Alliances and Risks

Firms enter into strategic alliances for a number of reasons, but they all involve some kind of risk reduction.

Alliances aim at helping players speed up market entry. Big drug firms generally cross-license their new drugs to one another. Such arrangements help the alliance partners reduce high fixed costs of R&D and global distribution. The alliance between Nestle and Coca-Cola helped both partners to gain access to each other’s distribution network quickly (Coke distributes Nestle’s line of fruit juices and coffees while Nestle offers Coke and its other soft drink products through its channels) Without such a cooperative arrangement both companies would have had to spend more time, energy and money to enter certain market segments.

Alliances can help define emerging industry standards or new products. In the desktop printing industry, Canon, has become the world’s longest supplier of engines that power laser printers by joining hands with Hewlett Packard. World’s laser printers use a Canon made engine to power the machine.

Companies use alliances to learn or to gain access to new technologies. IBM for instance, has teamed up with Motorola and Toshiba to enhance its semi-conductor manufacturing capabilities in making super dense chips. From Motorola IBM learns how to design new products for emerging wireless technologies. Toshiba offers its expertise in miniaturization skills.

Companies use the alliances route to fill gaps in their product line. Ford formed an alliance with Nissan Motor to build new generation minivans.  The alliances with Mazda helped Ford co-produce Ford Escort. In turn Mazda has learnt from Ford as to how to build the Ford’s popular line of recreational vehicles.

Risks and Costs of Alliances

Through, alliances firms can gain access to new technologies develop new products, acquire latest skills and knowledge that are otherwise not available to them in their individual capacity. However, working with an alliance partner may prove to be a painful experience in some cases

Over the years, technologies market conditions, consumer tastes are bound to change. Alliance partners having a smooth run may find the going tough, if the changed scenario requires them to shift their focus and later their strategies. Growing incompatibility in developing strategies and objectives may often lead to a serious rift between alliance partners. The joint venture between Godrej Soaps and Proctor & Gamble India illustrates this point. Both wanted to build strong brands by meshing their skills in the new product development, marketing and distribution. An intermediate review of joint venture by Godrej revealed to its dismay that its own brands have suffered in the market place. Again P&G has not utilized the Godrej’s plant capabilities fully, as was agreed initially. There was a growing uneasy feeling that the international giant has tried to improve its market share at the expense of Godrej. The joint venture under the circumstances could not flourish and Godrej had to call it a day and pull out of the agreement.

Firms taking part in an alliance must carefully identify and isolate what types of skills and knowledge can be safely shared with a partner. This is particularly important in industries that are converging. For example the computer communications and consumer electronics industries are growing more similar where an alliance based on designing new types of computers will have a decisive impact on communications devices too. In such cases the firm that has access to latest skills and knowledge would run the risk of giving more insight into its knowledge base than intended.

Risk of Dependence: Alliances can make a firm too dependent on its partner unwittingly. The partner having critical skills naturally starts exercising a high degree of control over the dependent firm. Over dependence makes the other firm to be complacent about new designs from its own manufacturing line. When the relationship turns sour and the alliance partners decide to pull out, the dependent firm is made to pay heavy penalty in terms of loss of market share and the absence of technology driven power brands in its product portfolio.

Joint ventures and strategic alliances would succeed if the following guidelines are kept in mind:

Successful collaboration requires commitment on both sides. Without sufficient management time, trust and respect the agreement is likely to fail. Both partners must work for mutual benefit and the minority stakeholder should not think that he is as the receiving end.

The visions of the partners about the joint venture must be identical. Both partners should appreciate clearly what the other party wants from the agreements and their objectives.

Choosing a complementary partner is another important issue. Partners should see their joint involvement as an opportunity to learn new skills and good practices. They are not simply there to bridge gaps or weaknesses. Alliances are apt to be smoother and less dangerous if two firms cooperate on a project that is not central to their interests, or if they collaborate in a market place where their interests are not likely to collide. The Japanese have been very good at learning from their alliances.

Agreement: Partners must spell out all operational details of the joint venture in black and white. Lack of clarity on important issues such as who takes control of the enterprise technology, transfer, establishment of own subsidiary of the foreign partner may come in the way of enforcing the joint venture agreements smoothly.

There should be enough room for both partners to adjust to changed circumstances in a flexible manner. Both should be in a position to shift priorities and change objectives in line with changes in internal as well as external environment. Every attempt should be made by partners to reconcile the cultural differences smoothly.