name „m-pesa‟. ICICI Bank, India’s largest private sector bank and Vodafone India, one of India’s largest telecom service providers, announced a strategic alliance to launch aunique mobile money transfer and payment service called ‘m-pesa’. ‘m-pesa’ is the trademark of Vodafone. The announcement was made by Chanda Kochhar, MD & CEO, ICICI Bank and Marten Pieters, MD & CEO, Vodafone India Ltd. ICICI Bank and Vodafone India through its 100% subsidiary, Mobile Commerce Solutions Ltd. (“MCSL”) have finalized plans to launch mobile payment services this year, under the brand name ‘m-pesa’. This offering will comprise: a mobile money account with ICICI Bank and a Mobile Wallet - issued by MCSL. This innovative offering will give the customer a comprehensive service comprising: E Cash deposit and withdrawal from designated outlets E Money transfer to any mobile phone in India E Range of mobile payment services including purchase of mobile recharge, recharge of DTH services and utility bill payments E Money transfer to any bank account in India E Payments at select shops The partnership between ICICI Bank and Vodafone effectively leverages the strengths of Vodafone’s significant distribution reach and the security of financial transactions provided to customers by ICICI Bank. These services are made convenient using a vast network of authorized agents who will enable the customer to deposit and withdraw cash in and from their account. By facilitating banking transactions at such agent locations, this alliance effectively delivers the last mile access in remote areas.

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The mobile payment service will be launched initially in the eastern region of the country viz. Kolkata, West Bengal, Bihar and Jharkhand and then will be rolled out to other parts of the country in a phased manner. Chanda Kochhar, Managing Director& CEO, ICICI Bank said, “ICICI Bank has been at the forefront of leveraging technology in banking and has revolutionized the way Indian customers carry out their banking transactions. We have now launched ‘m-pesaTM’, a unique and innovative offering which will allow us to provide basic banking services to millions of customers spread across the country. This will help us reach out to segments that currently do not have access to banking services, towards our objective of achieving greater financial inclusion. We are very happy with this partnership with Vodafone which will bring together the strengths of our respective brands and our complementary capabilities.” Marten Pieters, Managing Director & CEO, Vodafone India said, “Vodafone is the world’s largest and leading provider of mobile payment services. Vodafone ‘m-pesaTM’is offering millions of people basic financial services, beyond the reach of traditional banking. After an in-depth understanding of the Indian customer insights, we concluded that there is tremendous potential for this product in India. We are really proud to announce the strategic partnership with ICICI Bank and launch this first-of-its-kind offering with ICICI to provide mobile payments. This offering has been customized to serve the Indian customer in compliance with all applicable regulatory requirements”.

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CONCLUSION The evaluation should not be limited to reaction of the investors, clients, suppliers and employees, but it should also include reaction of the government, the local community, the banking system, unions and, not least of all, the authority that regulates competition. Strategic alliances, which are cooperative strategies in which firms combine some of their resources to create competitive advantages, are the primary form of cooperative strategies. Research on strategic alliance in the past few decades has suggested that strategic alliance can enhance competitiveness. Whatever forms joint venture, equity based or non equity based, strategic alliance assist in ensuring the economic value addition, multidimensional inter-firm network, and interorganizational coordination. In this paper we have tried to identify how strategic alliances enhance competitiveness and some factors which foster strategic alliances. Finally, we have identified some research gap that will help in conducting future research regarding strategic alliance issues. Alliances often change the landscape of competition; rewrite the way of competing, initiating reactions of rivals and antitrust authorities. There are many cases of announced alliances, which are later dissolved or changed in structure following antitrust intervention. A strategic alliance can help a firm gain knowledge and expertise. Further, when partners contribute skills, brands, market knowledge, and assets, there is a synergistic effect. The result is a set of resources that is more valuable than if the firms had kept them separate. Similarly, a strategic alliance can help a firm gain a competitive advantage. Contracts are commonly used governance mechanisms in strategic alliances to prevent against opportunistic behavior.

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BIBLIOGRAPHY

WEBLIOGRAPHY SOURCES:

Search Enginewww.google.com www.yahoo.com www.wikipedia.com

Web siteswww.business.info.com www.rrdonnelley.com www.web.mit.edu.com www.safaribooksonline.com

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