Joint Ventures and Strategic Alliances
Joint Ventures and Strategic Alliances
As economies become more globalized, more and more firms are participating in foreign markets. The most popular participation strategies include exporting, licensing, outsourcing, strategic alliances, joint ventures, and direct foreign investment. Each of these involves different levels of risk, capital, and returns.
The use of strategic alliances and joint ventures is rapidly becoming popular with a growing number of multinational firms. According to Cullen in his 1999 book, an international strategic alliance is an “agreement between two or more firms from different countries to cooperate in any value-chain activity from R&D to sales”. A strategic alliance, as differentiated from a joint venture, is a collaboration designed to achieve an isolated objective and involves no equity stake from the partners. Hitt, Ireland, and Hoskisson offered this definition: “joint venture is when an independent firm is created by at least two other firms.” A strategic alliance is a less rigid agreement than a joint venture. These cooperative strategies offer many potential advantages to the participant, but they are also pitted with special problems.
Firms may have many motivations to form strategic alliances, and most of these reasons are based on the logic that each partner can bring complementary strengths to the table, resulting in a competitive advantage for the participants collectively. Partners in a strategic alliance can benefit from many aspects of a cooperative relationship: access to unfamiliar or untapped markets, risk sharing, economies of scale, shared technology, and decreased costs.
A partner's knowledge of the local market can be invaluable to a firm if it wants to get its services and products into a new market. This advantage is most easily achieved when the local firm is in a related industry with related products. The local partner knows the buying habits and preferences of the local buyers and suppliers, and he should also have knowledge of the existing channels of distribution. These relationships with others in the value chain may be otherwise unobtainable to an outside firm.
Consider a company that is contemplating entering foreign markets. Local governments often require, as a condition of entry, that entering companies allow some local ownership. This stipulation is found more often in developing countries than in more developed nations because the developing countries are trying to avoid being exploited for their resources. Through a joint venture the outside company can meet this requirement; in fact, the government of a developing country is often the partner in a joint venture.
Joint ventures and strategic alliances force companies to share revenues and profits, but they also share the risk of loss and failure. Thus, the popularity of the cooperative strategies increases as projected risk increases, because joint ventures allow firms to take on projects that are otherwise too risky or too costly.
Economies of scale can be achieved when two or more firms pool their resources together, maximizing efficiency based on the project's needs. Cooperative strategies also allow small companies to join together to compete against an industry giant. Companies of different sizes may also benefit from joining together. The large company offers its capital and resources in exchange for the efficiencies or innovations found at the smaller company. An article by Shafer describes how Abrakadoodle—a company that offers creative art classes for children in schools, day care centers, and community programs—established a strategic alliance with Binney and Smith, known for its Crayola brand art products. Abrakadoodle founder Mary Rogers was seeking products of high quality that would be safe for children and that would be available
nationally, so all locations could use the same materials in their classes. Since she was already using Crayola products in her classes, she states, “We realized that once we started franchising, the number of Crayola products used in Abrakadoodle classes would grow enormously.” After months of negotiation, agreement was reached between the two companies. Crayola products will be featured exclusively in Abrakadoodle classes, Abrakadoodle will be allowed to use the Crayola trademark for advertising purposes and will be eligible for discounts on Crayola products. Both companies are benefiting from their shared vision for encouraging children's artistic creativity.
In cases where firms do not have the same strengths, creating alliances can allow them to share technology. This, in turn, can help firms produce more efficiently or at a higher quality. Firms must learn to recognize which other companies can offer complementary skills or technology.
When companies from developed countries cooperate with companies in less developed countries, they usually realize huge cost savings by seeking cheaper labor and untapped reserves of material. The company from the less-developed country benefits from advanced technology and increased access to capital. Both companies benefit from the cooperative alliance. Many U.S. firms have been attacked for taking their manufacturing plants “south of the border” to Mexico and thereby harming American workers. The firms are criticized because they join with governments in developing nations so that they can obtain cheaper labor in less-developed countries, thus lowering their production costs. Many argue that it harms American workers, but opponents often overlook the advantages that the developing country receives. Often, the large American company provides jobs to areas with alarmingly high unemployment rates and offers them infrastructure and support that they never had before.
SELECTING AN ALLIANCE PARTNER
In order to realize such benefits, many considerations must go into choosing a partner for a joint venture or a strategic alliance. Choosing a strategic alliance or joint venture partner is very important and can prove to be very difficult. Inherent in partner selection is the understanding of potential partners' goals. For one thing, a potential partner must have complementary strategic objectives. A venture will not succeed if the objectives are in conflict, but the objectives do not need to be identical. For example, the alliance between Yahoo and eBay provides Yahoo with an advertising client and gives eBay (as well as its subsidiaries, like PayPal and Skype) access to Yahoo's large customer base. Together, the two companies possess a market share to rival Google's domination of the Internet advertising market. The strategic alliance is mutually beneficial for both parties. It is important that each partner understand and accept the other's objectives.
Potential partners should also possess complementary skills. Each partner must contribute more than capital to the project, bringing other competencies into the venture. One firm may bring technical skills and another may bring knowledge of the market. There are many skills that a firm can bring into the relationship: managerial expertise, production facilities, or access to limited resources. Skills are most easily meshed when partners have similar, but not identical, products. If both produce an identical product it may be difficult for them to work together. Even if skills are complementary, competition may drive them apart and cause the venture to fail.
While the partners must offer complementary objectives and skills, both partners must believe that they can trust each other and that mutual commitment is a reality. As Cullen explained, “A common theme among managers from both failed and successful strategic alliances is the importance of building mutual trust and commitment among partners. No matter how mutually beneficial and logical the venture may seem… without trust and commitment the alliance will fail entirely, or it will fail to reach its strategic potential.” There are a variety of ways that a company can attain and sustain commitment and trust in cooperative ventures. Goal and intent revelation is a crucial step toward building trust. The partners in a joint venture will outline their duties and goals. Both parties share in the right to manage the enterprise, the right to the profits and the duty to share the losses. The contract also determines when the joint venture will be terminated.
The management structures that control cooperative efforts are varied, and they are usually unique to each relationship. Cullen identified five typical management structures used by companies for their joint ventures and strategic alliances: dominant parent, shared management structure, split-control management structure, independent management structure, and rotating management.
The dominant parent is generally the majority owner of a joint venture. In cases where there is no majority owner, the dominant parent may be the company that contributes the most valuable resources. When there is a dominant parent, this company makes more operational
and strategic decisions. In many instances, a joint venture is treated as a subsidiary of the dominant parent. Often when large multinational firms have cooperative alliances with firms in small countries, the multinational firm comes in as the dominant parent.
The shared management structure and the split-control management structure are very similar. In these structures, both parent companies share decision-making responsibilities. In the shared structure, there are an equal number of managers in controlling positions from each company (board of directors, top management, and functional management). In split-control structures, there are not equal numbers of managers from each company at the functional level. In areas of expertise, one company may hold most or all of these positions. This can be because of differences in expertise or because one firm may insist on this type of arrangement if they do not want to share their knowledge or technology.
Independent management structures are found when the management of a joint venture acts independently of either parent firm. Because a joint venture is a separate legal entity, this is possible, but it is highly unlikely with new joint ventures. It is more common to see the independent management structure as a joint venture matures and begins to act as an independent firm. If the independent management structure is found in a young joint venture, it is often because the parents agreed to recruit externally for management positions.
In a rotating management structure, key positions of the hierarchy rotate between firms. Each firm assigns a person for their term. This structure is popular when an alliance partner is from a less-developed country. With this type of management, local management can be trained so that technology and expertise are transferred to the community, according to Cullen.
DOMESTIC JOINT VENTURES AND ALLIANCES
Not all joint ventures and strategic alliances cross international boundaries. Companies in the same country can achieve many of the same benefits found in an international cooperative agreement. For instance, in 2007, SAB-Miller and Coors entered a joint venture that combined their U.S. operations. The two companies merged their brand portfolio to consolidate their position in the beer market. According to SABMiller, the large scale and increased resources will enable the companies to invest more in brands and product innovation. The company predicts that lower operating costs will result in $500 million in cost synergies per year.
Just as the companies that come together are quite varied, so are their reasons for doing so. There is, however, one best reason for bringing two firms together: synergy. Synergy is the realization that the whole may be greater than the sum of the parts, according to Hitt et al. Often, when two firms are combined, they find that their new venture is greater than the sum of what each could have done independently. Many of the reasons presented create synergy, but one must analyze the venture to make sure that it creates something greater than the two companies could have been on their own. When there is synergy, new products are created for the market quicker or better than they would have been if the companies had kept their resources to themselves. If there is synergy, everyone benefits.
SEE ALSO Competitive Advantage; Diversification Strategy; International Business; Strategy Formulation
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