Manufacturing capacity into profits

Strategic alliances have many advantages for international businesses. First of all, the fast technological change nowadays is so significant that firms often have problems in meeting all the numerous costs of developing all the capabilities needed. With alliances, it is actually possible, for a company, to spread fixed costs to other companies and risks in development and manufacturing efforts (when developing new products or entering new markets notably).

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For example, “Texas Instruments” and “Hitachi” joined forces to create new “memory chips”, but they realised that the costs were too much important to develop such jet engines together. So they asked powerful aerospace companies to join them. As a result, costs management was made much easier as costs were shared, (according to I. Ronkainen, E. Moynihan, M. Czinkota, M. Moffett, “Global Business”, p. 416). In addition, strategic alliances are an efficient way to facilitate the entry into a foreign market.

Indeed, finding a local partner who approves common business conditions and who has good connections as well is a significant opportunity to catch. Furthermore, according to P. Barnevick, “Global strategies”, “Harvard Business Review”, preface, p. xvii, and international strategic alliances are useful to get into new markets as it is a precious way for one partner to build according to the other’s experience. It also accelerate the entry into new market and thus, it can represent significant money saving.

The author also mentioned that money savings can also be realised when using existing distribution channels of the other collaborator. P. Kotler, “Marketing Management”, p. 108, also mentions that strategic alliances are also ways to cut exit costs when divesting operations and to turn excess manufacturing capacity into profits.  A way to fill gaps in the existing market and technology: It can be significant to elaborate a strategic alliance “that will help the firm establish technological standards for the industry that will benefit the firm”, (“Global Business Today”, p.388).

Strategic alliances are actually about creating values with the exploitation of the different partners’ core competencies. Speed up international market development: Many reasons can justify the internationalisation of a firm: a way to increase market shares, profits, knowledge, materials, to reduce costs (off shoring production in countries with low labour costs), to get economic advantages (implementing its production in a Freeport area for example – low taxes), a way to diversify its portfolio, a way to extend the product life cycle to other markets and so on…

Getting into foreign market is the very first “big” objective of numerous companies. Forming a strategic alliance with another organisation (suppliers, competitors, firms specialised in other industries… ) can strongly speed up a product introduction in foreign markets, as it is easier to know and overcome some cultural, legal, economical, political and geographical barriers. Developing a partnership can also help in finding new business opportunities (new partners, new manufacturing plans, new technologies, new commercial tools…).

For example, the company “Toshiba” was sharing manufacturing plans and “chip design” with “Motorola” to obtain a stronger access to the Japanese market, (“Global Business”, p. 416). ? To defend home markets: A company facing difficulties in his home market (sales slow down, problems with manufacturing sites or suppliers… ) might need to form a strategic partnership to overcome those issues. For example, the “Bechtel Group” was desperately waiting for new orders (nuclear power plants).

To solve that problem, the group decided to create an alliance with the world famous German company “Siemens” in order to service several North-American plants (“Global Business”, p. 416). ? To generate economies of scales (costs reduction leading to a better competitiveness notably: Getting new technological capabilities from a partner can allow a firm to strengthen its manufacturing process and to reduce cost per unit (thanks to an improved technology and a better organisation notably).

In addition, it is to say that a firm expanding its scale of operations also generates economies of scales. This expansion, as we explained previously, is made possible with the formation of strategic alliances. Many things are actually linked. Combining capabilities to create value: Strategic partnerships allows firms to combined a important range of complementary capabilities, as each firm involved in the alliance has a specific combination of competences. Here is a chart explaining how complementary strengths can create high value for firms involved in alliances, (according to I.

Ronkainen, E. Moynihan, M. Czinkota, M. Moffett, “Global Business”, p. 417): Firm #1’s Specific Strength Firm #2’s Specific Strength Common Objective with the creation of a strategic alliance “PESPI”, selling canned drinks “LIPTON”, as a well-known tea brand and customer franchise Selling together canned iced tea drinks in international markets “KFC” main assets: a well-known fast food brand, efficient operational skills “MITSUBICHI”, involved in real estate and efficient in site-selection competences all over the Japanese territory

Creating several “KFC” stores in Japan “CORNING”, recognised for its glass and optical fibres technology “SIEMENS”, a brand involved in many international telecommunication markets and its recognised cable-manufacturing technology Creating a fibre-optic-cable business worldwide “HEWLETT – PACKARD”, famous for its computers, software and electronic channels notably “ERICSSON” with strong technological capabilities in many public telecommunication networks Creating and launching into global markets numerous network management systems

We can notice in this chart that, more globally, we can also categorised strategic alliances into two major groups: – Alliances between competing companies Vs. – Alliances between non-competing companies It is interesting to see how two completely different companies can get together to enlarge the scope of their active operations. ? To avoid competition: In some cases, markets are not large enough to hold numerous competitors. As a result, firms have the possibility to create strategic partnerships in order that they do not have to compete with one another.

? Problems with mergers/acquisitions: As we mentioned before, strategic alliances and mergers/acquisitions are different strategies. Dissatisfactions with mergers/acquisitions are numerous. First of all, we can evoke the quite low success of mergers/acquisitions such as a risk loss of flexibility for small companies. In addition to that, it is to say that mergers/acquisition quite often contain acquisitions of unnecessary activities for companies and also inconveniences with post-mergers integration (Eleanor Davies, “Strategic Alliances”, lecture).

A way to stop potentially “dangerous” competitors: Strategic alliances can be elaborated to block some rivals’ actions. To illustrate that, we can give the example of the company “Caterpillar” that formed a partnership with “Mitsubishi, Japan” in order to strike back at “Komatsu”, the main competitor in that domestic market (“Global Business”, p. 416). ? Getting new core values: A company can form some strategic alliances in order to strengthen its core values. For example, the famous sports firm “Reebok” created an alliance with “Amnesty International”.

Indeed, “Reebok” sponsored a series of concerts organised by “Amnesty” all around the world to “promote” the cause of Human Rights. It was actually a way for “Reebok” to mention Human Rights as a part of it core values (better image and reputation notably). When this alliance was elaborated, it was perceived as a very strange fit. But this shows us that organisation can get together to achieve goals even if they do not belong to the same “industry” at all… (E. Austin, “The Collaboration Challenge”, “Harvard Business School”, p. 4).