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Ch. No 1. Introduction
MEANING
A strategic alliance is an agreement between two or more parties to pursue a set
of agreed upon objectives needed while remaining independent organizations.
This form of cooperation lies between Mergers & Acquisition M&A and organic
growth.
Partners may provide the strategic alliance with
resources such as products, distribution channels,
manufacturing capability, project funding, capital
equipment, knowledge, expertise, or intellectual
property. The alliance is cooperation or collaboration
which aims for a synergy where each partner hopes
that the benefits from the alliance will be greater than
those from individual efforts. The alliance often
involves technology transfer (access to knowledge and
expertise), economic specialization, shared expenses and shared risk.
DEFINITION
Strategic alliances are agreements between companies (partners) to reach
objectives of a common interest. Alliances are among the various options which
companies can use to achieve their goals; they are based on cooperation between
companies. The description strategic limits the field to alliances that are
important to the partners and have broad horizons1.
Using a broad interpretation, strategic alliances are agreements between
companies that remain independent and are often in competition. In practice,
they would be all relationships between companies, with these exceptions: a)
transactions (acquisitions, sales, loans) based on short-term contracts (while a
transaction from a multi-year agreement between a supplier and buyer could be
an alliance); b) agreements related to activities that are not important, or not
strategic for the partners, for example a multi-year agreement for a service
provided (outsourcing). With this interpretation, the spectrum is wide. It goes
from a sub-supplier contract to franchising and licensing; from R&D partnership
contracts to joint venture and consortium investments, to participation in capital
stock.


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According to a more restrictive interpretation, strategic alliances would be
limited to long term agreements based on the conferral of resources and
participation in capital stock. Agreements based on contracts would not be
considered alliances. Whatever the definition, alliances have some distinctive
characteristics.
Two or more organizations (business units or companies) make an
agreement to achieve objectives of a common interest considered important,
while remaining independent with respect to the alliance. If A and B create an
alliance C, A and B remain independent both between themselves and with
respect to C.
The partners share both the advantages and control of the management of
the alliance for its entire duration. As we will see, this is the most difficult
problem. The partners contribute, using their own resources and capabilities, to
the development of one or more areas of the alliance (important for them). This
could be technology, marketing, production, R&D or other areas. Alliances which
are now called strategic are not new. Westinghouse Electric and Mitsubishi
were allied for seventy years.
Alliances yield better results under certain conditions.
1. When each partner recognizes the need to have access to capabilities and
competencies it cannot develop internally.
2. When a gradual approach is preferable in accessing resources, capabilities and
competencies. Uncertainties about the future evolution of demand and
technology often advise flexibility. The alliance can provide this.
3. When the acquisition of another company is not a possibility in achieving
particular development goals. It is a fairly common belief that the management of
an alliance must have qualities different at least in part from those of the parent
company (the partners). The reason is simple. The management of a strategic
alliance is profoundly different from that of a company that acts independently.





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Seven features of successful strategic alliances
1. Values:
To be successful in an alliance the organisations need
to hold a shared set of values about the cause they are
championing and about ways of working together.
These values will influence the way the parties
approach the alliance and how they work together.

2. Leadership:
Partnerships require champions in each of the participating
organisations, and these individuals need to take direct
responsibility for achieving the partnership goals. Partnerships
also require the unequivocal support of the leaders of the
participating organisations.

3. Clarity of mission and strategy:
Strategic alliances need a compelling mission, realistic objectives and a clear
strategy for achieving them. Each partnership needs to have great clarity over its
goals, achievable objectives with win-win opportunities for both organisations.
4. Board commitment:
The boards of all participating organisations need to be strongly committed to
the partnership and willing to support it through the good times and the difficult
times.
5. Resources:
Strategic alliances need to be properly resourced and there needs
to be great honesty and realism about the time and financial
commitments each organization will have to make to the
partnership. When it comes to reporting on how the resources
have been applied, the financial reports need to be tailored to the
needs of the partnership and not to necessarily follow the
standard reporting formats of the participating organisations.
6. Open and honest communications:
Managers need to recognize that many different stakeholders such as funders,
board and committee members, staff, chapters and volunteers, may be affected
by a strategic alliance. Each requires regular and thorough communication.
Formal communications should be supported by plenty of informal
communication, ideally at board, senior management and staff levels.
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7. Commitment to good faith negotiations:
When the alliance is being established there should be three ground rules.
Without prior agreement of all partners:
there should be no material changes in the partnership proposition
negotiators must be named and there should be no changes during
negotiations
there must be no negotiations with other external parties.
Goals of alliances
Alliances include a wide variety of goals which companies are completely or
partially precluded from achieving when confronting competition on their own.
Setting new global standards
Entering into an alliance can be the best way to establish standards of
technology in the sector.
PHILIPS-SONY. In the late 80s, Philips was in essence pushed out the VCR
market, when Japanese producers managed to impose their standards. To avoid
new defeats, Philips created various alliances with Japanese rivals to assure
technological compatibility among European and Japanese products. The
compact disc (CD) was designed with a global standard by virtue of a series of
alliances:
1) between Philips and Sony, which not only contributed to the planning of the
CD and sound reproduction, but with its presence in the alliance dissuaded other
Japanese producers from seeking alternative solutions;
2) to spread usage of the CD and the standard, Philips ceded the production
licensing in exchange for modest royalties;
3) Philips and DuPont made a 50-50 joint venture to produce and sell optics
components for the audio-video market;
4) Philips and Sony jointly launched the mini-CD. Confronting competition. When
a high-volume producer decides to attack a new geographic market, defense is
difficult if it does not have comparable size. Alliance between companies is a
response which has often led to positive results. It is equally valid to attempt an
attack on a leader that has consolidated its own positions.

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CLARK-VOLVO In the earth-mover sector, neither Clark Equipment nor Volvo
had enough production volume (the former in the United States, the latter in
Europe) to take on the global leaders Caterpillar and Komatsu. In the mid-80s
they decided to create an alliance. Overcoming protectionist barriers. Alliances
can allow companies to avoid controls on importation and overcome barriers to
commercial penetration. For example, in Japan many companies have established
that the best and fastest way to achieve success in the market is to make an
alliance with a local company. In fact, the distribution system is controlled by a
tightly-woven network of producers, distributors and importers. Only an alliance
with one of these can open the road to the final buyer. Alliances can also be a way
to respect the bonds posted by the host country regarding value-added local
content and participation in the capital of local businesses. Dividing risks. For
certain projects, risks of failure are high, and even higher when investments are
elevated. CFM International. The alliance (50-50 joint venture) between General
Electric and Snecma was made to plan, develop and produce a new airplane
propeller. Over ten years of R&D work and more than two billion dollars were
necessary to sell the first engine. Economy of scale. There are many alliances
designed to divide fixed costs of production and distribution, seeking to improve
volume. The alliances between airlines to manage reservation systems
(Computer Reservation Systems) jointly are among the most notable examples.
COVISINT. Every year, Ford, General Motors and Daimler Benz buy component
parts and services together for $250 billion. The auto companies give strategic
importance to economies on the acquisition side. Covisint that is, the synthesis
of collaboration, vision and integrity is a B-to-B that at first integrated
exchanges of parts and services made within Ford and GM and then after the
entry of Daimler Benz connected over 50 thousand potential suppliers.
Through a common platform, participants in the alliance aim to develop and
standardize online transactions. According to the authors of COVISINT, with the
complete realization of the network, planning of a new car model could decrease
from 40 to 15 months.
NESTLE-HAAGEN DAZS. When in the summer of 1999 Nestl and Haagen-Dazs
(part of the Diageo group) announced an alliance for production and marketing
in the United States (not the rest of the world), many were shocked. In the past,
Nestl had rarely made alliances with the competition. The only notable
exception was made to enter into a new product line: breakfast cereals. A joint
venture with General Mills was formed called Cereal Partners Worldwide. In the
United Sates, Nestl sought to build critical mass in the ice cream sector and a
way to reduce costs by operating its plants in California and Maryland at full
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capacity. We believe we can grow better together than separately said a Diageo
spokesperson. Nestl would contribute its frozen dessert technology, while
Haagen Dazs would contribute to distribution through the network of points of
sale with its name. (Beck E., Nestl, Haagen Dazs to create venture, Wall Street
Journal, 20-21 August 1999). Access to a market segment. In mature segments, a
company often wants to develop in a market segment where it is not present
through an agreement with another company.
SMART. An alliance was created between Daimler-Benz and the Swiss
microelectronics company SMH. Smart-ville was inaugurated in October 1997,
in Lorena, not far from the German border. Access to a geographic market. A
strategic alliance is often a way to enter a market that is protected by (national)
tariff and other barriers, or dominated by another company with particular
competitive advantages.
MOTOROLA-TOSHIBA. For a long time, Motorola encountered serious obstacles
to entering the cellular phone market in Japan. In the mid 80s, it publicly
declared the existence of commercial barriers (state protection). The shift
happened in 1987 when an agreement was made with Toshiba to produce
microprocessors. Toshiba contributed access to the distribution network
(difficult to penetrate for a foreign company) and its existing relationships with
the governing authorities. Motorola was authorized to operate in Japan and also
obtained a radio frequency for its own mobile communications system.
(Economist, Asia Beckons, May 30, 1992).
Access to technology. Convergence among technologies is the origin of many
alliances. It is increasingly more frequent that companies need to appeal to their
competition in different sectors if they want to realize a product line.
GENERAL INSTRUMENTS, MICROSOFT, INTEL. In the information gateway
alliance, General Electric brought its experience and market share in converter
boxes; Microsoft contributed its software and Intel its microprocessors. Uniting
forces. Some projects are too complex, with costs that are too high, to be
managed by a single company (military supplier contracts, civil infrastructure
construction).




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Ch. No 2 Types of alliance
Strategic alliances can be considered on a spectrum ranging from informal
collaboration (which hardly merits the term strategic alliance) to group
structures and finally merger. Alliances at the left hand end of the spectrum allow
organisations to maintain a great deal of autonomy. Moving across the different
types (to the right) requires greater commitment and leads to greater
integration.
The type of alliance chosen for a particular venture needs to suit the
circumstances.
It is useful to distinguish among types of alliance in order to understand
various characteristics and make choices. But every alliance is different and has
its own story. It adapts its needs to specific situations. After deciding to form an
alliance and with whom, the best form of collaboration needs to be established.
There are numerous distinctions to be made. Three of these merit examination
for their ability to illustrate the advantages and disadvantages of alliances and
thus make the choice based on the different strategic needs of the partners:
1. alliances based on contracts as opposed to those based on ownership of
capital;
2. relationships between the degree of involvement of the partners in the
alliance and ownership of capital;
3. management of the resources conferred in the alliance, their separability and
the risk of other partners appropriating these resources.
Contracts/ownership of capital
One of the most prevalent and effective distinctions (regarding problem
management) is that between alliances based on contracts and alliances based on
ownership of capital. Using this interpretation, strategic alliances would be
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contracts of partnership, investments in the capital of already existing
organizations and investments for the creation of new organizations (joint
ventures and consortia).
To clarify this concept of alliance, it is useful to look at what an alliance is not
(if this interpretation is accepted).
+ Mergers and acquisitions are not considered strategic alliances, in that they
involve two or more entities that do not remain independent.
+ For the same reason, the acquisition of control of a companys total capital by
another company is excluded in discussion of an alliance.
+ Whether a joint venture is or is not a strategic alliance depends on the
features of the agreement. To be a strategic alliance, the agreement must be
important for the partners. It is not a strategic alliance if it simply represents
a tool to update
+ Periodically the database for a market or system of suppliers. It can be
strategic if it concerns an agreement to distribute products in a market where
penetration by a foreign company is difficult.
+ Similarly, sharing technology in exchange for royalties is not strictly speaking
a strategic alliance, unless it deals with core competencies. All the more
reason a franchising contract is not considered a strategic alliance.
Involvement/ownership of capital
Others interpret the concept of alliance more restrictively. Harbison and
Pekar (1998), for example, distinguish relationships between companies by two
criteria. On one side, the degree of involvement, which ranges from a simple
transaction (sale) to the long term and a permanent relationship (for example a
cartel or keiretsu). On the other side is ownership of capital, which goes from no
ties between the partners at all to total control of the capital by one or more of
the partners (e.g. the 100% acquisition of Jaguar by Ford).
The two authors cited limit strategic alliances to long-term agreements
based on conferring resources and financing and on stock participation
(including cross participation). They do not consider relationships based on
transactions regulated by contracts, such as agreements on marketing
collaboration or the cooperation between distribution and licensing to be
strategic alliances.
They exclude (on the grounds of their permanence) cartels, which aim to
restrict competition and fix price structures, and keiretsu, which aim to give
stability to the vertical structure of service and product suppliers. They also
exclude joint ventures based on the ownership of capital.
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O Resource management, separability, risk that a partner will
appropriate resources
We have already discussed how strategic alliances are based on a wide
variety of agreements. On one hand there are extremely formalized alliances
based on contracts and the control of capital; on the other are alliances based on
informal agreements between organizations, without any control of property.
The reasoning at the base of these different forms of alliance is varied, but more
often than not involves the nature of resources (assets) involved in the alliance.
Resources is a broad concept, ranging from the availability of financial
resources to the availability of plants, from access to a market to intellectual
property and the availability of professional capabilities (skills). A classification
of strategic alliances and the motives at their origin is based on the weight given
to: 1) the management of resources; 2) separability of the resources; 3) the risk
that one partner will appropriate the key resources.
- Asset management: the extent to which the assets (resources) can be
managed jointly.
- Asset separability: the extent to which it is possible to separate the assets
(resources) between the partners.
- Asset appropriation possibility: the extent to which a risk exists that one of
the partners involved could appropriate the assets (resources).
Types of alliance
Alliances assume many different configurations.
Joint ventures:-
These are the results of agreements based on which the
partner companies remain independent and decide to create a
new organization that is legally distinct. The share of
participation in capital can be 50/50, 49/51, 30/70. Most
joint ventures limit collaboration to specific functions. For
example, only R&D, not product development and
distribution. Joint ventures that cover all possible functions of
a company are rare.
EASTERN EUROPE- In two different periods, joint ventures
were the preferred tool of operations in the economies of
Eastern Europe. During the Cold War they were the only means of being present
in these markets. The political regimes did not admit foreign property of means
of production. As a consequence, the only possibility was a joint venture between
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the western company and a local organization. Western participation was almost
always as a minority. In the early 90s and beyond, the joint venture has
represented the best way to set up collaborations between western companies
and Eastern European ones. The former supplied technology and financial
means, the latter supplied low-cost labor, entry into the markets and production
facilities (which almost always needed modernization). Consortia. These involve
two or more organizations, both public and private. Their objective is a particular
initiative or a particular project. The most significant examples are in
construction or large infrastructure, like the Channel Tunnel, or aerospace
construction, like the European Airbus consortium.
AIRBUS INDUSTRIES- It was founded in 1969 by the governments of Great
Britain, France, Germany and Spain. At the beginning it was a consortium for the
marketing of the airplanes of the four partners: Aerospatiale, Daimler Benz
Aerospace, British Aerospace and Costrucciones Aeronauticas. Contract of
partnership in specific functions. One or more companies decide to collaborate in
one or more functions, such as marketing, R&D, production, distribution, or other
functions, without starting a new, legally distinct entity.
The partners set contracts or make formal agreements among themselves.
They remain independent. Often, they are competitors. Ownership of capital. The
alliance can be based on stock participation of one or more of the partners by
other partners. Networks. These are agreements in which two or more
organizations collaborate without formal relationships, but through mechanisms
that provide reciprocal advantages. Code sharing agreements among airlines
can be considered networks. These are agreements through which passengers
can fly with one ticket, using several airline partners. Franchising. This is an
agreement in which a company (franchiser) allows another (franchisee) the right
to sell its products or services. An exclusive franchise is when the agreement is
made with a single company; a non-exclusive franchise when it is made with a
number of companies. A franchising contract is set for a specific period of time.
The franchisee pays a royalty to the franchiser for the buying rights. The most
notable examples are Coca Cola and McDonalds. In these cases, the franchisee
carries out a specific activity such as production, distribution or sales, while the
franchiser is responsible for the brand, marketing, and often the training. In the
fast food sector, and in clothing distribution, franchises are quite common:
Burger King, Kentucky Fried Chicken, Tie Rack, Dyno-Rod. Franchising is a type
of alliance that offers advantages to both parties. The franchiser is offered the
possibility of quickly developing sales over a wide territory, often worldwide,
without having to invest serious resources. There can also be advantages of
entrepreneurial motivation of the franchisee, who prefers to operate under the
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brand name of a large organization. All generally have to contribute an initial
investment in tangible activities, therefore having a personal interest in the
success of the initiative.
The franchisee can gain the advantage of acquiring sales methods from the
franchisers technical assistance, specialized equipment and global advertising
campaigns.
Licensing
This is an agreement in which a company allows
another (exclusive licensing) or multiple others
(non-exclusive licensing) the right to use its
technology, distribution network or to
manufacture its products. Licensing is based on a
contract, generally stipulated for a specific period
of time, in which the licensee pays a fixed amount
and/or a royalty or fee for the rights that are
ceded to it.
For an innovative company with limited resources, licensing offers the possibility
of presence in multiple markets and recuperating investment capital quickly. The
risk is that the company, ceding its own know-how to current or potential
competitors (for a long period), therefore loses control over its core technology.
To address this risk, and to widen the collaboration in the technology field, the
companies can decide to collaborate exchanging expertise or technology. They
create a cross-licensing agreement that brings a certain expertise from A to B and
licenses another expertise complementary to the first from B to A.
MOTOROLA-TOSHIBA- The two companies made a cross-licensing alliance.
Motorola ceded part of its microprocessor technology to Toshiba. In exchange,
Toshiba allowed Motorola part of its memory chip technology.







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Ch. No.3 The Implementation of Strategic Alliances
Alliance implementation issues include the choice of governance
mechanisms, enhancing trust and reciprocity between partners, managing the
integration of project staffs from different organizational cultures, and resolving
conflicts that arise among partners with divergent expectations about and
contributions to their collaboration.

Relational Contracting
Some firms engaging in repeated long-term transactions may attempt to
use hierarchical governance forms to safeguard the specific assets that evolve
during their exchanges. Hierarchical governance mechanisms include
empowering one firms decisions over anothers; creating a neutral body with
authority and power to control specific issues; and implementing standard
operating procedures within the alliance. As alternative to hierarchical
governance, it is proposed that relational contracting could counteract the
uncertainties associated with arms-length contracts. Relational governance
forms rely on such diverse coordination mechanisms as reciprocity norms, inter
organizational trust, and social capital embedded in multiplex exchanges and
social interactions. As a theoretical perspective, the concord that implicitly
underlies relational contracting contrasts with the opportunism explicitly
presumed in both agency theory and transaction cost economics (Borsch 1994).
Relational contracting embraces not only unspecifiable terms and conditions in
complex and open-ended contracts, but also collective interorganizational
strategies for eliminating rivalry through tacit coordination. Pursuing a collective
strategy typically depends on unanticipated future conditions that cannot be
explicitly written into formal contractual agreements. Hence, successful
strategies require basic trust, mutual understanding, unrestricted learning, and
interorganizational knowledge-sharing to achieve a high level of joint decision
making at both strategic and operational levels. Operationalized these processes
as open solicitation and seeking domain consensus, where the relational
partners continually elaborate on their mutual objectives, capabilities, resources,
and tasks. Achieving a well-documented consensus would then serve as a
foundation on which relationally contracted firms could subsequently announce
and implement a formal strategic alliance. A central issue remains how best to
manage the balance between interdependence and control, with the alternative
strategic alliance governance forms discussed above serving as particularly
important mechanisms for resolving conflicts and preserving the partners
relationship. Social capital, in the form of interpersonal and inter organizational
trust, is indispensable to reducing the costs of negotiations between partners.
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Moreover, many analysts treat trust as both an alliance outcome variable and a
predictor of alliance success.

Managing Alliance Formation
Once organizations decide to form a strategic alliance, the partners face
serious challenges of turning their good intentions into a viable enterprise at all
levels, from routine activities to strategic policies. This implementation phase
typically requires that two autonomous firms pool some human resources and
material assets; develop a practical governance structure with sufficient power
and control; and learn how to cooperate for mutual benefit. The inevitable
misunderstandings and conflicts arising in a collaborative undertaking demand
that partner firms and their employees master new management skills, especially
coping with complex lateral relationships spanning legally autonomous entities.
When two firms simply attempt to work together according to an agreement, the
clean authority lines of a corporation hierarchy typically are supplanted with
disorderly parallel command-and-report systems. The managers delegated by
the partners to implement the joint project may be initially
uncertain about who is really in control and possesses final decision making
authority. Careful attention must be paid to selecting staff and leaders for liaison
management, the required continual linkages among partners and between
partners and the alliance. Creating a formal separate subsidiary having its own
board of directors and internal authority hierarchy, with equity stakes legally
dividing ownership and control among the partners, may
help to clarify the venture partners ultimate rights and expectations vis--vis
one another. But, even the most meticulous contractual safeguards provide no
guarantees against the uncertainties, ambiguities, and disputes that constantly
surface during daily operations. Several social control processes, such
interorganizational trust, reciprocity, and confidence, loom large as mechanisms
for sustaining alliances during their precarious implementation phase.
Generating trust among alliance participants is crucial to overcoming
competitive rivals initial suspicions about possible partner opportunism, which
may prevent effective implementation of their collaborative agreement.
Imbalances in organizational power, indicated by disparities in the resources
contributed and controlled by each partner organization, can impede trust
creation due to the partners unequal capacities to fulfil their obligations . Initial
alliances among previously inexperienced partners (virgin ties) often begin
with formal contractual linkages that expose the partners only to small risks.
Because both organizations still have few grounds for trusting one another,
equity-based contracts predominate as legal protections against potential
opportunism (so-called hostage-taking purportedly limits each firms capacity
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to act in disregard of the partners interests). Once both partners gain mutual
confidence through continual testing, then informal psychological contracts
increasingly compensate or substitute for formal contractual safeguards as
reliance on trust among parties increases over time (Ring and Van de Ven
1994:105). Repeated strategic alliances among experienced partners are more
likely to rely on inter organizational trust than on formal safeguards against
potential partner opportunism.












Prior Alliances
Using a 1980-89 panel of 166 corporations operating in three worldwide
sectors (U.S., Japanese, and European new materials, industrial automation, and
automotive products firms), Gulati (1995b) conducted event-history analyses on
a variety of dyadic alliances ranging from licensing agreements to closely
intertwined equity joint ventures. He found strong evidence that formal equity-
sharing agreements decreased with the existence and frequency of prior ties to a
partner. Domestic alliances less often involved equity mechanisms than did
international agreements, supporting claims that trust relations are more
difficult to sustain cross-culturally. Strategically interdependent firms (i.e.,
companies operating in complementary market niches) formed alliances more
often than did firms possessing similar resources and capabilities. Previously
allied firms were more likely to engage in subsequent partnerships, suggesting
that over time, each firm acquired more information and built greater confidence
in its partner. However, beyond a certain point, additional alliances reduced the
likelihood of future ties, perhaps reflecting fears of losing autonomy by becoming
overly dependent on a partner. Indirect connections within the social network of
prior alliances also shaped the alliance formation process: previously
unconnected firms were more likely to ally if both were tied to a common third-
party, but their chances of partnering diminished with greater path distances.
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Gulati (1995b: 644) concluded that the social network of indirect ties is an
effective referral mechanism for bringing firms together and that dense co-
location in an alliance network enhances mutual confidence as firms become
aware of the possible negative reputational consequences of their own or others
opportunistic behavior. His results reflected a logic of clique-like cohesion
rather than status-competition among structurally equivalent organizations.

Trust and Reciprocity
Andrea Larsons (1992) ethnographic exploration of dyadic alliances illuminated
the role of trust and reciprocity norms during the alliance implementation phase.
She conducted in-depth interviews in the mid-1980s with informants from seven
partnerships created by four small entrepreneurial companies (a telephone
distributor, a retail clothing company, a computer firm, and a manufacturer of
environmental support systems). Although mutual economic gain was a
necessary incentive for an alliance to emerge, sustaining the relationship
required a trial period, lasting between six and 18 months, during which the
partners incrementally built stable and predictable structures to govern their
collaboration. Key features of this critical trial phase were the institutionalization
of implicit and explicit rules and procedures, and the evolution of clear
expectations that became taken-for-granted by managers in both companies. As a
relationship solidified over time, organizational actions grew more integrated
and mutually controlled through intertwined operational, strategic, and social
mechanisms.









Ch No. 4 Alliances for specific functions
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For each partner, the alliance is a means to overcoming a weakness. Each
wants to bolster its own capabilities, in technology, finance, marketing, etc., to
ally itself with partners that are strong where it is weak. Many alliances deal with
specific functions. Two or more companies decide to cooperate in one or more
functions: R&D, marketing, production, distribution, etc.
+ Research and Development
This is a collaboration for the development of new products and
technologies. The alliance is generally limited to research. The partners then
develop the production and distribution on their own. R&D alliances are an
important strategic option when the costs for researching innovations are high
and when shortening the life cycle of products creates pressure to be among the
pioneers of product innovation and the production process, which also greatly
increases risk factors. The alliance also offers the advantages of having access to
work groups with elevated professional skills, avoiding duplication of costs and
accelerating the introduction of the product to the market.
Generally, this type of alliance is limited to a specific project or market
segment. It almost always involves only one aspect of technology. The
organization of alliances is quite varied. Sometimes the partners carry out the
research in their own laboratories or with their own equipment, then exchange
information and personnel (Philips-Siemens), or they develop distinct branches
of the R&D process (Tanabe-Glaxo) or one part of the product (Philips Du Pont
Optical).
+ Production
The advantages of an alliance in production are mainly in the economy of
scale and the possibility of absorbing excesses in operational capacity during
periods of declining demand.
+ Distribution
This is one of the most common and oldest forms of alliance. It gives a
company the possibility of broadening its range of products and services offered
on the market, adding the products and services of another company to its own.
The greatest successes happen when the alliance is made for products that are
compatible or complementary, so that they can be sold as part of a coherent line.
Alliances for distribution are often integrated with other alliances. For example,
in exchange for an agreement to combine production capacity, one of the
partners offers the other or others its own distribution structures (logistics,
channels, relationships with individual distributors and distribution chains).
Why alliances are more common now
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The drive to create alliances has evolved quickly over the last few decades.
In the 70s, the main factor was the performance of the product. Alliances aimed
to acquire the best raw material, the lowest costs, the most recent technology
and improved market penetration internationally, but the mainstay was the
product.
In the 80s, the main objective became consolidation of the companys
position in the sector, using alliances to build economies of scale and scope. In
this period there was a true explosion of alliances. The one between Boeing and a
consortium of Japanese companies to build the fuselage of the passenger
transport version of the 767; the alliance between Eastman Kodak and Canon,
which allowed Canon to produce a line of photocopiers sold under the Kodak
brand; an agreement between Toshiba and Motorola to combine their respective
technologies in order to produce microprocessors.
In the 90s according to Harbison and Pekar (1998) collapsing barriers
between many geographical markets and the blurring of borders between
sectors brought the development of capabilities and competencies to the center
of attention. It was no longer enough to defend ones position in the market. It
became necessary to anticipate ones rivals through a constant flow of
innovations giving recurrent competitive advantage.
It is easy to predict that various factors will contribute to the diffusion of
alliances in the coming years.
Acceleration of the rhythms of technological innovation and shortening of
product life cycles.
The convergence of technologies and the permeability of borders between
sectors and between markets.
Progress in telecommunications.
Strong improvements in R&D costs, new product launches, tools and systems.
The collapse of many barriers to competition, on account of deregulation,
privatization and globalization.
The interest of governments in attracting foreign capital and technologies
without ceding control of local companies to foreigners.



Four Steps to a Successful Merger
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Four essential steps contribute to a successful merger:
1. Define the prize
The prize is the vision of a merged organisation, for example assisting more
people, mounting stronger campaigns and
providing better quality and more integrated
services. The prize should become the touchstone
which everyone can hold on to when negotiations
become difficult.
2. Establish a process and timescale for
negotiations
Timescales are important. They should be neither too long nor too short. The
ideal is 4 6 months. Organisations should identify all the issues that might
arise at the first meeting and then agree which ones need to be solved before
the merger can proceed. The proposed process should anticipate that there
will be difficulties and should therefore include a mechanism for resolving
insuperable obstacles.
3. Address the biggest obstacles early on in the process
Two common difficulties are the name of the merged organisation and who
fills the key roles of Chair and Chief Executive. Inability to agree on any of
these can bring the whole process to a grinding halt. These issues need to be
raised early in the process, but not before good personal relationships have
been established.
4. Recognize that cultural integration is the greatest challenge
There is ample evidence that a significant reason why mergers fail is the
inability of the two organisations to integrate at a cultural level. People bring
their own organization cultures to the negotiating table and expect others to
share their point of view, not realising that their organization has different
beliefs and norms.
Managers negotiating a merger need to be acutely aware of different ways we
do things, to surface those differences and encourage discussion about what
might be best for the newly merged organization.

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Strategic Alliances - an important part of most
business models
A strategic alliance is an agreement between two or more players to share
resources or knowledge, to be beneficial to all parties involved. It is as way to
supplement internal assets, capabilities and activities, with access to needed
resources or processes from outside players such as suppliers, customers,
competitors, companies in different industries, brand owners, universities,
institutes or divisions of government.
Different forms of Strategic Alliances
Strategic Alliances can take different forms, occur within an industry or
between actors in different industries, and can range from simple agreements
to mergers or equity joint ventures. There are basically three types of generic
strategic alliances: Non-Equity Strategic Alliances, Equity Strategic Alliances,
and Joint Venture Strategic Alliances.
O Non-Equity Strategic Alliances
Non-Equity Strategic Alliances can range from close working relations with
suppliers, outsourcing of activities or licensing of technology and IPRs, to
large R&D consortia, industry clusters and innovation networks. Informal
alliances without any agreements, or based on "Gentlemens agreement", are
common among smaller companies and within university research groups.
Another form of informal non-equity alliances are geographic clusters where
concentrations of interconnected players, industries, universities and
government agencies co-exists, increasing local competition and productivity.
O Equity Strategic Alliances
In Equity Strategic Alliances agreements are supplemented by equity
investments, making the parties shareholders as well as stakeholders in each
other. The investments are passive so each firm retains fully its decision
power. The cross-shareholding of companies may result in a complex network
where company A owns equity in company B that owns equity in C, creating
direct and indirect ownership. Intuitively, when firms share profits the
incentives for competing are reduced and are often done to enhance control
and make takeovers more difficult.


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O Joint Venture Strategic Alliances
Joint ventures are distinguished from Equity Strategic Alliances in that the
participating companies usually form a new and separate legal entity in which
they contribute equity and other resources such as brands, technology or
intellectual property. The parties agree to share revenues, expenses and
control of the created company for one specific project only or a continuing
business relationship.
Reasons for entering a Strategic Alliance
Firms entering strategic alliances often have multiple objectives, some of
them listed below:
Access to intellectual property rights
Access to knowledge
Access to new technology
Access to new markets
Access to distribution skills
Access to manufacturing capabilities
Access to marketing skills
Access to management skills
Access to capital
Create critical mass
Create common standards
Create new businesses
Create synergies
Diversification
Improve agility
Improve quality
Improve R&D
Improve material flow
Improve speed to market
Influence structural evolution the industry
Inhibit competitors
Reduce administrative costs
Reduce R&D costs
Reduce risk and liability
Reduce cycle time
Utilize by-products

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Main risks identified in the literature
There are several risks and limitations using
strategic alliances. Failures are often attributed
to unrealistic expectations, lack of commitment,
cultural differences, strategic goal divergence
and insufficient trust. Some of the risks are listed
below:
= Activities outside scope of original agreement
= Hidden costs
= Inefficient management
= Information leakage
= Loss of competencies
= Loss of operational control
= Partner lock-in
= Partner product or service failure
= Partner unable or unwilling to supply key resources
= Partner's quality performance
= Partner take advantage of its position
= Partner experiences financial difficulties












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Ch No.5 Stages of Alliance Formation
A typical strategic alliance formation process involves these steps:

Strategy Development:
Strategy development involves studying the alliances feasibility,
objectives and rationale, focusing on the major issues and challenges and
development of resource strategies for production, technology, and people. It
requires aligning alliance objectives with the overall corporate strategy.

Partner Assessment:
Partner assessment involves analyzing a potential partners strengths and
weaknesses, creating strategies for accommodating all partners management
styles, preparing appropriate partner selection criteria, understanding a
partners motives for joining the alliance and addressing resource capability
gaps that may exist for a partner.

Contract Negotiation:
Contract negotiations involves determining whether all parties have
realistic objectives, forming high 22aliber negotiating teams, defining each
partners contributions and rewards as well as protect any proprietary
information, addressing termination clauses, penalties for poor performance,
and highlighting the degree to which arbitration procedures are clearly stated
and understood.

Alliance Operation:
Alliance operations involves addressing senior managements
commitment, finding the 22aliber of resources devoted to the alliance, linking
of budgets and resources with strategic priorities, measuring and rewarding
alliance performance, and assessing the performance and results of the
alliance.

Alliance Termination:
Alliance termination involves winding down the alliance, for instance
when its objectives have been met or cannot be met, or when a partner
adjusts priorities or re-allocates resources elsewhere.



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Benefits of Strategic Alliances and Partnerships
Associations enter into a strategic alliance or partnership with other
associations or for-profit entities for many reasons. Typically, the objective is
to exchange or publish information, hold joint meetings and/or trade shows,
offer education and training programs, sell products and services, promulgate
industry standards, and/or monitor policy issues.
Partnerships and strategic alliances can help to make an international
program more successful. These partnerships can be informal, such as using
the expertise of a counterpart organization or government agency to
strengthen your associations own capacities such as attracting international
attendees to a meeting you sponsor. Or, they can be more formal (and
perhaps on-going) alliances to help distribute, for example, one or more of
your associations products on a worldwide basis. Potential partners include
counterpart associations, government agencies, publishers, association
management companies, universities, or other for-profit entities.
The most common way to grow internationally is through the formation of
a strategic partnership network. Strategic alliances can take different forms
and have different objectives depending on the nature of the association, its
products, services, and resources. The nature of a strategic alliance is also
highly influenced by the local market conditions including the state of the
competition. By and large strategic partnerships are designed to achieve one,
or a combination, of the following goals:
1. To distribute products or services to a set of customers. This represents a
straightforward distribution or licensing deal.
2. To jointly develop products and services for the local market. In this
model, the association will find organizations that have products, services or
skills complementary to theirs and join forces to develop products for the
local market. Although it is not uncommon to see this model apply to content-
based products, it is more often seen in the organization of events such as a
tradeshow.
3. To work with local or regional counterparts to drive a common agenda.
This model, also known as co-opetition (collaborating with your competition),
is often seen when the two associations are joining forces to push forward an
aggressive advocacy or legislative agenda for the benefit of both associations
members.
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A partner in another country can offer local contacts, language capabilities
and knowledge of the cultures, protocols and business styles. To most
effectively form and utilize these alliances, however, the organization should
determine some initial goals. Many other ideas for joint ventures are also
possible based on your associations interests, contacts and creativity.
In general, here are some of the most common benefits and cautions of
strategic alliances and partnerships:
Benefits
E Can capitalize on the individual strengths of each participating
organization.
E Can provide local contacts and links to local communities/stakeholders
who may be critical to the success of the program you want to launch or
implement.
E Involves shared responsibility for the development and execution of a
particular program or service.
E Limits a participating organizations liability to the scope of project
involved.
E Provides reduced-cost opportunities and expertise for each participating
organization.
Disadvantages
E Some cautions or challenges that an organization may encounter in
pursuing strategic alliances or partnerships include:
E Usually limited in scope to the objectives of the alliance or partnerships
E Can become ineffective if one partner doesnt perform at the expected
level or fulfill its obligations to the agreement.
E Can consume more human and financial resources than were anticipated.
E Can require a significant time investment to develop an effective alliance
or partnership.
E Can result in a loss of flexibility for the organization to take quick action in
another area that may be in the organizations better interests than the
area they are pursuing with a given partner.



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QUESTIONS TO ASK:
Before entering into a strategic alliance or partnership, ask:
? Does it extend the associations reach by opening up and developing new
markets?
? Does it help members gain access to additional industry intelligence and
knowledge of other markets?
? Does it increase the associations revenue? Will it contribute to the bottom
line?
? Will it amplify the associations resources? Will it leverage or reuse an
already existing resource?
? Does this alliance have relevance for the association and its mission? Will it
increase the value of the association within the industry or profession

The effects of formal contracts on opportunistic behavior in strategic
alliances
Collaboration between organizations is crucial to remain capable of
meeting the desires of the demanding customer of today. Organizations are
aware of the fact that focusing on their core competences is the most effective
way to sustain competitive advantage. Many firms are involved in high-tech
alliances and their importance for firm performance is growing. Alliance forming
is a way of achieving competitive advantage and alliances are important for the
innovative performance of the firm. In the Netherlands, about a third of
innovations is developed in collaboration and estimate is that about 25% of
research and development funds are invested in alliances. Despite the
advantages of alliances for both parties the failure rate is remarkably high,
around 50%. One reason for failure of alliances is the opportunity of alliance
partners to behave opportunistic. Firms could enter an agreement with a secret
agenda. These firms do not participate in the cooperation for mutual benefits, but
have the incentive to absorb the other partners knowledge, skills and other
assets. For that reason contracts are important instruments to mitigate
contemporaneous and future risks.

The focus of this literature research is on strategic alliances, and the role
formal contracts play in this form of inter-firm collaboration. The main research
question that is being answered in this research is:


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V.E.S College of ARTS, Science &Commerce
What is the effect of formal contracts on opportunistic behavior in
strategic alliances?
The contribution of this literature research is that it increases the
understanding of the effect of detailed formal contracts on opportunistic
behavior in strategic alliances. Opportunism in inter-firm relationships is a major
issue and an important reason for the high rate of failure of strategic alliances.
Therefore it is important to increase the understanding of how to avoid
opportunistic behavior. Many scholars see formal contracting as the appropriate
governance mechanism to avoid opportunistic behavior. But this research will
make clear that the effect of formal contracting on opportunism entails not
always the desired effect.

The first part of this article deals with alliance failure. After this the proposed
positive effect of formal contracts on opportunism is explained. This is followed
by the effect of formal contracts on trust, which is an unambiguous effect. The
following part deals with the fact that it seems situation dependent whether
formal contracts really prevent against opportunistic behavior.




















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Ch. No. 5 EXAMPLE
ICICI Bank and Vodafone India through its 100% subsidiary, Mobile
Commerce Solutions Ltd. (MCSL) have finalized plans to launch
mobile payment services this year, under the brand name m-pesa.
ICICI Bank, Indias largest private sector
bank and Vodafone India, one of Indias
largest telecom service providers, announced
a strategic alliance to launch aunique mobile
money transfer and payment service called
m-pesa. m-pesa is the trademark of
Vodafone. The announcement was made by
Chanda Kochhar, MD & CEO, ICICI Bank and
Marten Pieters, MD & CEO, Vodafone India
Ltd.

ICICI Bank and Vodafone India through
its 100% subsidiary, Mobile Commerce
Solutions Ltd. (MCSL) have finalized plans to
launch mobile payment services this year, under the brand name m-pesa. This
offering will comprise: a mobile money account with ICICI Bank and a Mobile
Wallet - issued by MCSL.

This innovative offering will give the customer a comprehensive service
comprising:
E Cash deposit and withdrawal from designated outlets
E Money transfer to any mobile phone in India
E Range of mobile payment services including purchase of mobile recharge,
recharge of DTH services and utility bill payments
E Money transfer to any bank account in India
E Payments at select shops

The partnership between ICICI Bank and Vodafone effectively leverages the
strengths of Vodafones significant distribution reach and the security of financial
transactions provided to customers by ICICI Bank. These services are made
convenient using a vast network of authorized agents who will enable the
customer to deposit and withdraw cash in and from their account. By facilitating
banking transactions at such agent locations, this alliance effectively delivers the
last mile access in remote areas.
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V.E.S College of ARTS, Science &Commerce
The mobile payment service will be launched initially in the eastern region
of the country viz. Kolkata, West Bengal, Bihar and Jharkhand and then will be
rolled out to other parts of the country in a phased manner.

Chanda Kochhar, Managing Director& CEO, ICICI Bank said, ICICI Bank has
been at the forefront of leveraging technology in banking and has revolutionized
the way Indian customers carry out their banking transactions. We have now
launched m-pesaTM, a unique and innovative offering which will allow us to
provide basic banking services to millions of customers spread across the
country. This will help us reach out to segments that currently do not have access
to banking services, towards our objective of achieving greater financial
inclusion. We are very happy with this partnership with Vodafone which will
bring together the strengths of our respective brands and our complementary
capabilities.

Marten Pieters, Managing Director & CEO, Vodafone India said, Vodafone is
the worlds largest and leading provider of mobile payment services. Vodafone
m-pesaTMis offering millions of people basic financial services, beyond the
reach of traditional banking. After an in-depth understanding of the Indian
customer insights, we concluded that there is tremendous potential for this
product in India. We are really proud to announce the strategic partnership with
ICICI Bank and launch this first-of-its-kind offering with ICICI to provide mobile
payments. This offering has been customized to serve the Indian customer in
compliance with all applicable regulatory requirements.













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V.E.S College of ARTS, Science &Commerce
CONCLUSION
The evaluation should not be limited to reaction of the investors,
clients, suppliers and employees, but it should also include reaction of
the government, the local community, the banking system, unions
and, not least of all, the authority that regulates competition. Strategic
alliances, which are cooperative strategies in which firms combine
some of their resources to create competitive advantages, are the
primary form of cooperative strategies. Research on strategic alliance
in the past few decades has suggested that strategic alliance can
enhance competitiveness. Whatever forms joint venture, equity based
or non equity based, strategic alliance assist in ensuring the economic
value addition, multidimensional inter-firm network, and inter-
organizational coordination. In this paper we have tried to identify how
strategic alliances enhance competitiveness and some factors which
foster strategic alliances. Finally, we have identified some research gap
that will help in conducting future research regarding strategic
alliance issues.
Alliances often change the landscape of competition; rewrite the
way of competing, initiating reactions of rivals and antitrust
authorities. There are many cases of announced alliances, which are
later dissolved or changed in structure following antitrust
intervention. A strategic alliance can help a firm gain knowledge and
expertise. Further, when partners contribute skills, brands, market
knowledge, and assets, there is a synergistic effect. The result is a set
of resources that is more valuable than if the firms had kept them
separate. Similarly, a strategic alliance can help a firm gain a
competitive advantage. Contracts are commonly used governance
mechanisms in strategic alliances to prevent against opportunistic
behavior.








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BIBLIOGRAPHY
WEBLIOGRAPHY
SOURCES:
Search Engine-
www.google.com
www.yahoo.com
www.wikipedia.com
Web sites-
www.business.info.com
www.rrdonnelley.com
www.web.mit.edu.com
www.safaribooksonline.com

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