Entry Strategies: Strategic AlliancesEssay Preview: Entry Strategies: Strategic AlliancesReport this essayENTRY STRATEGIES: STRATEGIC ALLIANCESINTRODUCTIONThe past two decades has been an era of global evolution, in which the globalisation of markets, the convergence of and rapid shifts in technologies, and the breakdown of many traditional industry boundaries, has rendered strategic alliances a competitive necessity (Ohmae, 1989). A single firm is unlikely to possess all the resources and capabilities to achieve global competitiveness. Therefore, collaboration among organisations that possess complementary resources is often necessary for survival and growth (Dussauge, Garrette and Mitchell, 1998). Defined as a long-term, explicit contractual agreement pertaining to an exchange or combination of some of a firms resources with another firm(s), strategic alliances allow firms to share risks and resources, gain knowledge and technology, expand the existing product base, and obtain access to new markets (Burgers, Hill and Kim, 1993; Dacin, Hitt and Levitas, 1997; Hagedoorn and Schakenraad, 1993; Morosini, 1999). Not surprisingly then, strategic alliances have become an increasingly popular strategy, particularly for entry into international markets (Osborn and Hagedoorn, 1997; Cullen, 1999). Approximately 20,000 alliances were formed worldwide between 1996 and 1998 (Harbison and Pekar, 1998; cited in The Economist, May 15, 1999), and it has been estimated that the number of strategic alliances will continue to increase at an annual rate of 25 per cent (Day, 1994). However, despite the frequency with which todays alliances are occurring, there is overwhelming evidence to suggest that alliances fail to deliver anywhere near the promised payoffs. The percentage of alliances that are failures runs the gamut across the research from a low 30 per cent (Cullen, 1999), to a high 70 per cent (Dacin et al, 1997). Apart from the inherent risk of entering into an alliance, partner compatibility is often cited as the main reason for alliance failure (Dacin et al, 1997).
In this context, the purpose of this paper is to analyse – using relevant international business theories – three newspaper articles that fall within this topic area. Specific reference will be made to the objectives and reasons for engaging in strategic alliances and the key characteristics that a firm should consider when evaluating a prospective alliance partner. Finally, the implications of these articles for the Australian government and businesses will be canvassed.
STRATEGIC ALLIANCES IN THE MEDIA: SUMMARY OF ARTICLESAll three articles appeared in the Australian media between 22 February 2006 and 3 May 2006, and deal specifically with the concept of strategic alliances between either an Australian domestic company and foreign firm or between two domestic companies seeking to leverage the international scope of one of the partners in order to expand into new markets. More specifically, Joyce Moullakis in “CPH, Wizard in Global Loan Foray” (Australian Financial Review, February 22, 2006) discusses the alliance between two Australian firms – namely Wizard Home Loans and Consolidated Press Holdings (CPH) – which has recently been formed with the objective of taking “the mortgage business into developing countries” (Moullakis, 2006, p. 55). The motivation for the strategic alliance between the Australian firm S8 Ltd (which recently acquired Harvey World Travel) and the UK-based Virgin Group is almost identical. The article “S8 Travelling with Virgin in Britain” (The Age, May 3, 2006) describes the alliance as part of S8 Ltds “global expansion plans to create a network of next generation travel agencies in Britain” (The Age, May 3, 2006). And for the Virgin Group, the alliance will allow it to capitalise on the travel agency experience of S8 Ltd, thereby enabling it to increase its “retail presence in Britain” (The Age, May 3, 2006). The final article deals with the partnership between Qantas and Air New Zealand, which is somewhat more complex given the original alliance was struck down by both the Australian Competition and Consumer Commission (ACCC) and the New Zealand Commerce Commission (NZCC) in 2003. James Hall in “Qantas, Air NZ Back on Same Flight Path” (Australian Financial Review, March 31, 2006) notes that the re-worked alliance will no longer take the form of full merger, but will instead focus on “code-sharing across the Tasman and other cost-cutting initiatives” (Hall, 2006, p. 72).
Flowing from this, the remainder of this paper analyses the afore-mentioned three articles through the prism of international business and its attendant theories.
ANALYSIS OF ARTICLES: RELATION TO INTERNATIONAL BUSINESS AND RELEVANT THEORIESAt the outset, it should be noted that strategic alliances can take many forms. They can be classified into three broad categories (Bierly and Kessler, 1998): (1) non-equity (contractual) alliances; (2) equity alliances (one partner purchasers a portion of its partners equity capital); and (3) joint ventures (a new separate entity is created by the combination of resources of the two parent companies. The alliances between Qantas and Air New Zealand and S8 Ltd and the Virgin Group are examples of non-equity partnerships. These forms of alliances carry less risk, and enable partners to dissolve the alliance more easily once the benefits of the partnership no longer accrue to both partners. In contrast, the Wizard-CPH alliance is an example of a type of equity alliance, with both partners contributing a total of $50 million to the partnership. Injecting such a large amount of money into a strategic alliance signals a relative greater commitment on the part of both companies.
There are many reasons for entering into alliances, be they personal/political or strategic. A UK study (Hunt, Lees, Grumbar and Vivian, 1987) found that the most common reasons for entering into alliances are those related to market share, technical capacity and management capability, the improvement of financial indicators, and sending the right signal to capital markets. It is necessary, also, to distinguish between domestic and cross-border alliances because to a certain extent each is motivated by different factors (Davis, Shore and Thompson, 1993). Cross-border alliances usually take place in order to establish a foothold in a foreign market; overcome trade barriers in the foreign country; capitalise on tax or other financial advantages; or exploit information synergies (Ietto-Gillies, Meschi and Simonetti, 2000). Other objectives associated with domestic alliances – expansion, diversification and economies
:
⢠to increase domestic demand for domestic goods;
⢠to increase domestic business by increasing national exports, increase domestic revenue exports;
⢠to decrease the reliance of the economy on foreign capital supply for business production;
⢠to reduce economic inflation and to support investment/investment in domestic industries, particularly in agriculture and food production.
⢠to improve growth prospects in sectors with strong incentives to innovate and to make effective use of resources, such as infrastructure, energy, energy related industries and energy, energy related industries. This is particularly so in light of the rise in global energy costs and technological advances, as well as to the fact that an increase in the level of energy consumption can only be achieved under international, regional, non-market economic arrangements.
⢠to increase the productivity of the industries and the economic strength of the domestic sector, especially in developed countries.
⢠to increase domestic trade with and exports to other countries.
⢠to increase production and the market capitalisation of small and medium-sized enterprises, particularly in the developing world.
⢠to make foreign direct investment into domestic industries more attractive by expanding and increasing cross-border investments.
⢠to increase domestic financial stability through increasing the relative share of cash repatriation, to reduce losses caused by capital flight or other international financial instruments.
⢠to increase exports of large volumes to regions of developing and developing nations or to develop regions outside the developed economy.
15.6. What is the importance of building links with countries outside domestic economic zones?
⢠When dealing with crossâborder crossâborder trade or of other goods and services outside domestic economic zones, the following is of increasing importance:
⢠to attract foreign markets to local markets (e.g. to build or expand highâspeed rail with the UK); to build new and lower cost and quality railway links with the UK, as proposed by Prime Minister Tony Blair.
⢠to build new infrastructure, particularly for the construction of new airports and other transport links within the internal boundaries of the British dominions.
⢠to establish a link between major local industries and local people.
15.7. What is the right level of investment towards foreign direct investment into foreign direct industry?
⢠To avoid foreign direct investment from other countries unless there is a strong case that it will undermine national security, it is recommended that investment be limited to specific industries.
⢠The right level of investment towards these industries depends on the industry’s specific objectives (‘to reduce current competitive barriers’), as well as the level of financial strength and ability to expand their business activity.
⢠The right level for capital formation, particularly to those sectors in which significant and long-term trends in capital accumulation are occurring from a particular point in time:
⢠that the sector remains competitive;
⢠that capital is available to expand and diversify; and
⢠that capital remains available to meet demand.
⢠If possible, to maximise capital access such that the growth from existing or new capital continues within the given period (e.g. if current demand/supply exceeds supply) such that growth is maintained through expansion for at least a small period in relation to the current exchange rate (e.g. by limiting the number of existing capital to an initial total of two per cent of its value); and especially, to reduce the risk of capital flight.
An example would be a major industrial sector with a strong export demand in the United States (see below for more information). In this example, if the value of national income in the United States were to decline by 50 per cent, the