Strategic Alliance as Cooperative Relationships

Chapter 16 - Interorganizational Relationships, Strategic Alliances, and Networks: The Role of Communication Systems and Information Technologies
Managing IT in Government, Business & Communities
by Gerry Gingrich (ed)
Idea Group Publishing 2003

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What is a Strategic Alliance?

An alliance is one of cooperative relationships between/among organizations. Child and Faukner (1998) defined alliance as partnerships between firms and a normal agent for cooperative strategy. An alliance is formulated strategically or tactically, for mutual benefit by two or more parties having compatible or complementary business interests and goals (Segil, 1996).

It is different from mere arm's length market transactions. Rather it is the particular kinds of interorganizational bonds that emphasize the relationship aspect of the exchange as much as the goods or services being exchanged (Kanter and Meyer, 1991).

In addition to exchanging these goods or services, partners can obtain unanticipated benefits from cooperation, such as mutual learning (Child and Faukner, 1998), which can bear some sort of innovation - new products/services, processes, markets, and resources, including knowledge.

According to Yoshino and Rangan (1995), a strategic alliance is defined as:

A strategic alliance links specific facets of the businesses of two or more firms. At its core, this link is a trading partnership that enhances the effectiveness of the competitive strategies of the participating firms by providing for the mutually beneficial trade of technologies, skills, or products based upon them (p. 4).

And they added the following three determinants of strategic alliances.

• Uniting the members independently in the form of alliance to pursue their shared goals.

• Partners share the benefit of alliance and control over the performance of assigned tasks.

• Partners contribute to one or more key strategic domains on a continuing basis.

Konsynski and McFarlan (1990) took up a concept of "information partnerships" through information or information systems, and listed the following five points as success factors of such partnerships.

• Shared Vision at the Top

• Reciprocal Skills in Information Technology

• Concrete Plans for an Early Success

• Persistence in the Development of Usable Information

• Coordination on Business Policy

Guiding Principles of Strategic Alliances

Value Chain

Generally, the concept of "value chain" is used as a guiding principle of strategic alliances. Porter (1985) paid attention to "value," which the firm generates, and made linkage between intra-firm activities and those that generate such value as value chain.

In the alliance between/among firms, he developed such value activities from intra-firm level to inter-firm level, and made the concept of "value system." It specifies the existence and the location of the source of value or competitive advantage in the inter-firm business processes. And with this method, we can point out the significant points in the inter-firm alliances and lead the strategies for competitive advantage.

Although the concept of value chain that Porter advocated was oriented to vertical integration of the value activities, there emerged new concepts such as "value chain integration" (Pine II, 1993) and "value constellation" (Normann and Ramirez, 1993, 1994) in the early 1990s.

Value chain integration is the concept that Pine II advocated. He stated that, in turbulent times like today, there needs to be more flexibility than that of the legacy value chain, and in order to realize such flexibility, we need value chain integration instead of a legacy value chain - a vertical integration system.

Value Chain Integration

Value chain integration is based on the "open communication lines that allow everyone in the entire chain to focus on the next customer, and most of all on the end customer, combined with activities that proceed concurrently rather than sequentially" (Pine II 1993, p. 229). He added that value chain integration focuses on process capabilities, while vertical integration focuses on product competencies.

For example, in the Dell Computer's direct model, all the parties (such as suppliers of the parts, Dell Computer, and Federal Express) who manage logistics, including inventory management and delivery of products, share the ordering information and work as if the process is carried out almost concurrently rather than sequentially.

Value Constellation

Value constellation is the concept that was advocated by Normann and Ramirez (1993, 1994). They indicated that the paradigm shift from adding value step by step to co-producing value is needed.

They stated that, in the turbulent environment, corporate strategies cannot cope with the new environment only by the value chain, which arrange value activities in line with the pre-determined order based on value chain. Instead of adding values, it is necessary to reinvent value. In order to realize value creation, various parties concerned, such as suppliers, partner firms, allied firms, and even customers, etc., must get together and co-produce value.

The key strategic task of successful companies is to reconfigure roles and relationships among constellation of the parties concerned "to mobilize the creation of value in new forms and by new players" (Normann and Ramirez, 1993, p. 66).

They took up the case of IKEA, which is the largest furniture retailer in the world, and illustrated the concept of value constellation.

Thus, at present, guiding principles of strategic alliance are changed from the vertical integration of value chain in other words from sequentially adding value to synchronous value offerings or co-production of value.

As Norman and Ramirez (1994) stated, "words like synchronous, parallel, concurrent, distributed, co-processed, or co-produced denote the new possibilities which break the time, space, interface and role constraints inherent in traditional strategic models" (pp. xvi-xvii).

Significance of Strategic Alliances

According to Lewis (1990), strategic alliance provides access to far more resources than any single firm owns or could buy. The firm can strengthen the following abilities:

• Create new products

• Reduce costs

• Bring in new technologies

• Penetrate other market

• Preempt competitors

• Reach the scale needed to survive in world markets

• Generate more cash to invest in core skills

Doz and Hamel (1998) pointed out the following three points as primary purposes of strategic alliances. I think these are not purposes but rather characters that effective alliance should possess.

• Co-option. Co-option is a kind of cooperative strategy with the potential competitors or complementors who offer complementary products/services.

  There are two purposes of co-option (Doz and Hamel, 1998).

  • Potential rivals are effectively neutralized as threats by bringing them into the alliance

  • Firms with complementary goods to contribute are wooed, creating network economies in favor of the coalition

• Co-specialization. Co-specialization is "the synergistic value creation that result from the combining of previously separate resources, positions, skills, and knowledge sources" (Doz and Hamel, 1998, p. 5).

  An alliance can be successful through the contribution of partners by offering their own unique and differentiated resources - skills, brands, relationships, positions, and tangible assets - with each other. When these resources are cospecialized and bundled together, these resources become more valuable and may create new value.

  I think there are two types of synergistic effects: complementary and reinforced. Complementary synergy is obtained through the combination of different types of resources. Reinforced synergy is that which is reinforced by bundling the same type of resources.

• Learning and Internalization. Skills that are tacit, collective, and embedded are not easy to transfer to another organization. And core competencies are not exchanged in an open market. The only thing that you can do to get these skills and competencies is to learn from the partners of an alliance. Skills obtained from partners should be internalized and exploited beyond the boundaries of alliance.

  In addition to the above, innovations such as new products/services, new processes, new technologies, and new knowledge, etc., which were created by interorganizational learning through the interactions of organizations should be added to the significance of strategic alliance.

  In the industries where there are such strategic alliances, there is a lot of "collective competition" (Gomez-Casseres, 1996), which is the competition between/among the groups of a strategic alliance. It is also important that such collective competition promotes innovation.

  In addition to the above, one of the purposes of a strategic alliance is in the risk reductions. There are risks such as loss of assets, decrease of income, responsibility of reparation, loss of personnel, and business risk (speculative risk), etc. Risk management for such risks are indispensable, and consists of risk control risk avoidance, loss prevention, loss reduction, segregation, combination, and risk hedge and risk finance risk retention and risk hedge.

  Although the appropriate method of risk management is in accordance with the kind of risk, type of strategic alliances, and situation which organizations confronted; in any case, it is apparent that sharing risk between/among parties in strategic alliance can reduce risk compared to the case that each party acts alone.

Classification of Strategic Alliance

Kanter and Myers (1991) examined particular kinds of interorganizational bonds (alliances) that emphasize the relationship aspect of the exchange as much as the goods or services being exchanged. And they classified such interorganizational bonds into following three major types:

• Multiorganization Services Alliances or Consortia

• The Opportunistic Joint Venture

• The Complementary or Stakeholder Partnership

Konsynski and McFarlan (1990) listed following four types of information partnerships:

• Joint Marketing Partnerships

• Intra-Industry Partnerships

• Customer-Supplier Partnerships

• IT Vendor-Driven Partnerships

Yoshino and Rangan (1995) carried out more minute classification. At first, they roughly divided inter-firm links into contractual agreement and equity arrangement. Then they broke down the former into traditional contracts arm's-length buy/sell contracts, franchising, licensing and cross-licensing and non-traditional contracts. On the other hand, they broke the latter into no new entity, creation of entity, and dissolution of entity. They also defined the non-traditional contracts, the no new equity, and the non-subsidiary joint ventures as the "strategic alliances."

Thus the strategic alliances are not inter-firm transactions in the market and also not internalization of the other firms, such as M&A, etc. They can be considered as loose-coupling inter-firm relationships that exist in the middle of the market and the firm.

Strategic Alliance Based on Core-Competence

What is Strategic Alliance Based on Core-Competence?

I will introduce a strategic alliance model based on "core competence" as one of the new models.

Core-competencies are not mere individual skills or technologies, but the integrated multiple streams of skills and technologies. They enhance customer value, differentiate from competitors, and strengthen capabilities of the firm (Hamel and Prahalad, 1994).

For example, SONY has a capacity to miniaturize electric appliances such as compact cassette tape recorders (Walkman), and Yamato Transport has an expertise of delivering goods everywhere in Japan within next day.

Strategic alliances based on core-competence are aiming at combined effectiveness of core-competence by being allied with partners with its own core-competence.

Classification of Strategic Alliances Based on Core-Competence

There are two types of core-competence linkage. One is the "heterogeneous alliance model" and the other is the "homogeneous alliance model" (Figure 3).

Figure 3: Classification of Strategic Alliance Based on Core-Competence

• Heterogeneous Alliance Model

  This model is alliances of organizations that have different functions of core-competence in IOR.

  It is divided into the "outsourcing model," which focal organizations consign their non-core-part to external specialists who have core-competence in such non-core-part; and the "network-based division of labor model," which two or more organizations that have different core-competencies get together and allocate each function in accordance with core-competence.

  These are types of gaining competitive advantage by complementing necessary core-competence with each other and can be called a "complemented alliance."

  • Outsourcing Model

  Generally, outsourcing is that organizations consign a certain part of their activities or functions to external specialists.

  In this model, the non-core part or functions shall be outsourced to the external specialists by contracts. Through the outsourcing, the organization can concentrate its resources into its core competence and make its activities more effective and efficient.

  Also, through shifting its paradigm from the "possession" to the "utilization" (or from "stock" to "flow") of the resources, the organization can reduce the inefficiency and the risks of possessing the full set of the assets.

  • Network-Based Division of Labor Model Virtual Corporation Model In this model, two or more organizations share their core competence and share a series of the business processes, and act like a "virtual corporation" as a whole. Through the division of labor, the effectiveness and the efficiency of a "virtual corporation" can be improved.

  The members participate in the networks through reciprocal agreement, the contracts of memberships of the networks, or the contract with the leader of the networks. "Supply Chain Management" can be a sort of this model.

• Homogeneous Alliances Model

  Homogeneous alliance is that firms that have a similar core-competence organize for the purpose of reinforcing their core-competence, and thus it can be called a "reinforced alliance."

  In this model, for example, if one firm is not able to obtain a competitive advantage in the market by its own core-competence only, then it forms an alliance with other firms (those have similar core-competence) and strengthen their competitive advantage as a group of firms.

  On the other hand, there is an alliance for the purpose of expecting the effect of "co-option." This is a kind of strategy that one firm forms an alliance with current competitors or potential new entrants who have similar core-competence with a focal organization (Yamada and Arakawa, 1998) in order to reduce the competitiveness of its counterpart in the market competitiveness of current competitors, bargaining power of suppliers, bargaining power of customers, threat of new entrance, and threat of substitute products or services (Porter, 1981).

  This model includes cartels, business cooperative associations in the same industry, joint ventures within the same industry, joint R & D, joint product development, joint manufacturing, joint marketing, and shared distribution services, etc.

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