(Continued)
3.2.2 Reasons for Choosing Strategic Alliances
There are many reasons for the company to choose strategic alliances: to share costs and reduce risks, to enhance their productive capacities, to reduce uncertainties in their internal structures and external environments, to acquire competitive advantages that enables them to increase profits, or to gain future business opportunities that will allow them to command higher market values for their outputs (Webster, 1999). Partners choose a specific alliance form not only to achieve greater control, but also for more operational flexibility and realization of market potential. Their expectation is that flexibility will result from reaching out for new skills, knowledge, and markets through shared investment risks. The strategic motives for organizations to engage in alliance formation vary according to firm-specific characteristics and the multiple environmental factors. A list below show various reasons for undertaking strategic alliances (Agarwal and Ramaswami, 1992; Auster, 1994; Doz and Hamel, 1999; Doz et al., 2000; Hennart, 1991; Lorange and Roos, 1993):
• market seeking;
• acquiring means of distribution;
• gaining access to new technology, and converging technology;
• learning and internalization of tacit, collective and embedded skills;
• obtaining economies of scale;
• achieving vertical integration, recreating and extending supply links in order to adjust to environmental changes;
• diversifying into new businesses;
• restructuring, improving performance;
• cost sharing, pooling of resources;
• developing products, technologies, resources;
• risk reduction and risk diversification;
• developing technical standards;
• achieving competitive advantage;
• cooperation of potential rivals, or pre-emptying ompetitors;
• complementarity of goods and services to markets;
• co-specialization;
• overcoming legal/regulatory barriers; and
• legitimation, bandwagon effect, following industry trends.
Growth strategies and entering new markets
The Coopers and Lybrand study (1997) rates growth strategies and entering new markets among the top reasons for forming strategic alliances. Companies do not have the time and resources to establish new markets one by one. Therefore, forming an alliance with an existing company already in that marketplace is a quite appealing alternative. Partnering with an international company can make the expansion into unfamiliar territory a lot easier and less stressful for a company. It is especially helpful for global business. It can get better local acceptance, and remove the local constraints on trade.
Obtain new technology or better business function
Technology is one of the key factors for the success of companies. But not all companies can provide the technology that they need to effectively compete in their markets on their own. Therefore, they are teaming up with other companies who do have the resources to provide the technology or who can pool their resources so that together they can provide the needed technology. Both sides receive benefit from the partnership.
Besides the technology, undertaking strategic alliances is to outsource business functions. They may be marketing, production, accounting, sales, or any other process. With strategic alliances, companies can oursource these funtions to others that can do it better and cheaper. Indeed, many companies are forming alliances looking for the best quality or technology, or the cheapest labor or production costs (Quinn, 1995).
Reduce risk and share costs of research and development
In order to develop a new product or production method, the financial risk involved is too high for a single company to undertake. In such cases, two or more companies come together and agree to spread the risk among all of them.
Achieve or ensure competitive advantage
Nowadays, the business world is technologically advanced, ever-changing. For many small companies, in order to stay competitive and even survive, the only way is to form an alliance with another company or companies. The firm manages to compete against much larger firms by creating teams with other companies, both large and small, on a project-by-project basis (Bernstein, 1999). By forming alliances with other companies, small businesses are able to accomplish bigger projects more quickly and profitably, than if they tried to do it on their own.