Strategic Alliances: Reasons and Types

Introduction

Strategic alliances and why are they formed

Strategic alliances can be seen as one of the fastest growing trends for business today; Alliances are sweeping through nearly every industry and are becoming an essential driver for their super growth. A strategic alliance, by definition, is a form of affiliation that involves a mutual sharing of resources for the benefit of all of the strategic partners. “Mutuality” is key (Beavers 2001). The business consideration is whether both alliance partners need each other. Strategic alliances range in size and scope from informal business relationships based on simple contracts to joint venture agreements, some times where corporations are set up to manage the alliance. According to Vyas et al (1995) strategic alliances are cropping up across the global arena mainly due to the maturation of several trends of the 1980s, such as: intensified foreign competition, shortened product life cycles, soaring cost of capital, including the cost of research and development, and ever-growing demand for new technologies. However, strategic alliances can be tricky. Partnerships foster mutual benefits, but the alliances exist only as long as they are advantageous to both parties. Research indicates that a high proportion of strategic alliances fail (Forbes 2002; Lorange and Roos 1991; Day 1995). This essay explores concept of strategic alliances drawing from Mintzberg et al's schools of strategy and then critically identifies the main factors that determine the design and delivery of effective co-operative strategies. It does so by using the case study that pertains to Avebe and Noveon Alliance.

Why?

For many multinational firms, strategic alliances have become increasingly important tools for ensuring speed and flexibility in carrying out multinational strategies. A typical example is SEVEL (Societa Europea Veicoli Leggeri), the 1978 strategic alliance between Fiat and Peugeot for the production of a new light van named Ducato. Both parties were short on resources and saved time and energy by combining their R&D and manufacturing efforts (Lorange and Roos 1991). Strategic alliances can be effective ways to diffuse new technologies rapidly, to enter a new market, to bypass governmental restrictions expeditiously, and/or to learn quickly from the leading firms in a given field

Mintzberg et al's Schools of Strategy

Strategic alliance is an agreement between two or more individuals, or entities, or organisations to cooperate in a specific business activity, so that each benefit from the strength of other and gains competitive advantage. The formulation of strategic alliance has been seen as a response to the globalisation and increasing uncertainty and complexity in the business environment. Strategic alliances involve the sharing of knowledge and expertise between the partners as well as in reducing the risk and costs in areas like relationship with the supplier and the development of new products and technologies. Strategic alliances usually make sense when the parties involved have complimentary strengths. Its unlike full-scale acquisition, an alliance does not give a firm total control over its partners.

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Avebe and Noveon Alliance - Case Study.

Avebe, a Dutch company, established in 1919 as a joint sales organisation for the greater part of the Dutch independent potato starch industry. Through research and development, joint ventures and acquisition in Netherlands, Europe and Worldwide, Avebe now plays a major role in the global sales, marketing, production and development of potato starch and starch specialities used in food, pharmaceuticals, animal feed, textile, paper and adhesives. Avebe's specialities are used by the textile industry for obtaining good weaving efficiency, to obtain smooth fabrics, and for sharp and durable printing of fabrics.

Noveon, headquartered in Cleveland, Ohio with regional centers in Belgium and Hong-Kong, is a leading global producer and marketer of technology advanced speciality chemicals for a broad range consumer and industrial application. Noveon was recognised as leading producer of polymers. It was also acknowledged as the largest producer acrylic acid for synthetic polymer.

Reason for cooperation - Avebe

Avebe was outstanding in printing thickeners but not yet in reactive dye printing market. It was not possible for Avebe to enter into this market as it was purely a starch based industry. Only a combination of starch and synthetic polymer could help them enter this market. For this Avebe had two options- Noveon and Alloid Colloids (under ICI Corporation, England). Combination of Avebe's and Noveon's products in laboratory test showed excellent printing thickness for reactive printing dye market.

The final selection was based on four considerations, namely-

• Noveon had the same synthetic polymer as that of ICI in dry form and Avebe was expert in dry blending.

• Dry blends resulted in more efficiency both in space and cost compared to liquid one.

• Noveon's synthetic was proved the best when combined with Avebe than any other.

• Noveon had excellent market expertise in the US, which Avebe lacked.

Combination of Avebe and Noveon's expertise expected around 25% of the new market to either company.

Reasons for cooperation - Noveon

Noveon's alliance with Avebe started by an accident. Noveon acquired QSI in South Carolina in 1994. QSI used to purchase natural starches from Avebe for its operation. This was the start of their joint venture. Synthetic polymer Noveon had was fairly expensive; while Avebe's natural starch was relatively cheap. They expected that blending of these two would result in better quality at reasonable price. Noveon expected that the price of synthetic and natural thickener blends would increase in US and Europe, due to the demand for high quality products. Combination of synthetic and natural thickeners could reduce the cost of dye stuff and chemicals. The saving was estimated to be around $ 1 million per year. Noveon selected Avebe for their technology. Far East and Europe preferred Avebe as their best choice.

Initial agreement

The agreement was signed by both the companies on 24th March 1995. After two year, to anticipate competition, both the companies formulated a marketing agreement for their joint product. The agreement was as follows-

• Division of the world market. As per this agreement, Noveon agreed market their product in America and the Caribbean. Avebe agreed to market its product in Europe, Asia- pacific and Russia. China and India was open for both.

• Restriction on sale of each others product. As per this agreement Avebe was forbidden to sell Noveon's product and Noveon agreed not to sell Avebe's products to any other company without a prior consent of other.

3) Information exchange/ training. Both Avebe and Noveon agreed for a meeting once in six months to exchange development, manufacturing and technical service information relating to their joint venture.

Reasons for alliance

1) Alliances assist the firm's learning and diversification into new areas of activities.

Alliances help to extend a firm's competitive advantage in several ways. A firm enters into strategic alliance because this can potentially provide benefits that are not possible through either internal development or external acquisition. This helps the company to acquire benefit by reducing the cost rather than taking it all by itself. An alliance stand as an intermediate to help the allies enter into new industry and markets.

2) Alliance provide useful platform to test their products in new markets.

Alliances help in extending and renewing their sources of competitive advantage while expanding globally. This helps the new companies to enter into new market with little market knowledge. By this these companies learn how to compete in the global market. Working together helps in overcoming the economic obstacles too.

3) Design School of strategic management- Henry Mintzberg

This prescriptive school of Mintzberg see strategy formulation as a process of conception which is responsible for the development of strengths, weaknesses, opportunities and threats of the organisation (SWOT). In this school the strengths and weaknesses are of the company are mapped along with the opportunities and threat in the market place. This is implemented in order to formulate clear and unique strategies in a deliberate process. In this the internal environment is matched to the external environment. This school mainly helps in reducing ambiguity and is mainly used in stable environments. It supports strong and visionary leadership. The main drawback of the design school is that it is weak in a fast moving environment and there are risks of resistance. It also has many variables and is inherently complex and also inflexible.

Types of strategic alliances

Strategic alliances can be classified into three main types:

• Shared- supply alliance

Shared- supply alliance bring together companies which join forces to achieve economies of scale on a given component or on an individual stage in the production process. The shared elements are further incorporated in products that are further incorporated in products that remain specific to each other and that competes directly in the market. This type of alliance is formed when the minimum efficient size at a particular stage in the production process is much greater than for the entire product, and when neither of the partner produce large enough to achieve the critical size. Shared- supply alliance are usually formed between partners of comparable size. This alliance primarily involves research and development (R&D) and manufacturing activities. Coordination of research activities between the partners makes it possible to optimize the use or resources. These alliances are usually formed by firms operating in the same zone. In this case of shared supply alliance the assets and skills that the partner companies bring to the joint project are similar in nature and their goal is to benefit from increased economies of scale.

• Quasi- concentration alliance

This alliance brings together companies that develop, produce and market a joint product. There is no open competition in quasi- concentration alliance. Quasi- concentration alliances are primarily characterized by transactions between the consortium of allies and the market. Transactions between the companies are also carried out within the alliance. This alliance covers all the main functions involved in carrying out an activity, that is, research and development, manufacturing, and marketing. Marketing and sales are either split between the partners on the basis of geographic presence or carried out jointly.

• Complementary alliance.

Complimentary alliances bring together companies which contribute assets and skills of different natures to bring up a combined project. Here one manufactures the product, which is marketed by other's distribution channels. There is no competition within the allies. This type of an alliance is mainly formed by only two parties.