Alliances and global strategy

Strategic alliances, which I also term coalitions, are a prominent tool in carrying out global strategies. These are long-term agreements between firms that go beyond normal market transactions but fall short of merger. I use

the term alliance here to encompass a whole variety of arrangements that include joint ventures, licenses, long-term supply agreements, and other kinds of interfirm relationships.²⁴ They exist in many industries and are particularly common in automobiles, aircraft, aircraft engines, robotics, consumer electronics, semiconductors, and pharmaceuticals.

International alliances, between firms in the same industry that are based in different countries, are one means of competing globally. They divide the activities in the value chain on a worldwide basis with a partner. While they have long been employed, their character has been changing. Historically, firms from developed countries formed alliances with firms in lesser- developed countries to perform marketing activities (often required to gain market access). Today, more and more alliances involve firms from developed countries who team up to serve whole regions or the entire world. Alliances also increasingly extend beyond marketing to encompass multiple activities. All the U.S. auto companies, for example, have alliances with Japanese companies (and in several cases with Korean firms as well) to produce cars for sale in the United States.

Companies enter into alliances to gain a number of benefits. One is economies of scale or learning, achieved by joining forces in marketing, component production, or assembly of particular models. A second benefit is access to local markets, needed technologies, or to meet government requirements for local ownership. General Motors' alliance with Toyota (NUMMI), for example, was principally designed, from General Motors' perspective, to gain manufacturing expertise. A third benefit of alliances is to spread risk. A number of pharmaceutical firms have entered into cross- licensing agreements on new drug discoveries, for example, to hedge the risks that their own research will prove to be unsuccessful. Finally, sophisticated competitors often employ alliances to shape the nature of competition in an industry by, for example, licensing a technology widely in order to promote standardization. Alliances can offset competitive disadvantages, whether they be in factor costs or technology, while preserving independence and foregoing the need for a costly merger.

However, alliances carry substantial costs in strategic and organizational terms. The very real problems of coordinating with an independent partner, who often has different and conflicting objectives, are just the start. Coordination difficulties impede the ability to gain the benefits of a global strategy. Today's partners also often become tomorrow's competitors, especially partners with more robust competitive advantages or that are more dynamic. Japanese firms have demonstrated this in countless industries. In addition, partners obtain a share of profits which can be substantial. Alliances are unstable, and many dissolve or fail. After a hopeful start, the relationship falls apart or evolves into a merger.

Alliances are frequently transitional devices. They proliferate in industries

undergoing structural change or escalating competition, where managers fear that they cannot cope. They are a response to uncertainty, and provide comfort that the firm is taking action. Alliances appear to be most common among second-tier competitors or companies trying to catch up. Alliances offer initial hope in weaker competitors of preserving independence, though ultimately a sale or merger may well follow.

Alliances are no panacea. Sustaining and improving competitive position ultimately requires that a firm develop its internal capability in areas important to competitive advantage. In the long term, global leaders rarely if ever rely on a partner for assets and skills essential to competitive advantage in their industry.

The most successful alliances are highly specific in character. The alliances employed by such worldwide leaders as IBM, Novo lndustri (insulin), and Canon tend to be narrow in focus and oriented toward access to particular country markets or to Particular technologies. Alliances are a tool for extending or reinforcing competitive advantage but rarely a sustainable means for creating it.