Managing Inter-firm Alliances
Companies may engage in inter-firm alliances in order to obtain something of value. The specific value may be financial, expertise or market position. Alliances can be formal or informal and can be short or long term. Some companies are looking for a long term partner and may engage in joint ventures in order to boost their qualifications for certain types of business. Meanwhile, others are looking for an informal partnership for the purpose of joint marketing. Some companies will acquire various entities to create a certain position in the market. The biggest management challenge in setting up an alliance with another firm is upfront planning. Advanced planning can be used to anticipate possible obstacles to effective alliances. Some of these obstacles can be in the sharing of information and staff, which entities will shoulder the financial burden, or how the financial burden will be distributed.
Keywords Acquisition; Alliance; Collaboration; Joint Ventures; Leveraged Buyout; Merger; Nondisclosure Agreement; Partnership
Management: Managing Inter-Firm Alliances
Companies may turn to inter-firm alliances for many reasons. These alliances may be formal or informal but in some way provide benefits for the parties involved. Some of the inter-alliances may be in the form of formal and legal partnerships and joint ventures. Companies may also align through merger and acquisition activity. Companies that are dependent on each other such as suppliers in an automobile manufacturer's supply chain may find value in alliances. Pietras and Stormer (2001, p.9) described strategic alliances as "a way for companies with complementary strengths to enter a given market more effectively and efficiently than either alliance partner could manage alone." Alliances can be a way for companies to avoid risk due to unforeseen factors, technology or market risk (Vaidya, 2011).
Dyer, Kale, and Singh (2001) called strategic alliances "a fast and flexible way to access complementary resources and skills that reside in other companies — an important tool for achieving sustainable competitive advantage." These benefits and others could explain why so many companies engage in alliances of all kinds. Dyer et al (2001, p.37) noted that "the top 500 global businesses have an average of 60 major strategic alliances each." However, about half of strategic alliances fail.
Reasons for Alliances
Alliances can take place because one company may have technology that another needs or may have demonstrated best practices in an area that can save a company money. For example, many online companies align themselves with specific shipping companies such as FedEx or UPS because these companies have demonstrated expertise in shipping. Online companies that sell merchandise that must be shipped may be experts in their business but may not be experts in the best and most efficient ways to ship. Similarly, online giant Amazon.com has become proficient in selling online and has built credibility online. The Amazon.com marketplace allows vendors to align themselves with Amazon.com using the online giant's proven system for getting customers, selling products and delivering those products quickly. Amazon.com has also proven that it knows how to protect customer personal information online. Many online shoppers are reluctant to shop with a company they have not done business with before. However, Amazon.com has set up a system for tracking orders and allows customers to access its customer service system if there are problems with an order sold through Amazon.com by a marketplace vendor.
Alliances can help companies get a product to market faster. One company may partner with another company with research and development expertise. Or, companies that are working in the same area of product development may pool their resources to complete a better product faster. Some products cross different fields making it important to find partners in the different industries needed. For example, a computer company might partner with a telecommunications company on a phone product with computer capabilities.
Alliances usually take place because one firm has something that another wants and jointly they can create opportunities for all parties involved (Mitchell & Canel, 2013). For example, a small company may offer a service but may need help in getting the word out about that service. The small company may partner with a well-known company that offers a similar service or even a different one. This type of alliance may only be needed for a short period of time. A company may develop a self-improvement product or service and may need to generate leads. The company may be aware that companies like Stephen Covey's CoveyLink.com or Donald Trump's TrumpUniversity.com attract people interested in self-improvement. The smaller company may align themselves with these giants in self-improvement to be positioned to target a large audience without having to build that list on its own. The larger company may benefit by being able to offer another product that someone else created giving customers another reason to visit the company website.
Sometimes alliances are formed to solve the joint problems that groups of companies share. For example, small manufacturers in the U.S. may form an alliance to address manufacturing competition from China. The companies in this type of alliance may work together to share ideas or even partner by trying to open up facilities overseas where appropriate. These companies could coalesce to identify joint purchasing opportunities or determine how they might lobby the government as a group to receive assistance. Similarly, technology vendors may form an alliance to ensure that technology is developed around open standards to ensure that products are compatible. If companies make a product that is far ahead of the competition but not compatible with the hardware, software and equipment that customers currently own, the advanced products are not very useful. The technology cemetery is loaded with very advanced but proprietary hardware and software that ended up failing because of the lack of interoperability and compliance with other products in use.
A non-profit organization called the Quoted Companies Alliance advocates for small companies listed in the United Kingdom (Binham, 2006). Companies might join an alliance like this to have a unified voice to represent their interests. Alliance groups like this one will only be successful as long as they stay in touch with the real needs of their membership. Pietras and Stormer (2001) give examples of strategic business alliances including "contracts, limited partnerships, general partnerships, or corporate joint ventures, or may take less formal forms, such as a referral network." Alliances are relationships between companies for mutual benefit.
Management of Alliances
The management of alliances starts at the very beginning of the relationship. Before the alliance is formalized, there is a need to do a great deal of planning and due diligence. Parties involved in the alliance will likely also exchange information, financial and otherwise, as part of the vetting process. There may be a need to sign nondisclosure agreements depending on the depth of the relationship and what internal information will be shared. Each party must manage and analyze information and manage the deployment of resources.
Alliances work when each side is able to get a result of value. Managing strategic alliances requires continual monitoring of the relationship to determine whether or not it is still effective. Collecting data on the cost of the alliance is also a factor in understanding if the alliance is useful. Evaluation at regular intervals will help the parties determine if the relationship should continue and if so, in what way. Keeping abreast of business activity in the industry and region can provide clues on which companies are engaging in strategic alliances and which companies may be ripe for that type of relationship.
Managing alliances can be tricky if the companies are in similar industries because a partner could also be partners with the competitor of their alliance partner. Careful thought must be given to this possibility up front and swift action will be needed as these situations arise. Cisco Systems is well known for products in the networking sector of the technology industry. Although Cisco has been successful, it still has ideas for expanding to other parts of the industry (Capron, 2013).
Cisco has entered the AON (Application-Oriented Networking) market by introducing products and by targeted merger and acquisition activity of at least ten companies per year in 2006 and 2007 (Manufacturing Business Technology, 2007). Cisco has a partnership with SAP to network enable enterprise applications. The partnership helps Cisco do what they do best (networking) while taking advantage of the reach that SAP has with enterprise customers. Companies like Cisco may also acquire companies to eliminate competition. The benefit to the acquired company is investment in the products and services offered and a means to take those products to market quickly to the automatically built Cisco customer base. It might take much longer for a smaller company to attract top tier clients which tend to be conservative in deploying technology due to cost, implementation, roll-out and...
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