Critically discuss the view that all international businesses should use strategic alliances and joint ventures as part of their strategy.
A business that operates globally has to follow a range of different strategies to enter and sustain in international markets. It is extremely crucial for Multi National Companies to devise an effective international business strategy (Braun and Latham, 2014). International business strategy is a systematic map that directs the commercial transaction between independent entities located in different countries. It facilitates effective and efficient cross border business operations.
MNC’s are the major players in the global marketplace. This situation is the result of reduced trade barriers, increased consumer awareness, improved infrastructure and rapid technological advancements. Wal-Mart is an American company, but more than one quarter of their revenue is generated from business outside United States. They operate through a large number of stores located in Mexico, Central America, Japan, Brazil, Canada, Chile, the United Kingdom and Argentina. They also operate through joint ventures in emerging countries like China and India (Dong and Glaister, 2006). They use a global strategy to achieve economies of scale by producing and offering same product and services in each international and national market. A product like ‘L’Oreal Total Repair Five’ can be a good example for a product using global strategy.
Cooperative business alliances are changing the structure of North American markets dramatically. In the present international business environment, strategic business alliance is gaining popularity. As this allows both the firms of alliances to combine their strengths and other resources effectively to gain competitive advantage over its competitor. Strategic alliance is an agreement between two consenting partners to achieve common objectives through combined efforts. Strategic alliance is an efficient way of learning, resource sharing and gaining competitive advantage over the major competitor in the market. The number of strategic association has grown exponentially after the North American Free Trade Association (NAFTA) reduced the trade barriers to US, Mexico and Canada (Duffy and O’Rourke, 2014). When a firm plans to enter into new international markets, they might require added resources and capabilities to serve in the international markets. Thus strategic alliances provide them with valuable resources and ample amount of local knowledge so that they can survive and thrive in these new markets. Each party to the contract have equity share in this new entity and they share all the expenses, profits and revenues.
There are various kinds of strategic alliance that a company might choose to adopt. Joint Venture is one of them. A Joint Venture is a contract between two or more otherwise legally independent companies to form a single separate legal entity to commence a particular project. Joint Venture follows the principle of shared ownership. Joint ventures foster long term relationships and help all the partners to transfer tactics knowledge to each other. This allows the firm to gain competitive advantage over its competitors. All the partners of joint venture equally participate in the operations of the business and share their resources. For example, a joint venture is formed between Warner Bros, Paramount Pictures, Sony Pictures Entertainment, Universal Pictures and Metro-Goldwyn-Mayer Inc to deliver the feature films via internet to consumers on demand.
Importance of Strategic Alliances in International Business
Strategic alliance or joint ventures permits a firm become a partner of an existing company which further allows them to share the risk and resources in the international markets. A strategic alliance is partnership between two or more companies which can be of different type such as transferring technologies, agreements of purchasing and distribution, collaboration for marketing and promotion or to develop new products using the combined expertise (Ghauri and Cateora, 2014). Each of the partners to such alliances retains their independent operations at the same time they contribute towards a common goal.
A joint venture involves a legal ownership by each partner and each one of them has equity shares invested in the newly formed venture. Joint ventures require long term investment of funds and require each partner to combine its competitive resources for the success of their venture. Joint ventures can be formed for various reasons such as to use the technologies held by the partners that are complimentary with each other, or to run the production facility efficiently in the new international country (Haeussler and Higgins, 2014). It might also be formed to create a strong brand presence through marketing and establishing effective distribution channel in new markets.
International markets are characterized by many difficulties, such as fluctuating exchange rates, different governmental requirements and rules and regulations, the economic and political condition of that country, the culture and local language of those countries etc. And there are other reasons also that necessitate a firm to adopt the strategic alliances and joint venture strategies in their international business plan.
Reasons for choosing Strategic Alliance and Joint Venture
Few of the reasons are as follows:
- To reach the desired rate of growth in international markets, following organic growth is not sufficient.
- If a firm partners with a local firm in another country, then it will reduce their research and development costs as the local firm is very well aware of the needs and current trend of the market.
- Due to increased complexity of the international business environment, it is necessary to partner with a local firm in order to operate efficiently in the international market. It will enable them to gain expertise in serving the international consumers satisfactorily (Husain, 2014). The local firm will have full knowledge about the governmental requirements and they can accurately determine the needs of the consumers.
- Strategic alliances or joint ventures help the firm to access the global markets. Such alliances also protect the firms from making costly mistake in international waters.
- Improved logistics availability, emergence of multiculturalism, reduced trade barriers and increased demand for international products have also led to the rise in the number of strategic alliances in the recent past.
- The cultural and national difference across different countries makes strategic alliance all the more attractive for a firm which is planning to go international (Isidor et al., 2014). It reduces the transaction cost while entering into these new markets.
- The combination of core competencies of each partners have a profound impact on the efficiency of the business. This allows each partner to augment their capabilities and thereby, their competitiveness.
It is for all the above reasons that all the major MNCs have started adopting this strategy while planning to go international. Few examples can be, the joint venture between Coca Cola and Procter and Gamble in 2001. They entered into a joint venture worth $ 4.2 billion when P&G wanted to use the large distribution system of Coca Cola to decrease the time to marketplace and to enhance the reach of its ‘Pringles’ and ‘Sunny Delight’. Another good example of strategic alliance can be of between Hewlett-Packard and NTT DoCoMo. They entered into partnership to conduct a research on developing technology for fourth generation mobiles, jointly (Kumar, 2014). With the help of this partnership they combined the DoCoMo’s technology of wireless broadband and computer servers and network infrastructure of HP.
All the above examples prove how strategic alliance plays an eminent role in international business strategy. This can be highly beneficial for the partnering firms. However, with higher opportunities come higher risks. A research suggests that the market capitalization was reduced to $ 43 billion because of 15 major unsuccessful alliances. Thus it is important for firms to carefully choose the companies they are planning to have an alliance with.
Criteria for selecting the Strategic Alliance or Joint Venture
The alliance which a firm wishes to form with the other company must be strategic. This means that the alliance should allow the firm to efficiently meet its strategic objectives (Moen et al., 2009). There are basically five major criteria on the basis of which the firm can identify whether the alliance is strategic or not. These criteria are as follows:
- It should be significant to the business objective: If cost reduction is the core objective of a firm, then, they should go into alliance with such business partners who can make significant cost savings in the internal operations by investing together in new technologies and standards, and new processes. This alliance will be considered strategic when it fulfills the fundamental business purpose of being a cost leader in the industry.
- It should develop or protect the core competency and competitive advantage of both the firms: when firms enter into alliance, they learn from each other competencies. The learning firm needs to create incremental skills in a critical area which can be augmented with the help of the experienced partner. However, to make learning effective, it is important that the objectives are shared with the partners.
- It should be able to block a competitive threat: even if an alliance fails to develop competitive advantage it can still be considered strategic if is effectively blocks a major competitive threat.
- When the alliance enables to achieve future strategic objectives: It should enable both the partners to achieve their underlying strategic objective in the long run.
- It should be able to mitigate the risk: when a firm enters into an alliance with an objective of mitigating the risk of failure in the international market, then the alliance must fulfill this objective only then it becomes strategic.
Any one among these should match with the strategic plan of the parties to alliance. Before forming an alliance both the parties should be aware of each other’s strategic objective, only then it will be successful (Nakos, Brouthers and Dimitratos, 2013). It is highly requires that the partners are chosen carefully by systematically evaluating the potential partners.
Strategic alliance and joint venture have certain advantages which makes it even more desirable to incorporate this strategy in the international business plan. They are as follows:
- It allows all the parties of alliance to share the market risk, which may arise due to new product development or exposure from new markets.
- Such alliances provide all the parties the access to the distribution network of the partner, which helps them to acquire new market shares at a faster rate (Nguyen and Srinivasan, 2014).
- The alliance makes use of the combined strengths thus allowing the partners to focus on those areas of their business in which they are the best. For ex, one partner can make use of its strong R&D capabilities and bring in innovation product while the local partner’s distribution channel can be accessed to reach out to a large number of people.
- Again, they can make use of the additional resources and allows the international firm to reach out to the local target consumer with the help of local partner
However, there are certain disadvantages of such alliances also. Such as, if both the partners do not understand each other’s objective, there might be certain disputes among them, the profit is divided among both the parties, if the alliance takes place between two firms who differs in size then face cultural difficulty as both might have a different way of doing the business (Pedersen, 2014). Strategic alliance also requires both the companies to put in a lot of time and commitment to make the alliance successful.
Thus, it is extremely crucial that the alliances are managed carefully. It is vital that they maintain flexibility in their relation which can facilitate both the partners in implementing change. They need to conduct training sessions to create an environment of mutual trust at the workplace for the employees.
This report has reinforced the statement that “all international business should use strategic alliance and joint venture as a part of their business strategy”. The report has discussed in detail the need for such alliances, how these alliances can be chosen and what are the benefits of using strategic alliance as a part of their international business strategy. Thus, it can be concluded that strategic alliance and joint ventures do facilitate the operations of a business in the international markets and therefore, they must use this strategy in their plan (Reynolds and Reynolds, 2014).
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