Kingston university | | |Discuss the most frequent sources of failure in forming strategic alliances. What can be done to mitigate these problems? | |International Business Strategy | |BSM103 | | | |05/03/2010 | Lecturer: Adam Raman By: Mohammad Alyazouri K0536616 2009/10 Sources of strategic alliances’ failure nd how to mitigate these problems Taking a decision to join an alliance would be very risky, in spite of any advantage that the alliance would give the firm, due to the high possibility to fail; unfortunately, this fact has formed an assumption that the formation of strategic alliances is more likely to fail, as long as more than sixty percent of alliances tend to fail according to (Kalmbach and Roussel, 1999, cited in Elmuti and Kathawala, 2001).
However, this essay discusses the frequent sources that lead alliances to failure as well as it emphasizes key features that could be followed in order to mitigate these problems.
According to Elmuti and Kathawala (2001), the most frequent sources of failure in forming a strategic alliance could be the following: 1) Cultural clash: It is considered to be the most significant problem that firms face when forming alliances, the language acts as a barrier against an effective communication, while in terms of operations, companies operate differently as their cultures differ, in 2001, Daniel and Radebaugh stated that American companies evaluate performance using financial measures such as profit and market share, while Japanese evaluation relies on how companies operate to help themselves build a strategic position.
On the other hand, in 2000, Steensma et al. said that the national cultural characteristics effect directly the formation of an alliance and temperate the technological doubts and formation of alliance relationship. 2) Lack of trust: The concept of sharing the risk is missing. Basically, what happens in alliances in case of failure is that each firm blames the other, which increases the size of the problem instead of solving it.
However, trust is an aspect of success, and it has three forms, responsibility, equality, and reliability. Therefore, the alliance members should work on these forms, and improve the trust among individuals, as long as people trust each other rather than the companies. 3) Unclear objectives: Nowadays, the purposes of forming strategic alliances are wrong in most of the cases; hence, many companies join alliances to fight competitors. This action prevents them from focusing on their businesses.
On the other hand, it discovers the existing problems within the alliance members; In addition, alliances might be formed to solve internal problems of a company. It is assumed that the increase in number leads to a fast repair which makes companies to join many alliances. 4) Poor managerial coordination: When decisions are made by members and don’t match high levels of management, this could disrupt the whole alliance, particularly, when allied companies treat themselves as enemies, since they were competitors prior to alliance.
For example, if a company does its marketing for its products and sells them by its own, while it was in alliance with another company, this would cause a direct separation. Moreover, Bruner’s 1999 example about Volvo in 1993 when it tried to merge with Renault which destroyed the shareholders wealth of Volvo temporarily. ) Difference in attitudes: Different companies have different attitudes in operations, for example, one company might produce their services or/and goods in bad conditions, or might not respect schedules and timetables in terms of delivering goods or/and services which leads into mistrust between companies and ending up with a takeover, in 1997, Melcher and Edmundson mentioned an example of a partnership between Publicis Communication and Foote, Cone and Belding (FCB) was ideal since it matches the strategic needs of both, this alliance was in Europe which satisfies the need of FCB for being international, while Publicis benefits from FBC experience in both North and South Americas in order to have multinational clients, but it has been ended very early, however, the world’s number eight agency group and the holding company of FCB, True Communication Inc. was refusing a $28 per share attempt of Publicis to takeover although Publicis owns 18. 5%. ) Relational risk: It is the risk to have a lack of commitment from the partner towards the alliance; this unexpected action would destroy the visions of an alliance, in 1997, Segil stated an example about a formation of a joint venture between Avon and Liz Claiborne after the acquisition of a cosmetic firm called Stern, however, Liz Claiborne considered Avon as a competitor thus the relationship started to collapse and then Liz Claiborne acquired the joint venture. 7) Performance risk: It is the risk to fail when partners are fully committed to the alliance, according to a study carried out by Das and Teng, in 1999, there are environmental factors behind this risk such as war, changes in governmental policies, economic recession, etc…, in addition to internal factors such as competence lacking in some areas and awful luck. 8) Creating future competitors: A participant may join an alliance with intent to test a market in order to launch a new product or subsidiary.
However, a company could decrease the possibility of creating a competitor in the future by refusing to cooperate with other companies in any part of its competency. According to Cojohari, N. (no date) there are six frequent problem areas that lead to alliances’ failure stated by Chernesky, R. J. (1996-2006), which are: > Poor management: It’s concerned with the amount of time and energy to be spent in order to manage a strategic alliance. > Strategic dead end: Unexpected clash in some aspects such as operations, objectives, and/or plans might cause failure. > Control loss: Partners give up some control to get shared return, if a partner was completely dependent on alliance in terms of growth, it would both lose its own business strategy and fail to concentrate on its business.
On the other hand, ending up with a competitor instead of a partner is the worst case that happened within the alliance concept. > Focus on other partners’ benefits: partners fail to work homogeneously because each partner looks at the other’s benefit from the alliance. > Poor objectives: partners fail to agree on specific goals and objectives (e. g. ROI, market share, etc… ) which causes significant difficulties. > Bad choice of partner: Failure to choose the appropriate partner causes the unique deals to fail, for example the alliance of General Motors with Daewoo to make Pontiac LeMans was an incredible deal, but the differences in both management style and culture caused the failure of the alliance. Kermally, S. 1999) states that some types of strategic alliances fail due to the some reasons such as: • The short term profitability takes most the attention rather than long term investment. • Assumption of the skills in a business that can directly be applied to the others. • Differences in management styles and unclearness of objectives. Scott, B. (2001) discusses the key features of successful alliances as the following: – Participants’ early involvement: Just before the project starts, all alliance members would have the chance to develop other key aspects; this kind of engagement should take place as early as possible. – Equitable relationship: To design and implement an equitable relationship would make successful alliances, includes development of agreed objectives and helping each other in individual objective as well.
However, in order to build this relationship the difficulty of pointing out the risks related to the partnership and divide them up between participants should be overcome. – Managerial commitment: This is concerned with the involvement of all the people within the alliance to understand the objectives and agree on them. – Commercial alignment: By establishing a scheme that converts returns of the alliance members to a real performance with specified criteria. – Integrated team: Making an integrated team considering two aspects, the first is the team structure and the second is commitment and alignment of its members individually and as a group in order to ensure success. Trust: The Construction Industry Institute defines the term trust as the following: “Trust is the confidence and reliance one party has in the professional competence and integrity of the other party (parties) to contribute to successful execution of a project in a spirit of openness, fairness and cooperation. ” (Scott, B. , 2001, p. 7), however, the definition of trust must be fully understood by all members. On other hand, concept of trust grows up with time, that’s why lack of trust is an initial barrier. -Innovation: Participants should encourage the innovative thinking continuously, as it has to be a key focus from the beginning to the execution. – Open communication: Honest and open communication is very significant between all the participants within an alliance. On the other hand, articipant must share some related information with others to develop the understanding of them, sometime they need to share information that were considered to be confidential previously. In 2002, Kaplan and Hurd determined three key principles for effective alliances (Birchall, D. and Tovstiga, G. , 2005, p. 147): The first key principle to determine the purpose and including specific metrics to track progress The second one to create a formal alliance management process: • Forming the alliance based on firm’s strategic plans. • Choose partners, starting with finance, strategy, assets, and capabilities, then cultural and personal fit • Determine the engagement rules, how will it work and be ruled? • Create metrics for success and a review process, for both the firm and the partnership. Include an obvious exit strategy within the initial agreement. The third on to look after the growth of the alliance intentionally and dynamically: • Accomplish joint reviews regularly. • Guarantee effective communication. • Employ various levels of management in the relationship. The essay has discussed most of the sources of strategic alliances’ failure; it also mentioned the key features of forming strategic alliances successfully. However, it has been concluded that the most important aspects are trust, management style, clear objectives and choice of suitable partners which have to be revised very well prior to formation in order to form a desirable alliance. 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.
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