Jing He 310139481

Synopsis

This report elaborates on the definition, the types of strategic alliances, and also discusses the reasons why strategic alliances are formed. Basically, there are four types of strategic alliances: joint venture, equity strategic alliance, non-equity strategic alliance and global strategic alliance. The report focuses on the different types of strategic alliances and analyses the advantages and disadvantages mainly on the aspects of logistics and supply chain management through the real world examples.

Jing He 310139481

Table of Contents
1 2 3 4 INTRODUCTION THE DEFINITIONS OF STRATEGIC ALLIANCES THE REASONS FOR CREATING STRATEGIC ALLIANCES TYPES OF STRATEGIC ALLIANCES 4.1 4.2 4.3 4.4 5 Joint Venture Equity Strategic Alliance Non-Equity Strategic Alliance Global Strategic Alliances 1 1 1 2 3 5 6 7 8

CONCLUSION

Jing He 310139481

STRATEGIC ALLIANCE
1 INTRODUCTION

With the development of globalisation, a great number of companies confront with increasing competition both within the domestic boundaries and internationally. The highly competitive external environment makes organisations take some actions correspondently to satisfy customers requirements, such as lowering cost, improving quality and appearance of products, shortening delivery time and so on. To accomplish these goals, it is imperative for a multitude of companies to establish strategic partners and alliances to survive and grow in intensively competitive world. Among the various aspects of strategic alliance, the partnership in logistics and supply chain management is one of the most critical parts to the successful relationship in strategic alliances. This report elaborates on the reasons to form strategic alliance, the different types of alliances and how these alliances affect their performance of logistics and supply chain management. And it also discusses the pros and cons of every alliance by using real world examples.

THE DEFINITIONS OF STRATEGIC ALLIANCES

The definition of strategic alliances varies from the different viewpoint. From the aspect of activities involved in the strategic alliance, it refers to voluntary agreements between firms involving exchanging, sharing, or co-developing of products, technologies, services, procedures and process (Peng 2009, p.497). From the perspective of management, it is also explained as a formal agreement between two or more parties to pool resources to achieve a common set of objectives that meet critical needs while remaining independent entities (Serrat 2009, p.62). No matter the way it is defined, a strategic alliance seems to be a broad concept for an agreement among potential or actual competitor or co-operator (Hill 2007).

THE REASONS FOR CREATING STRATEGIC ALLIANCES

Jing He 310139481 There are a series of reasons contributing strategic alliances, including expanding market share, increasing profit, enhancing competitiveness in both domestic and global market, reducing operating cost, creating new market in foreign countries, improving the quality of products and service and learning other firms technology and experience in sales or operation etc. One of the main reasons for most companies is to have access to new capital for growth, for development of new products or services, or for entry into new lines of business (Loughner 2006). For example, the merger between Chrysler and Daimler-Benz in 1998 offered the opportunity to combine their operations, shared R&D centres and joint sales, which saved $1.2billion in the area of product development (Deresky 2008, p.323). Another crucial reason to establish a strategic alliance is to expand new market domestically or internationally. Taking Wal-Marts expansion in Mexico market in 1991 as an example, Wal-Mart allied with Cifra, Mexicos largest retailer. The alliance in North America provided Wal-Mart with significant convenience to get access to supplier and dealer networks and shared the value chain in Mexico. In 2007, Wal-Mart de Mexico had become No.1 retailer in Mexico, with 17.0% percent market share and $19 billion gross sales (Gupta 2008, p.65).

TYPES OF STRATEGIC ALLIANCES

According to the different classifications of strategic alliances, there are also different types of strategic alliances. Based on various relationship of partners in the supply chain, the strategic alliances can be divided into two types: vertical strategic alliance and horizontal strategic alliance. Vertical strategic alliance means an alliance that involves upstream and downstream companies across the supply chain to form networks. One of drivers to establish such collaborative relationship is the value created by the networks within a supply chain overweighs that created by a single company (Sporleder n.d., p.159). Taking the vertical strategic alliance between airline and airport industry as an example, because the airlines and airports both focus on a target to provide high quality service to passengers and there are some links in their supply chain, such as luggage handling system, resource planning, IT system,

Jing He 310139481 integration of technical infrastructure as well as closer coordination of operational procedures, can reduce operating costs and improve the punctual departures that is one of main concerns in aviation industry.

As for horizontal strategic alliance, it refers to a cooperative partnership in which firms at the same level of the supply chain share the resources and capabilities (http://www.scribd.com/doc/48399380/strategic-alliance-scrbd). The drives of horizontal strategic alliance are to enhance competitiveness in the market, to response to competitors moves simultaneously and to reduce risks and competition. For instance, when most major global auto firms entered the Chinese market, they all chose to ally with their Chinese partners Volkswagen and GM with Shanghai Automotive Industrial Corporation, Honda with Guangzhou Auto Group, Toyato with First Auto Works, Chrysler with Beijing Auto Works, Ford with Changan Auto motors. The reasons for these alliances partly because that Chinese government does not approve wholly owned subsidiaries for foreign carmakers, partly because that they could use their partners supply chain in China to create significant value, although they had already obtained world-class supply chains in their previous market.

Another popular classification of strategic alliance is based on the means of forming alliance. Generally, it can be broken into four groups: joint venture, equity strategic alliance, non-equity strategic alliance and global strategic alliance. In the following paragraphs, each type of strategic alliance is analysed in detail.

4.1

Joint Venture

A joint venture is a corporate child that is a new entity given birth and jointly owned by two or more parent companies (Peng 2009, p.494). This metaphor vividly illustrates the characteristics of joint venture a new entity developed by two or more organisation according to a commercial agreement. Joint ventures can be equity or non-equity partnership. Equity joint ventures are contractual arrangements with equal partners, and non-equity ventures are the ones where the host country has a great

Jing He 310139481 stake ( Deresky 2008, pp.305). Generally speaking, the way of joint venture involves more investment, operational assistance, training system and share of technology than other ways of strategic alliances. There are a multitude of advantages of forming a joint venture. One of most dominant strengths is to get access to a large variety of resources including new geographic markets, new expertise, new technology etc. Secondly, it also neutralise risks for venture partners if one of firms tied to expand a new market. Thirdly, joint ventures are relatively flexible because the establishment of joint ventures are based on the agreements. These kinds of agreements could agree on the limited life span or limited scope of operation of joint ventures. However, each kind of the strategic alliance has its own disadvantages, the way of joint venture is not an exception. In the first place, the ambiguous objectives of the joint venture may disperse support and capital. Also, the imbalance in levels of investment or technology and different cultures and style of leadership brings the difficulties in management and low efficiency in cooperation. Moreover, the absence of comprehensive research also results in the failure in joint ventures (http://www.rpemery.com/articles/advantages_and_disadvantages_jv.htm).

The joint venture of DaimlerChysler AG is an appropriate example to demonstrate the above-mentioned viewpoints. In the 1998, the merger of Daimler-Benz and Chrysler Group was regarded as an important strategic alliance in global auto industry. Although there was mismatch in their brand Daimler-Benz was a luxury brand while Chrysler focused on the low-end sub-compact cars and trucks, it was foreseen by many experts that the joint venture given birth by the two giants of auto manufactures in Europe and North America respectively would have a promising prospect. Actually, at that time, it was unavoidable for both corporations to pursue growth in global market without a partner. For Chrysler, it encountered a serious of financial problems and still was behind other competitors both in quality and customers satisfaction. To merge with other car maker was the unique choice for Chrysler to survive and develop in global market in future. And for Daimler-Benz, although it enjoyed high reputation in its luxury cars in European market, the pace of

Jing He 310139481 expansion in global market lagged behind with its competitors, such as GM, Ford and Toyota.

For both companies, there were a great number of advantages to build this joint venture. The first one was to cut cost for both companies by sharing R&D, technology and joint sales, especially in 1990s when the auto industry in relatively hard times. Another attraction, especially for Daimler-Benz was that Chrysler had a superior supplier network and outsourcing resources in its value chain. Daimler wanted to use Chryslers supplier chain in small-car and sub-compact models in North America market. Furthermore, they could both use their counterparts supply chain and dealer networks to enter a new market, which also helped them to gain effective experience to open more doors in emerging markets.

However, with the further cooperation, a set of problems had been arisen. The main issue was the problem in cross culture and equality that always plagued DaimlerChrysler AG. Daimler was a typical European corporation with conservative and rigid culture that emphasized the hierarchy, quality and less risk-taking. On the contrary, Chrysler was totally America style with characteristics of outward oriented, less rigid in operation and high-risk taking. These differences led to a series of controversy, such as formulation in strategy, leadership, the response of problems and management structure. In 2007, Daimler sold its 80 percent stake to a New York private company, which showed the divorce of the merger (Deresky 2008).

4.2

Equity Strategic Alliance

Equity Strategic alliance is a partnership where two or more organisations do not own the same shares of the firm. By this means, the company can utilise other companies competence and resources better to sustain the competitive advantage in the market. This kind of alliance is very common in automobile industry. For example, the alliance between Chrysler and Mitsubishi in an equity strategic alliance which Chrysler held a controlling stake in Mitsubishi in 69 months (International Herald

Jing He 310139481 Tribune, 28 March 2000). In 1997, because of bad performance in Mitsubishis balance sheet, the company had to form some kind of alliance with other company to survive. Finally, Chrysler purchased a 34 percent stake in the company, which saved Mitsubishi in danger and at same time, provided Chrysler a new supply chain in Asian market and increased the market share. After ending the alliance with Mitsubishi, Chrysler replaced its partner with Fiat Group, a main Italian automaker, to bring Fiats advanced engine technology to its engine manufacturing in the US. In this alliance, Fiat owned 20 percent share in Chrysler, which is also an equity strategic alliance (Kroll 2009). The merits of equity strategic alliance are similar with those of joint venture, such as getting access to new market, capital and technology and obtaining some rights of vote on the board. However, the demerits are also obvious. Firstly, the cost of equity strategic alliance is relatively higher compared with non-equity strategic alliance. Moreover, since owing certain proportion of stake of the company, the buyers have to bear unexpected disappointments or risks from partners, which exert negative influence on buyers in the sales or reputation. For example, shortly after the partnership between Chrysler and Mitsubishi was finished, Mitsubishi involved in an accusation about defects in their cars, which finally led to recall more than one million cars and 30 percent reduction in stock market price. As a result, Chrysler had to subject to big loss and decided to reduce 200 million investment in the stock purchase (Ito 2006).

4.3

Non-Equity Strategic Alliance

Non-equity strategic alliance is based on the contract within two or more companies to share their resources and capabilities to get advantage in a competition, which includes licensing, franchising, turnkey projects, co-marketing etc (Peng 2009, P.168). For example, compared with equity alliances, the process is relatively easy and the cost is also small, contractual joint ventures, one of non-equity strategic alliance, is a major form of corporate cooperation in Chinese reform era (Wang & Nicholas, 2007). For another example, the distribution system of McDonalds is mainly through franchising and licensing. More than three quarter of McDonalds restaurants over the

Jing He 310139481 world are owned or operated by franchising (http://www.aboutmcdonalds.com/mcd/franchising.html). McDonalds sets down strict requirements for their franchisees to ensure high quality and effectiveness in operation and logistics system. These requirements include minimum franchise fees $45000 (higher than other fast-food companies), 12.5% royalty tax, 20 years contract and certain amount of cash liquidity (http://www.slideshare.net/mjahanzaib/mc-donalds-e-procurement-supply-chain-and-l ogistics). Meanwhile, once having become franchisees, the headquarters provide the whole set of training system including cooking methods, staffing policy, decoration of restaurants and selection of location and so on. McDonalds also organizes the supply chain and offers management training and financial assistance to the franchisees (Deresky 2008). The prominent strong point of non-equity strategic alliance is relatively low costs and risks. Also, the investors can learn some local culture and operational experience from their local partners. The drawbacks in non-equity strategic alliance primarily lie in lack of control over technology and marketing and inability to engage in global coordination (Deresky 2008). Furthermore, the emergency of a full set of skills in operation and marketing might nurture efficient competitors, which results in the companies losing the main competitive advantages.

4.4

Global Strategic Alliances

Global strategic alliance generally means alliances among two or more firms across countries and industries. Actually, the definition of global strategic alliance has certain overlap with those of above-mentioned alliances, because global strategic alliances can use various modes, such as joint venture, equity alliance or non-equity alliance to enter other companies in different nations or industries. The global strategic alliances attach more importance on partnership among different countries and fields. At the VoiceCon Orlando 2008 conference, Microsoft Corp. and Aspect software, an English famous contact centre company, signed a multiyear strategic alliance to assist deliver unified communication to contact centre across the world (Internet Weekly News 2008). Jim Foy, the president and CEO of Aspect, said Our alliance and the resulting

Jing He 310139481 joint solutions are designed to enhance sales, service and support capabilities for organizations of all types and sizes, across many industries. We strongly believe that the combination of Microsoft Office Communications Server 2007 and Aspect Unified IP redefine the way companies interact with their customers. With the alliance and its equity investment, Microsoft could improve access to the people and information efficiently. From the example, the advantages of global strategic alliances are similar to most of above-mentioned advantages of other strategic alliances, such as getting access to new market and technology, speeding the entry into new market, increasing sales, enlarging the distribution channels and developing new products with high profit. One of different advantages is that global strategic alliances can enhance the image in the world marketplace and broaden the business and political contact base. However, the disadvantages of different cultural problems and weak management in global alliances should not be neglected (http://importexport.about.com/od/MarketingAndSellingGlobally/a/Global-StrategicAlliances-Advantages-And-Disadvantages-To-Global-Strategic-Alliances.htm).

CONCLUSION

To sum up, each kind of strategic alliance has its own merits and demerits. Fortunately, the weakness of each alliance could be minimised and the strengths could be enhanced by optimising in various aspects of cooperation. It is convinced that, with the advancement of globalisation, increasing number of corporate strategic alliance will be formed both in the domestic and international market to increase the efficiency in production and service.

Jing He 310139481

References

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Deresky, H. 2008, International management: managing across borders and cultures, 6th edn, Pearson Prentice Hall Franchising 2011, Franchising About McDonalds [Online], Available: http://www.aboutmcdonalds.com/mcd/franchising.html [07 May 2011] Gupta, A.K., Govindarajan, V. & Wang, H. 2008, The quest for global dominance: transforming global presence into global competitive advantage, 2nd edn, Jossey-Bass, San Francisco Hill, C. 2007, International Business, 6th edn, McGraw-Hill Irwin, New York Ito, T. 2006, The Light and Shadow of Corporate Reconstruction, Electronic Journal of Contemporary Japanese Studies, [Online] Available: http://www.japanesestudies.org.uk/discussionpapers/2006/Ito3.html [06 May 2011] Kroll, K. Cleveland 2009, Chrysler ends alliance with Mitsubishi and Hyundai, [online] Available: http://www.cleveland.com/business/index.ssf/2009/09/chrysler_ends_alliance_with_ mi.html [05 May 2011] Loughner, C., A Guide to Strategic Alliances, Scribd 2006, Strategic Alliance, [online], Available: http://www.scribd.com/doc/44324109/Strategic-Alliance [30 April 2011] Microsoft; Microsoft and aspect form global strategic alliance, 2008, Internet Weekly News, pp.100

Jing He 310139481

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