Peter Drucker. One of the greatest business scholars of this century. Mentioned strong partnerships. Or strategic alliances. As an important strategic element for a company to have in the future. In addition. Former GE Chairman Jack Welch emphasized strategic alliances as an important factor in securing competitiveness. Saying. “Thinking that you can do everything on your own is a shortcut to defeat in the global era.”
Like the views of major academics and business executives. The importance of strategic alliances in corporate management is emerging. According to a survey by a research institute. The world’s top 500 companies have an average of 60 strategic alliances. In the past five years. The number of strategic alliances between companies has increased by more than 25% annually. You can indirectly guess the importance of strategic alliances in corporate management.
The pace of change in industrial technology is accelerating. And consumer needs are becoming increasingly complex and diversified. Autonomous growth that utilizes only internal capabilities cannot respond to the speed of change in industrial technology and consumer needs. This is why strategic alliances are required to secure external capabilities.
What is the purpose of a strategic alliance?
The accelerating pace of market change is expanding the competencies that companies must have to respond to changes. The scope of the expanded competency is becoming broader and more complex than the area previously operated by a single company. In order to respond to these market changes. Companies need to break away from the existing self-sustaining growth method and pursue a growth strategy that actively utilizes external capabilities.
In this paper. As a way to utilize external capabilities. We will look at strategic alliances that can respond quickly to changes in the market environment based on flexibility in resource mobilization.
Strategic alliance is a management strategy in which companies with strategic intentions seek to secure an integrated competitive advantage by forming a cooperative relationship based on their competitive advantage.
In terms of business strategy. It is a strategy to secure a competitive advantage with relatively low risk and profitability compared to mergers and acquisitions. But relatively high risk and profitability than licensing.
Individual companies conduct strategic alliances to supplement and nurture insufficient capabilities and functions in the value chain necessary to respond to market changes. The purpose of the strategic alliance to complement the value chain can be summarized in the following five points.
Finance and risk management
Strategic alliances enable easy capital raising for investment. Securing external investment resources can reduce the company’s investment risk. Which leads to the creation of efficient capital management performance. In addition. Securing stable financial resources plays a role in enhancing external credit.
Reduction of time and cost for securing technology can be realized through technology exchange between research and development . Mutual cooperation in research and development can increase the technological prowess between the two countries within a short period of time. And through this. The effect of strengthening the market position can be realized.
Purchasing and procurement
Through alliances with all defense companies along the value chain. Stable raw material acquisition and procurement for product production and development can be realized. This enables companies to focus on their core competencies through cost reduction and elimination of inefficient work. And lays the foundation for strengthening corporate competitiveness.
Strategic alliances make the production process more efficient. Through partnerships such as sharing production bases and introducing advanced management techniques. Productivity can be enhanced. And cost savings can be created through the realization of economies of scale.
Sales and marketing
Strategic alliance enables technology convergence between different industries and induces new market creation through convergence of new technologies. It also plays a role in preempting the market and strengthening its position through joint marketing.
What types of strategic alliances are there?
For a successful strategic alliance. The purpose must be clear and the type of strategic alliance suitable for that purpose must be pursued. So. What are the types of strategic alliances? We classified the types according to the strength of the partnership between stakeholders and their interrelationships.
Classification according to the strength of alliance between stakeholders
Strategic alliances can be divided into three types according to the size of the alliance. The form with the lowest alliance strength is the consortium. This is an alliance in which companies with the same purpose share resources with each other to secure capabilities that are difficult for individual companies to obtain.
This is the case when Hyundai Heavy Industries and GE entered overseas markets in the form of business alliances with various venture companies. Joint Ventures (JVs) have a slightly higher alliance strength than consortiums. A JV is not a simple sharing of resources with each other. But a method of promoting mutual cooperation by establishing a new corporation through equity participation. A representative case of JV is that Samsung Electronics and Sony established an S-LCD joint venture. Equity alliance is one that has a higher level of cooperation than establishing a new corporation through mutual equity participation.
Equity alliance is an alliance to strengthen each company’s core business by solidifying mutual relationships through equity investment in partners. The automaker Daimler’s partnership with Renault is a good example of an equity alliance.
Classification according to the mutual relationship between stakeholders
Strategic alliances can be subdivided into four types according to the interrelationships between stakeholders who intend to form strategic alliances.
Pro-competitive mainly appears in the form of alliances between companies that are vertical in an industry’s value chain. A typical example is the establishment of a JV company. Hitachi Vehicle. With the battery manufacturer Hitachi to strengthen the competitiveness of the electric vehicle business.
Non-competitive appears in the form of alliances between companies that exist within the same industry. But do not consider each other as main competitors due to differences in the level of main production models and target markets. Such as the case of partnership between automakers GM and Isuzu.
Pre-competitive can be found mainly in cases of cooperation between heterogeneous industries for the development of new technologies. Through partnerships such as the development of canned tea beverages by Pepsi and Lipton and the development of fiber optic cables by Siemens and Corning. Each company pursues the development of new technologies by convergence of its own technologies. is the case
Competitive is a form of alliance between companies that are directly competing in the final product market. As a strategic alliance with the highest potential for conflict between alliance partners. The most representative case is the alliance between GM and Toyota. Which was signed to share production methods and plant operation methods.
Examples of major strategic alliances with advanced companies
Strategic alliances are growth strategies to strengthen corporate competitiveness by securing an integrated competitive advantage. Let’s take a detailed look at how major domestic and foreign advanced companies have utilized strategic alliances to strengthen their competitiveness.
Hyundai Capital & GE alliance: Securing stable investment resources and improving external credibility
In September 2004. GE Consumer Finance acquired a 38% stake in Hyundai Capital for approximately KRW 430 billion. Strategic alliances to be dispatched to Capital will be implemented. Through this. A total of 1.5 trillion won was invested in Hyundai Capital by 2006.
After the strategic alliance. Hyundai Capital’s sales in the first quarter of 2005 increased by 10% compared to the same period of the previous year. Hyundai Capital’s credit rating was upgraded from AA3 to AA1. And the corporate bond yield fell from 6.2% to 4.9%.
At the time of the alliance. GE Consumer Finance had 32.000 employees in 47 countries around the world. And in 2004 had an AAA credit rating of $151.2 billion in assets and $2.5 billion in net profit.
From the standpoint of GE Consumer Finance. It was urgent to establish a bridgehead to advance into the growing Korean financial market. At that time. Hyundai Capital. Which had the largest share in the automobile installment and auto lease market. And a credit rating of AA3. Was the most suitable partner. From the standpoint of Hyundai Capital. It Was a good opportunity to enhance external credibility by partnering with GE. A multinational super company. And at the same time acquire GE’s advanced installment financing techniques. Hyundai Capital secured additional funds through a strategic alliance through equity investment and improved market credibility. In addition. Through human exchanges with GE Consumer Finance. Advanced financial know-how was introduced to secure a competitive edge in the market.
Samsung Electronics & IBM Alliance: Concentrate on new product development through mutual patent sharing
In February 2011. Samsung Electronics and IBM signed a ‘comprehensive mutual patent use agreement’ to jointly use patents held by each other. Each company is a giant patent holder that ranks first and second in the number of patents held in the United States. Through this alliance. The two companies will be able to pursue the reduction of the development cycle of next-generation products and reduce costs related to patent fees. In addition. It is expected to be able to focus on core competencies by avoiding exhaustive competition and cooperating to lead the global standard.
Samsung Electronics holds 100.000 patents in a wide range of fields such as semiconductors. Mobile phones. Displays. And home appliances. IBM is a leading patent acquisition company that has acquired the most patents in the United States for 18 consecutive years based on 7.000 research personnel at Watson Research Center. Its own research institute. Through this alliance. Samsung Electronics has been able to avoid checks through patent litigation in the electronics industry and to secure competencies centered on communications and software. Which are relatively inferior to competitors. IBM was able to secure basic patents for memory semiconductors necessary for product diversification and performance upgrade.
In a market that requires fierce competition like the electronics industry. Sleeping with the enemy’ is a basic strategy. As in the case of Samsung Electronics and IBM. focusing on developing next-generation products instead of exhausting competition through technological alliances is a meaningful effect that can be achieved through strategic alliances.
Partnership between POSCO and Nippon Steel: Achieving cost savings through joint purchase
Recently. The M&A craze in the steel industry is heating up. Mittal Group. The world’s No. 1 steel company. Has secured its current status through 29 M&As. Iron ore companies such as BHP Billiton, Rio Tinto, and CVRD, and steel products demanding companies such as automobile companies are strengthening their sales and purchasing negotiating power through mergers.
In this trend, the need for cost reduction in the steel industry has reached its peak. It can be understood in the same context that POSCO. The number one steelmaker in Korea. And Japan’s New Nippon Steel. Promoted a joint purchase project to stably secure low-cost. High-quality coking coal and iron ore.
At the time of the alliance. POSCO. The world’s No. 1 crude steel producer. And New Nippon Steel. The world’s second largest crude steel producer. Integrated the operations of coal mines and mines in Australia. Canada. And India to maintain cost competitiveness amid competition from European and Chinese companies. and joint investment for new development and expansion. In addition. Various joint works related to the purchase of raw materials were carried out. Such as the introduction of a joint electronic system for raw material import and approval documents. Through this. It was possible to secure a stable source of raw materials and to reduce the cost of purchasing raw materials. Thereby laying the groundwork for enhancing price competitiveness. Which is a major success factor for the steel industry.
Boeing & Parts Provider: Concentrate core competencies through procurement partnerships The
The aviation industry requires enormous management resources to develop products or technologies. This is an area in which strategic alliances that can share these resources are actively pursued for the purpose of investment costs. Technological barriers. And market security due to long-term investment meetings or increased uncertainties such as the recovery schedule and scale.
In 1990. Boeing was able to dramatically lower the parts defect rate from 15% to 5% and its own parts procurement rate from 70% to 30% when manufacturing the B777 through strategic alliances between 2.000 parts makers. While reducing the inefficiency and cost burden caused by independent development. He was able to focus his capabilities on aircraft design and system construction.
Parts suppliers were able to upgrade their capabilities to the next level by acquiring expertise and experience from Boeing. In addition. It was able to secure a stable demand for Boeing. Which enabled it to become self-sustaining.
Star Alliance: Realizing economies of scale and scope through alliance networks
Affiliate networks are often formed as a result of the need to realize economies of scale and increase market share through alliances. The alliance group thus formed is a collection of individual companies through various cooperation agreements, and does not have a direct link with a specific company.
The Star Alliance. An aviation alliance. Is the most representative example of forming an alliance network to realize economies of scale and scope. The economic value of scale and scope of the aviation industry in the 1980s and 1990s greatly increased due to the easing of aviation regulations in the United States. The adoption of a centralized method of air routes in large cities. And economic integration in Europe. The market has been transformed into a structure in which only large companies that can expand airplane routes to various countries can generate profits. In order to strengthen the organization’s competitiveness and overcome the limitations of individual capabilities. Star Alliance. An alliance of about 25 airlines including Air Canada and United Airline. Was formed.
They achieved additional sales through customer base integration and joint marketing. And were able to focus more on improving service quality by reducing airport incidental facility costs and procurement costs per customer.
Toyota & GM: Improving
productivity by sharing production bases and sharing roles A representative example of a partnership that dramatically improved productivity through the provision of production bases and clear division of roles for the introduction of management techniques is Toyota and GM’s Nummi (New United Motor Manufacturing). Incorporated) JV.
In 1983. Toyota and GM established a 50:50 joint venture and introduced Toyota’s Just In Time (JIT) production method in Fremont. Which had the lowest productivity among GM’s factories at the time. As a result. The absenteeism rate was reduced from 20% to 2% and the inventory turnover rate was increased from 20 days to 2 days. Resulting in a more than 50% improvement in factory productivity. At the time of the alliance. GM was the world’s No. 1 automaker. But as its market share in the country was declining. It wanted to learn excellent management techniques from Japanese companies. Toyota needed a production plant in the US to enter the US market.
The Nummi partnership allowed Toyota to successfully enter the US market. GM was able to launch the Saturn after learning Toyota-style management techniques.
Corning & Siemens Alliance: Creating New Markets Through Technology Convergence
The optical fiber alliance between Corning and Siemens is one of the best strategic alliances in sales and marketing.
Since its founding in 1851. Corning has been a leading company in the fields of glass. Ceramics. Polymers. And optics. Corning developed fiber optic technology in the 1960s. But it was never put to use. In the early 1970s. Corning established a joint venture with Siemens. A multinational corporation that had sales bases in 160 countries through major businesses such as information and communications. Logistics. Energy. And medical products at the time. To create a fiber optic cable market in the telecommunication market.
Corning needed marketing and sales capabilities for the optical fiber communication cable business. And Siemens also wanted to bring additional growth engines to the telecom industry. Through the partnership between the two companies, it is currently the world’s No. It could develop into an optical fiber manufacturer. And Corning expanded its strategic alliance in the future. and by the mid-1990s. more than 25% of its total profits were generated from the strategic alliance business.
McDonald&Zynga: Improving sales performance through joint marketing McDonald’s, A
global fast food company. Formed a McDonald’s village in FarmVille. Zynga’s representative game. Through a strategic alliance with Zynga. The world’s largest social game developer.
Farmville is an online game that is used by an average of 100 million people per month. As a game in which you create your own farm in a virtual space and communicate with other users. Through this partnership. McDonald’s expects the effect of advertising its brand and products for consumers around the world owned by Farmville. Although the partnership is still in its infancy. Both companies are expecting great results.
Suggestions for a successful strategic alliance When
two or more companies with different objectives pursue a strategic alliance. Failure is more likely than success. There are factors that hinder the success of the strategic alliance in all areas of business. Such as cultural differences between the two companies. Problems of vision. Differences in values pursued. And information security.
Among the above cases. There are cases in which the partnership was canceled or acquired by a partner due to a problem between the two companies.
According to a study by Joel Bleeke. A prominent American consultant. The duration of strategic alliances is only about 7 years on average. And 80% of strategic alliances are terminated due to contract termination or acquisition. It can be seen that achieving and maintaining it is not easy. In this regard. T-Plus intends to conclude this article by providing seven suggestions for successful alliances derived from the analysis of failures and successes of existing strategic alliances.
Set clear and measurable goals In
strategic alliances. If there are no clearly set goals or if non-measurable goals are set. The intended goals cannot be achieved and conflicts with partners may arise.
IBM pursued a strategic alliance with Siebel instead of independent development under the goal of ‘acquiring customers by providing optimal solutions. And through this. It was able to develop solutions tailored to its own platform and secure more than 200.000 loyal customers.
Choose the right partner to achieve your goals
Rather than being deceived by the past reputation and history of the other company. You should select a partner with the appropriate capabilities to achieve the goals of the alliance. Utilization of open infrastructure can be a way to find optimal alliance partners. P&G. A consumer goods company. Is forming an extensive partner pool through the C&D model and selecting the optimal partner for technology discovery and process innovation.
Management should keep the overall schedule and results in person
The role of management in a strategic alliance does not end with the conclusion of negotiations. But rather leads the alliance to success through continuous attention and interim inspection. The Walt Disney Company was able to achieve the expected marketing effect by jointly using the marketing calendar with HP under the leadership of the management team to clearly share the planned systematic plan according to the schedule and the expected effect to the partners.
Prevent leakage of core competencies of one’s own company Since A
a partner may turn into a competitor in the event of leakage of core competencies. The source of competitive advantage. It is necessary to clarify the limits of the alliance and closely monitor changes in the partner’s strategy. Some American companies that had partnered with Japanese companies were obsessed with short-term profits and passed on their know-how indiscriminately. Resulting in losing competition with Japanese companies in the future.
Gatekeeper can be a good example of solving this security problem. By designating the people and facilities to which the alliance partners can access and establishing a system for exchanging information only through official channels. It will be possible to prevent indiscriminate information leakage.
Respect your partner’s culture and be flexible with it
Insufficient understanding of the other’s culture leads to mutual distrust and adversely affects the absorption of core competencies. So it is necessary to embrace the other’s position.
According to a study of 130 cases of Vantage Partners in 2003. More than 50% of the failures of strategic alliances were caused by cultural differences with partners.
alliance with your employees Whether an alliance ends in a technology leak or revitalizes an organization depends on how well employees understand the purpose of the alliance. Alliances provide an opportunity to get a close look at competitors. And this opportunity is given to employees. Not management. The effectiveness of the partnership should be enhanced by giving employees a clear sense of purpose and rewarding them accordingly.
Restructure your partnership portfolio periodically. According to
In a survey by global consulting firm McKinsey. About 70% of companies that have entered into a strategic alliance say they are not satisfied with the performance of the alliance and that improvement measures are needed. did.
It takes about 2-3 times more effort than the restructuring of a business unit of an organization. In order to prevent this inefficient situation, it is necessary to periodically manage the affiliate portfolio by introducing the Gate Review System. It is necessary to set a step-by-step schedule and performance goals. Take necessary actions before the problem worsens, or evaluate the future value to determine whether to continue the unachieved partnership.
Cisco has set a grace period of 12 to 18 months after the conclusion of the strategic alliance and adopted the Gate Review method to make adjustments to determine the improvement. Extension. And termination of the alliance.