Strategic Alliances
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From analyzing your market conditions, your business may decide to enter into a strategic alliance.

Strategic alliances occur where two companies in the same industry may work together to develop new products. The main aim being to reduce development costs. During the 1980's this method was seen as being very beneficial in reducing costs, yet still developing next generation products.

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The three major forces which be described as the basis for strategic alliances are:

  1. TECHNOLOGICAL ADVANCEMENTS - Changes in traditional competitive advantage, the rising costs and risks of research and development, shorter product lifecycles.

  2. CONVERGENCE OF TECHNOLOGIES - Based on the creation of new industries based on the growth of technology and mergers between companies to develop new sectors.

  3. MARKET GLOBALISATION - Growth of global marketplace and competitors thereof. The global market also covers the direction of foreign investment patterns.

Other purposes of strategic alliances include:

  • Sharing of costs and risks, particularly preferred by Western companies.

  • Learning knowledge and skills which is preferred by Asian firms as it allows access to technology.

  • Transform existing operations of the business, with the aim being to improve weak sectors of the business.

  • It allows for an attacking and defensive strategy, as a business could use the alliances to attack new market sectors whilst developing a protective cover in other markets.

  • Refines and creates new sets of core competencies. As technology changes so will core competencies, therefore the business needs to develop new competencies, one way of developing/learning this is by using strategic alliances.

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However, alarming factors began to appear in the 1990's, these factors were highlighted by Lei and Slocum as including:

  • Certain internal functions suffer as a result of not being unable to contribute to the development of their functions as the business decides to use the approach adopted by alliance companies.

  • The risk of opening up the entire business 'core competencies' to alliance partners who are essentially still competitors.

  • Cultural differences which could affect the aim of the alliance.

Additional risks of strategic alliances include:

  • Poor compatibility with partners is viewed like a bad marriage, therefore the business needs long-term commitment from alliance partners, the necessary steps need taking to find a suitable partner.

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Hollowed out organisations occur when a business decides to outsource a complete competency out to another business.

The initial logic is to reduce costs and concentrate on other areas, but completely outsourcing tasks can be detrimental. 

The classic example of where a strategic alliance has caused problems was in the USA, with General Electric (GE), during the 1980's. GE were market leaders in the consumer microwave market, as the market was growing there was intense pressure put on them to enter the low cost sector of the consumer microwave market. 

GE decided to use Samsung at the time a small Korean electronics company.  Samsung was to use GE designs to build microwaves for the US market for GE, whilst Samsung would use the designs to hopefully enter other world markets.

GE thought there would not be a problem, as there were a lot of GE microwave designs, and the fact that Samsung did not know how to make the microwaves or anything about the US market would put them off entering the US market.

The problem was that GE was actually losing it's competitive advantage as it was actually teaching Samsung all about the manufacture of microwaves, using them to manufacture the microwaves and reducing it's own production. 

Samsung knew very little about the microwaves and GE quality standards, but over a relatively short period of 2-3 years learnt a lot about the market.

Samsung actually surpassed the GE standards of manufacture, what eventually happened was that Samsung decided to enter the US market on it's own, with it's own brand name. GE tried to maintain it's market share, unfortunately Samsung having learned all that they could from GE, and were persistently outselling GE in each sector of the microwave market. The end result was that GE eventually decided to retreat from the microwave market completely.

What GE mis-understood with the strategic alliance was that having a competitive product was not the same as having a competitive organisation, they mistook using Samsung to build their microwaves would make them more competitive in the the long run, however their own organisation could not react quick enough once Samsung decided to enter the same market.

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We can say that strategic alliances with competitors may generate a cosy relationship, it is still based on two competitors in the same market place sharing information.

The first thing which needs to be identified is the what core competencies does your business have that is attracting your competitors into forming a strategic alliance, be aware of them and ensure that you are protecting them.

Try to go for strategic alliance partnerships with companies from complimentary markets. This will lead to a greater mutual trust and sharing of resources and information.

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Strategic alliances can work for the benefit of a business to reduce development costs and speed up development timescales. They do however, require careful planning and monitoring, to ensure the business does not give too much away.

In industry today it is not the case of several companies competing against one another, moreover we can state that it is becoming the case of one set of networked companies (companies with strategic alliances with one another) versus another set of networked companies.

If your business decides to enter into a strategic alliance, what must be remembered is that the end result of any strategic alliance will be the fact the company that learns the quickest will be the winner.

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(c)  Est 08/00 - Last Updated 28/05//2001