Study in Warwick

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3.2.3 Different Perspectives

There are many different theoretical perspectives of the bulk of writing on strategic alliances. The most popular of them are the economics-based view, strategic management theory, and organisation theory.

Economics-based View

In the business world, theories of strategic alliances from economics view are popular. There are three main perspectives in economics:
 Market Power Theory
 Transaction Cost Theory
 The Resource-based View

Market Power Theory

The market power approach of Michael Porter (1980) dominated the strategic management studies in the 1980s. In his book Competitive Strategy, he suggests that the competitive intensity of industries is determined by five fundamental forces: the degree of rivalry between competing firms, the power of suppliers and buyers, the threats from new entrants and potential substitute products or services. As a result, the strategy should be to position the company to take best advantage of the five forces. Alliances can enhance market power, and the greater market power can enhance the returns. Collaboration may be a faster and cheaper way to gain market power than mergers and acquisitions.

Porter’s (1980) framework assumes that the structure of the industry and national environment dictates a firm’s most appropriate generic strategy—cost leadership, differentiation, or focus. The process of forming strategic alliances is within an analysis of industrial and national structural determinants in this way. Market power theory contributes to the understanding of the links between cooperative strategies and industrial and national context.

Transaction Cost Theory

The perspective on strategic alliances offered by transaction-cost theory views the arrangements as potentially cost-reducing methods of organising business transactions.

Transaction cost are those costs incurred in arranging, managing, and monitoring transactions across markets, such as the cost or negotiation, drawing up contracts, managing the necessary logistics, and monitoring accounts receivable (Child and Faulkner 1998). Transaction cost theory regards the basic choice in organising economic transactions as being between effecting these through market exchanges and internalizing them within a single firm. Alliances combine elements of both markets (in that they represent decision making mechanisms in which no one firm has complete authority) and hierarchies (in that they are ways to govern incomplete contracts between economic actors) (Gomes-Casseres, 1996). This view of alliances as such hybrid structures is discussed in detail by Williamson (1991). Gomes-Casseres (1996) extends this view by considering the way in which ‘constellations’ of hybrid structures can be identified in certain industries.

Transaction cost economics contributes important insights into the governance forms that alliances may assume in view of the circumstances under which they are formed (Child and Faulkner 1998). It provides a powerful framework to identify those situations in which alliances are more efficient than either turning to the market or internalizing transactions. The level of transaction costs involve the considerations in choosing whether to cooperate with other companies, and the form of that cooperation.

The Resource-Based View

Transaction cost economics talked above treats the company as a ‘nexus of contracts’. The primary benefit concerned is the reduction in transactional cost. The resource-based view pushes the logic of transaction cost theory further. It regards the company as a bundle of resources, capabilities, and competencies intended to generate maximum benefits. It is primarily concerned with increasing the value of rents that can be obtained from companies’ resources (Peteraf 1993). The primarily benefit is sustainable competitive advantage. Collaboration provides the company with access to complementary capabilities which provide a potential in building competencies.

The resource-based view holds that a company can achieve and keep a competitive advantage by configuring its tangible and intangible assets in a way that is difficult or indeed impossible to imitate perfectly, or by having resources, skills, or capabilities that are durable, and not appropriable, perfectly transferable, or replicable (Barney 1991; Peteraf, 1993). In some cases of the resource-based view, the Trojan horse strategy is not based on appropriating resources possessed by a partner but on preventing the partner from developing or maintaining its own resources. Thus, companies can restrict their competitors’ innovative capacity by cooperating with them (Dussauge and Garrette, 1999).

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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.

Strategic alliances are very common now as a model for business co-operation between large companies. Over the past 20 years they have attained the status almost of an ideology in technology-driven business sectors such as motor vehicle manufacture, airline operation and pharmaceuticals (Matthews 1999). In this section, these questions about strategic alliances are answered:
 What are strategic alliances?
 Why companies choose strategic alliances?
 What are the popular perspectives on strategic alliances?
 Why do strategic alliances fail?

3.2.1 Definition of Strategic Alliances

There are many definitions of strategic alliances. It is difficult to define it accurately. Matthews (1999) defines strategic alliance (SA) is "an agreement between two or more ‘partner’ organisations, committing them to pool their efforts and resources in some way". The level of agreement can be either ‘overall business’ or project-based, but stops short of requiring full commitment by the partners, so allowing them each to retain their separate identity. And Wheelen and Hungar (2000) define it as "an agreement between firms to do business together in ways that go beyond normal company-to-company dealings, but fall short of a merger or a full partnership". The definition given by Phan and Peridis (2000) is a kind of long term, trust-based relations that entail highly relationship-specific investments in ventures that cannot be fully specified in advance of their execution. Simply, strategic alliances are a type of co-operation or collaboration between companies to achieve mutual benefits.

In many cases, the term 'joint venture' is regarded the same as strategic alliances. These two definitions are slightly different. In America, joint venture alse can be used as joint venture company, in the context of a separate business entity created by two or more partners. But in UK, joint ventures are not regarded as separate entities. Rather, a joint venture usually is organised as a partnership or through a jointly owned corporation (Hall 1984), which is the same as strategic alliances.