Kingston University | Discuss the most common reasons for failure in forming strategic alliances. What can be done to reduce these problems? | International Business Strategy | BSM103 | 05/03/2010 | Lecturer: Adam Raman By: Mohammad Alyazouri K0536616 2009/10
Sources of strategic alliances’ failure and how to mitigate these problems:
Making the decision to enter into an alliance is a risky endeavor, despite the potential advantages it can offer a firm. The high likelihood of failure has led to the assumption that strategic alliances are more likely to fail, with over sixty percent of alliances actually failing (Kalmbach and Roussel, 1999, cited in Elmuti and Kathawala, 2001). This essay will discuss the common sources that contribute to alliance failure and emphasize key strategies for mitigating these issues.
Elmuti and Kathawala (2001) suggest that the primary causes of failure in establishing a strategic alliance can be attributed to cultural clashes. Such clashes hinder effective communication due to language barriers and lead to differing operational approaches. Daniel and Radebaugh (2001) further explain that American companies rely on financial measures like profit and market share to evaluate performance, whereas Japanese companies focus on operational tactics to develop their strategic positions.
Steensma et al. (2000) stated that national cultural characteristics have a direct impact on alliance formation and play a role in tempering technological doubts and the formation of alliance relationships. Additionally, the lack of trust is a major issue as the concept of sharing risk is absent. In case of failure, instead of resolving the problem, each firm tends to blame the other, exacerbating the situation.
Trust is crucial for success and can take on three forms: responsibility, equality, and reliability. It is essential for alliance members to prioritize these forms and enhance trust among individuals. It is important for people to trust each other rather than relying solely on the companies involved. Additionally, unclear objectives hinder the effectiveness of strategic alliances. Many companies form alliances solely to combat competitors, which distracts them from focusing on their core business operations.
Furthermore, the formation of alliances may uncover existing issues among its members. Additionally, alliances can be established to address internal problems within a company. The expectation is that joining multiple alliances can expedite the resolution process, prompting companies to participate in numerous alliances. One detrimental factor to consider is poor managerial coordination; if decisions made by members do not align with top management’s expectations, it can disrupt the entire alliance. This is especially true when allied companies view each other as adversaries due to their previous competition prior to forming the alliance.
If a company markets and sells its products independently while in partnership with another company, it may result in a direct separation. Additionally, using Bruner’s 1999 example of Volvo’s attempted merger with Renault in 1993, it temporarily decreased Volvo’s shareholders’ wealth. Companies have different attitudes towards operations, such as producing goods or services in poor conditions or failing to adhere to delivery schedules, which can lead to mistrust and potential takeovers. For instance, in 1997, Publicis Communication and Foote, Cone and Belding (FCB) formed a partnership that seemed ideal as it served the strategic needs of both parties. However, the alliance ended prematurely despite FCB’s international expertise benefiting Publicis in North and South America. Furthermore, True Communication Inc., the holding company of FCB, rejected Publicis’ $28 per share takeover attempt despite owning 18.5% of the company. Relational risk is the potential lack of commitment from a partner towards the alliance.This unexpected action could potentially undermine the objectives of forming an alliance. In 1997, Segil provided an example involving a joint venture between Avon and Liz Claiborne after Avon acquired a cosmetic company called Stern. However, Liz Claiborne viewed Avon as a rival, causing the relationship to deteriorate and leading to Liz Claiborne acquiring the joint venture.
The risk of performance failure in alliances occurs when partners are fully dedicated to the collaboration. According to a 1999 study by Das and Teng, there are various environmental factors, such as war, changes in government policies, and economic recession, that contribute to this risk. Additionally, internal factors like lacking competence in certain areas and unfortunate circumstances also play a role.
Participating in an alliance can result in the creation of future competitors. This occurs when a participant joins with the intention of testing a market in order to launch a new product or subsidiary.
However, a company could reduce the likelihood of creating a future competitor by refusing to cooperate with other companies in any aspect of its expertise. According to Cojohari, N. (no date), there are six common problem areas that can result in the failure of alliances, as stated by Chernesky, R. J. (1996-2006). These problem areas include:
Poor management: This refers to the amount of time and effort required to manage a strategic alliance.
Strategic dead end: Unexpected conflicts in operations, objectives, and/or plans can lead to failure.
Loss of control: Partners relinquish some control in order to achieve shared benefits. If a partner becomes overly dependent on the alliance for growth, it may lose its own business strategy and ultimately fail to focus on its core business.
The worst case scenario within the alliance concept is when one ends up with a competitor instead of a partner. This can happen due to partners focusing on their own benefits rather than working together harmoniously. Additionally, poor agreement on specific goals and objectives can cause significant difficulties. The failure to choose the appropriate partner can also lead to the failure of unique deals, as seen in the case of General Motors’ alliance with Daewoo for the Pontiac LeMans. Kermally (1999) mentions that some strategic alliances fail due to reasons such as prioritizing short term profitability over long term investment, assuming skills can directly be applied to other businesses, and differences in management styles and unclear objectives. On the other hand, Scott (2001) highlights that successful alliances involve early involvement of all participants, allowing them to develop key aspects before the project starts as early as possible.– Creating a fair relationship is crucial for building successful alliances. This involves establishing common goals and supporting one another in achieving individual objectives.
In order to establish a solid partnership, it is essential to overcome the challenge of identifying and dividing the associated risks among all participants. Managerial commitment is vital, as it requires involvement from everyone involved in the alliance to understand and agree upon the objectives. Commercial alignment is also necessary, achieved by creating a system that converts the returns of alliance members into measurable performance based on specific criteria. The creation of an integrated team is crucial, considering both the structure of the team and the commitment and alignment of its individual members in order to ensure success.
Trust is a fundamental aspect of any partnership. According to the Construction Industry Institute, trust is defined as having confidence and reliance on the professional competence and integrity of the other party/parties involved. However, it is important that all members fully understand and embrace this definition of trust.
On the other hand, trust takes time to develop, making lack of trust an initial barrier. To foster innovation, participants should continuously encourage innovative thinking throughout the partnership, making it a key focus from the beginning to the execution stage. Finally, open and honest communication among all participants within the alliance is highly significant.However, in order for participants to develop a comprehensive understanding, it is necessary for them to share pertinent information with others. This may even include sharing previously confidential information. In 2002, Kaplan and Hurd identified three crucial principles for successful alliances (Birchall, D. and Tovstiga, G., 2005, p.147):
The first principle aims to establish the purpose of the alliance and define specific metrics to measure progress.
The second principle involves creating a formal alliance management process, which includes: aligning the alliance with the firm’s strategic plans; selecting partners based on financial, strategic, asset, and capability considerations as well as cultural and personal compatibility; establishing rules of engagement and governance; and developing success metrics and a review process for both the firm and the partnership. Additionally, it is important to include an exit strategy in the initial agreement.
The third principle emphasizes intentionally nurturing the growth of the alliance through regular joint reviews, effective communication, and involving various levels of management in the relationship.
In summary, this essay has explored numerous reasons for strategic alliance failures while also highlighting key factors for successful alliance formation. Ultimately, it concludes that trust, management style, clear objectives, and selecting suitable partners are essential aspects that must be carefully evaluated prior to entering into an alliance in order to ensure a favorable outcome.Bibliography:
• Scot, B. (2001) Partnering in Europe: Incentive based alliancing for projects. London: Thomas Telford Ltd.
• Gerlach, M. L. (1992) Alliance Capitalism: The social organization of Japanese business. United States of America.
• Kermally, S. (1999) when economics means business: the new economics of the information age. Great Britain: Biddles Ltd, Guildford & King’s Lynn
• Birchall, D. & Tovstiga, G. (2005) Capabilities for strategic advantage: Leading through technological innovation. New York: Palgrave Macmillan.
• Lasserre, P. (2007) Global Strategic Management. 2nd edn. Hampshire: Palgrave Macmillan.
References:
1.Elmuti, D. & Kathawala, Y. (2001) “An overview of strategic alliances”, Management Decision, 39 (3), pp.05-218 Emerald [Online] Available at (Accessed: 01 March 2010)
2.Cojohari, N. (no date) Competitive advantage of strategic alliances [Online] Available at (Accessed: 02 March 2010)
3.Scot, B. (2001) Partnering in Europe: Incentive based alliancing for projects.London: Thomas Telford Ltd.
4.Scot, B. (2001) Partnering in Europe: Incentive based alliancing for projects.London: Thomas Telford Ltd.
5.Kermally, S. (1999) when economics means business: the new economics of the information age.Great Britain: Biddles Ltd, Guildford & King’s Lynn
6.Birchall, D. & Tovstiga, G. (2005) Capabilities for strategic advantage: Leading through technological innovation.New York: Palgrave Macmillan.
