Cooperative strategies (such as alliances for a benefit, joint ventures etc.) are a logical and timely response to intense and rapid changes in economic activity, technology and globalization. Apart from alliances between firms operating within the same country, cross border alliances (alliances between companies with headquarters in different countries) have also become increasingly popular these days. Strategic alliances generally come in three basic types: joint ventures, strategic alliances and consortia.
Joint ventures are a special case of consolidation where two or more companies form a temporary partnership for a special purpose. Once the purpose is achieved (or the project is completed) the joint venture is terminated, with all profits distribution to (or losses recovered from) its members. From an Indian standpoint different joint ventures can take place between: 1) two firms in one industry, 2) two firms across different industries, 3) an Indian company and a foreign company in India, 4) an Indian company and a foreign company in that foreign country and 5) an Indian company and a foreign company in a third country. Joint ventures are an excellent way to share costs, spread risks and combine expertise in case of new projects involving huge outlays. They also permit venture partners to share new technology, exploit new markets and expand their scale of operations globally. Joint ventures however, may not always bring in the requisite benefits because of differences between joint venture partners. Each partner may like to have full control over the project without allowing enough room for others to operate with freedom. Differences in culture and stages of economic development of the countries to which the parties belong to may create difficult operational problems. The legal rules regarding equity participation voting rights, dividend remittance and management control may also come in the way of effective coordination between partners.
In the case of equity, partners own different percentages of equity in a new venture. Many foreign direct investments are completed through equity strategic alliances such as those by Japanese and US companies in India (Maruti, Hero Honda, Birla – Tata — A&T etc.) Equity alliances are more effective at transferring know how between firms because they are close to hierarchical control than are non-equity alliances. Non-equity strategic alliances are formed through contractual agreements given to a company to supply, produce or distribute a firm’s goods or services without equity sharing. Such contractual arrangements may cover marketing and information sharing activities too. As there is no need to bring in equity investments, such licensing agreements are less formal and demand fewer commitments from partners than joint ventures and equity strategic alliances. Under licensing agreements the proprietary rights of a foreign partner are passed on to the other under licensing agreements.
Consortia are defined as large interlocking relationships, cross holdings and equity stakes between business of an industry. There could be two forms of consortia:
Multi partner Consortia
These are multi partner alliances intended to share an underlying technology. One of the most important European based consortium to date is Air bus Industries. Airbus brings together four European aerospace firms for Britain, France, Germany and Spain. A common consortium arrangement binds each firm to certain stipulations. The goal of 20 Air Bus Industries is to dethrone Boeing from its dominant position in the global commercial aircraft market. By pooling their member firm’s resources, Air bus Industries has become a threat for the US giant Boeing. Without a consortium arrangement, it is unlikely that any of the individual firms would have been able to challenge Boeing on a low cost basis.
Cross holding Consortia
These include large Japanese Keiretsus and Korean Chaebols. Two important features of cross holding consortia are building long term focus and gaining technological critical mass among affiliated member companies. The supplier buyer relationships help members stabilize their production volume. Each member could obtain needed components from other consortium members easily (especially for TV sets, VCRs, etc.) All of them can pool resources and make huge fixed cost investment in key technologies. Further, there is a guaranteed internal market for components. However, on the negative side valuable capital is often locked up in investments that may be less productive or lacking the same degree of core competencies as compared with a much more focused competitor. Further, such cross holdings may slow down a member firm’s ability to react quickly to new development.
Apart from the above explicit strategic alliances there could be cooperative arrangements. Tacit collusion is an example of such an arrangement. Tacit collusion exists when several firms in an industry cooperate tacitly to reduce industry output below the potential competitive level, thereby increasing prices above the competitive level. In the recent past, cement manufacturers in India, especially the Big players of the industry have tried to regulate output and obtain better realizations per bag of cement through an understanding in different parts of the country.