Strategic alliances

Strategic alliance formations have increased dramatically over the past decade and, in many U.S. and E.U. industries, alliances are now a central strategic component and a core offensive and/or defensive competitive weapon. Strategic alliances have shifted the fundamental competitive paradigm in many domestic and international markets from traditional firm-to-firm competition to more alliance-based, network-vs.-network competition

Merger - the creation of a new company by joining two separate companies in order to enhance the financial and operational strengths of both organizations. Disney-Pixar created successful movies: “WALL-E,” “Up,” and “Bolt.” Pixar needed money Disney liked their image.

Daimler Benz/Chrysler merger

They had different corporate culture. In 1998, Mercedes-Benz manufacturer Daimler Benz merged with U.S. auto maker Chrysler to create Daimler Chrysler for $37 billion. The logic was obvious: create a trans-Atlantic car-making powerhouse that would dominate the markets. But by 2007, Daimler Benz sold Chrysler to one firm, which specializes in restructuring troubled companies, for a mere $7 billion.

Takeover –is the purchase (acquiring control) of one company (the target) by another (the acquirer, or bidder) by stock purchase or exchange.
Takeover bids can either be friendly or hostile. In a friendly takeover the acquiring firm negotiates with the targeted company, and common agreement is reached in an amiable atmosphere for subsequent approval by shareholders. Sometimes a company's management will defend against unwanted hostile takeovers by using several controversial strategies including the poison pill, crown-jewel defense, golden parachute(offer lucrative benefits to the current top executives^ stock options bonuses liberal severance pay it can cost an acquiring firm a lot of money), and others.

Acquisition - when one company buys another one or part of another one. Acquisitions can be either friendly or hostile.

There is no tangible difference between an acquisition and a takeover; both words can be used interchangeably - the only difference is that each word carries a slightly different connotation. Typically, takeover is used to reference a hostile takeover where the company being acquired is resisting. In contrast, acquisition is frequently used to describe more friendly acquisitions, or used in conjunction with the word merger, where both companies are willing to join together.

An acquisition or takeover occurs when one company purchases another. Companies perform acquisitions for various reasons: they may be seeking to achieve economies of scale, greater market share, increased synergy, cost reductions or for many other reasons. The acquiring company would usually proceed with the corporate action by offering to purchase the shares from the shareholders of the target company. Often, a cash offer is made but sometimes the acquiring company may offer to trade its own shares in exchange for the target company's shares. Also, the difference between mergers and takeovers/acquisitions are that mergers involve two companies of roughly equal size that have decided to combine together to take advantage of expected advantages of a being larger company.

A strategic alliance is an alliance formed as part of a plan with important aims. It is a cooperative arrangement between two or more companies that have decided to pool resources, investment and risks to undertake a specific, mutually beneficial project. In a strategic alliance, each company maintains its autonomy while gaining a new opportunity. The formation of strategic alliances has been seen as a response to globalization and increasing uncertainty and complexity in the business environment. A strategic alliance can help a company develop a more effective process, expand into a new market or develop an advantage over a competitor, among other possibilities.

For example, an oil and natural gas company might form a strategic alliance with a research laboratory to develop more commercially viable recovery processes. A clothing retailer might form a strategic alliance with a single clothing manufacturer to ensure consistent quality and sizing.

Different forms of Strategic Alliances

Strategic Alliances can take different forms, occur within an industry or between actors in different industries, and can range from simple agreements to mergers or equity joint ventures.

Some types of strategic alliances include:

· Horizontal strategic alliances, which are formed by firms that are active in the same business area. That means that the partners in the alliance used to be competitors and work together In order to improve their position in the market and improve market power compared to other competitors. Research &Development collaborations of enterprises in high-tech markets are typical Horizontal Alliances.

· Vertical strategic alliances, which describe the collaboration between a company and it´s upstream and downstream partners in the Supply Chain, that means a partnership between a company it´s suppliers and distributors. Vertical Alliances aim at intensifying and improving these relationships and to enlarge the company´s network to be able to offer lower prices. Especially suppliers get involved in product design and distribution decisions. An example would be the close relation between car manufacturers and their suppliers.

· Intersectional alliances are partnerships where the involved firms are neither connected by a vertical chain, nor work in the same business area, which means that they normally would not get in touch with each other and have totally different markets and know-how.

· Joint ventures, in which two or more companies decide to form a new company. This new company is then a separate legal entity. The forming companies invest equity and resources in general, like know-how. These new firms can be formed for a finite time, like for a certain project or for a lasting long-term business relationship, while control, revenues and risks are shared according to their capital contribution.

· Equity alliances, which are formed when one company acquires equity stake of another company and vice versa. These shareholdings make the company stakeholders and shareholders of each other. The acquired share of a company is a minor equity share, so that decision power remains at the respective companies. This is also called cross-shareholding and leads to complex network structures, especially when several companies are involved. Companies which are connected this way share profits and common goals, which leads to the fact that the will to competition between these firms is reduced. In addition this makes take-overs by other companies more difficult.

· Non-equity strategic alliances, which cover a wide field of possible cooperation between companies. This can range from close relations between customer and supplier, to outsourcing of certain corporate tasks or licensing, to vast networks in R&D. This cooperation can either be an informal alliance which is not contractually designated, which appears mostly among smaller enterprises, or the alliance can be set by a contract.

Starbucks and Pepsico got together to create coffee-flavoured drink. Starbucks wanted to get into the bottled drinks market and Pepsico was interested in creating an innovative product they met their strategic goals.

Strategic alliances have many advantages: they require little immediate financial commitment; they allow companies to put their toes into new markets before they get soaked; and they offer a quiet retreat should a venture not work out as the partners had hoped. However, going into something knowing that it is (literally) not a big deal, and that there is a face-saving exit route, may not be the best way to make those charged with running it hungry for success.

The most popular use for alliances is as a means to try out a foreign market. Not surprisingly, therefore, there are more alliances in Europe and Asia (where there are more foreign markets nearby) than in the United States. In some cases, alliances are used by companies because other means of entering a market are closed to them. Hence there have been many in the airline industry, where governments are sensitive about domestic carriers falling into foreign hands.
When a company has built strategic business alliance with other partners, they are preparing the enjoy of the following benefits/advantages. (especially for foreign partners)
1. They gain better access to attractive country market from host country’s government to import and market products locally
2. Take advantage of partner’s local market knowledge and working relationships with key government officials in host country. It is very important to get working relationship with local government officials, (social capitals).
3. Capture economies of scale in production and/or marketing, when they operate together, they can use the same machine or equipment to produce products and use the same marketing channel for both products.
4. Fill gaps in technical expertise or knowledge of local market; they will learn technical knowledge from each other.
5. Share distribution facilities and dealer networks, they can use the same agent or retailers to reduce the logistic cost and penetrate the market more easily, they can use the put-together technical and financial resources to attack the rivals.
6. Direct combined competitive energies toward defeating mutual rivals
7. Useful way to gain agreement on important technical standards, it is easier to set up a standard for the products with a joint effort.
8. Can reduce the cost and more efficient to penetrate the market by doing the followings:

a. Joint research efforts
b. Technology-sharing
c. Joint use of production and distribution facilities
d. Marketing/promoting one another’s products.
Is everything perfect for building partnership? Of course not! Everything comes with its own pros and cons.
Here are the drawback/disadvantages of partnership:
1. Overcoming language and cultural barriers
2. Dealing with diverse or conflicting operating practices
3. Time consuming for managers in terms of communication, trust-building, and coordination costs
4. Mistrust when collaborating in competitively sensitive areas

5. Clash of egos and company cultures
6. Dealing with conflicting objectives, strategies, corporate values, and ethical standards
7. Becoming too dependent on another firm for essential expertise over the long-term

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