189

CHAPTER 12
International Strategic Alliances

After studying this chapter, students should be able to:

> Compare joint ventures and other forms of strategic alliances.

> Characterize the benefits of strategic alliances.
> Describe the scope of strategic alliances.
> Discuss the forms of management for strategic alliances.
> Identify the limitations of strategic alliances.

LECTURE OUTLINE

OPENING CASE: The European Cereal Wars

The opening case examines the cereal market in Europe and the role of the key
players, Cereal Partners Worldwide and Kellogg, within the market.

Key Points

• Kellogg initially began to introduce its cereal to the European market in the
1920s when it entered the United Kingdom. Since then, Kellogg has virtually
created the market for breakfast cereals in Europe. However, the process was not
an easy one because Europeans traditionally preferred other foods.

• Today, however, the market is booming. The turnaround is the result of a

number of factors: health-conscious Europeans are looking for alternatives to eggs
and meat; demand has increased for prepackaged foods to ease demands on dual-
career families; supermarkets with large amounts of shelf space have opened; and
the growth of commercial TV has allowed for an increase in advertising.

• General Mills, one of Kellogg’s biggest competitors, noted the opportunities in

Europe and made the decision to enter the market. However, General Mills knew it
could not compete head-to-head with powerful Kellogg, and began to look for an
ally.
190 > Chapter 12

• General Mills identified Nestle as a potential partner because Nestle is the

world’s largest food-processing firm. It is a household name in Europe, has a well-
established distribution system, and owns manufacturing plants worldwide, but it
does not have a strong cereal line. In fact, Nestle had been considering
approaching General Mills for that very reason.

• Nestle believed that General Mills would be a good partner because it had a
strong knowledge of cereal technology, an array of proven cereal products, and
expertise in marketing cereals to consumers.

• A new firm called Cereal Parents Worldwide was formed by the two companies.
Under their agreement, General Mills installed its proprietary manufacturing systems
in existing Nestle factories, oversaw the production process, and assisted in the
development of advertising campaigns. Nestle agreed to lend its corporate name to
the venture’s products and handle sales and distribution.

• At this point in time, CPW is successful and has established itself as a major
player in the European cereal markets. CPW has also begun to expand into Latin
America and Asia.

Case Questions

1. What brought General Mills and Nestle together?

General Mills and Nestle were brought together because of complementary skills
and needs. General Mills, interested in the European market, but hesitant to enter
on its own, found the Nestle name, distribution system, and worldwide
manufacturing plants very attractive. Nestle, lacking a strong cereal line, found
General Mills’ knowledge of cereal technology, array of proven products, and
expertise equally attractive, and consequently the two firms were able to form a
mutually beneficial strategic alliance.

2. Is the strategic alliance between Nestle and General Mills a comprehensive

alliance or a functional alliance?

The strategic alliance between Nestle and General Mills would probably be
classified as a comprehensive alliance because it involves collaboration at multiple
stages of the production process. For example, the agreement called for General
Mills to install its proprietary information in existing Nestle factories, oversee the
production process, and help develop advertising campaigns. For its part, Nestle is
responsible for providing its name to the product, and handling sales and
distribution.

Additional Case Application

The case points out that a potential threat to General Mills is the possibility that its
partner, Nestle, will acquire it. Students can be asked to debate the relative merits
of forming a partnership with a firm that is in a position to acquire. Issues that could
be raised include whether it is better to enter a strategic alliance than to be
acquired, how General Mills could protect itself if Nestle made a move, and what
other options are open to General Mills and Nestle.
 International Strategic Alliances > 191

CHAPTER SUMMARY

Chapter Twelve explores international strategic alliances in detail. The chapter begins
with a discussion of the various types of strategic alliances and then goes on to explore
the benefits of alliances. The scope of strategic alliances is the subject of the next
section, followed by a discussion of how strategic alliances should be managed.
Finally, the pitfalls of strategic alliances are considered.

I. INTERNATIONAL CORPORATE COOPERATION

• Strategic alliances, business arrangements whereby two or more firms

cooperate for their mutual benefit, can take many forms including cross-licensing of
proprietary information, production sharing, joint research and development, and
marketing of each other’s products using existing distribution channels.
• A joint venture is a special type of strategic alliance in which two or more firms
join together to create a new business entity that is legally separate and distinct
from its parents.
• Strategic alliances are one means of expanding internationally. Other modes of
expansion include exporting, licensing, franchising, and FDI (see Chapter 11).
However, a strategic alliance differs from these other modes in that it involves
cooperation among firms.
• A joint venture can be managed in any of three ways: parent companies can
jointly manage the venture, one parent can manage the venture alone, or an
independent team of managers can be hired to run it. Other types of strategic
alliances may involve a more informal management arrangement such as a
coordinating committee.
• Joint ventures are typically broader in scope and have a longer duration than
other types of strategic alliances. In fact, non-joint venture alliances are frequently
formed for a specific purpose that has a natural ending.
• Non-joint venture alliances are generally less stable than joint ventures because
they lack a formal organizational structure and have a narrow mission. The text
provides an example of a non-joint venture alliance involving United Airlines and
British Airways.
• The number of alliances has skyrocketed because they represent an effective
means of competing in international markets. The growth rate in 1980 was about 6
percent per year, but had risen to 22 percent per year by the end of the decade.

Teaching Note:
Instructors may wish to emphasize how important
strategic alliances have become to companies by
developing a record of the strategic alliances that have been formed over a period
of one year. Students can be divided into twelve small groups, each of which is
then assigned to examine the Wall Street Journal (or another business publication)
for announcements of strategic alliances in a particular month. Students can
classify the alliances according to why they formed, who was involved, etc. This
information can then be compiled into a “master list” that demonstrates the growth
of strategic alliances.
192 > Chapter 12

II. BENEFITS OF STRATEGIC ALLIANCES

The four potential benefits a firm may realize from a strategic alliance are: ease of
market entry, shared risk, shared knowledge and expertise, and synergy and
competitive advantage. Discuss Figure 12.1 here.

Ease of Market Entry

• Strategic alliances may represent a means of overcoming the obstacles to entry

that can hinder a firm’s international expansion. (See Chapter 11 for a discussion of
the basic factors to consider when assessing a foreign market.)
• Strategic alliances may be a way to achieve the benefits of rapid entry while
keeping costs down, or to overcome regulations imposed by the host government
regarding entry modes. Moreover, strategic alliances may be a means of obtaining
information about local customers, distribution networks, and suppliers. The text
provides several examples of how various companies have employed strategic
alliances to facilitate their global expansion. The text also discusses how joint
ventures with local firms are sometimes required by host governments. Show Map
12.1 here.

Shared Risk

• Strategic alliances can help a firm minimize or control risk because by definition,
strategic alliances imply that two or more firms work together, and therefore, risk is
shared. The text provides several examples of firms that have controlled risk via
strategic alliances.

Discuss Going Global: The Ups and Downs of Market

Entry
This Going Global Box examines the entry strategy used by
Otis Elevator in emerging markets. Otis attempts to capitalize
on first mover advantages by quickly linking up with local partners and moving into
emerging markets as they open up. Use Map 12.2 in this discussion. The Box
fits in well with the discussion of shared risk, Review Question 3, and Discussion
Question 10.

Shared Knowledge and Expertise

• A firm may be able to gain knowledge and expertise that it lacks via a strategic
alliance. For example, the text points out that one of the main objectives behind the
collaboration of Toyota and GM was cross-learning.

Synergy and Competitive Advantage

• Synergy and competitive advantage are benefits of strategic alliances that are
results of the combination of the other advantages mentioned above. The text
provides an example of this concept through a description of the strategic alliance
between PepsiCo and a division of Unilever.
• A detailed study of the reason why firms entered into strategic alliances during
the 1980s revealed that motivations varied by industry.
 International Strategic Alliances > 193

III. SCOPE OF STRATEGIC ALLIANCES

The scope of cooperation among firms can vary significantly depending on the basic
objectives of each partner. Figure 12.2 should be used here.

Comprehensive Alliances

• Comprehensive alliances involve an agreement by participants to perform

multiple stages of the process by which goods and services are brought to market.
Because this type of alliance requires that firms mesh functional areas such as
finance, production, and marketing, most comprehensive alliances are structured as
joint ventures.
• Comprehensive alliances may be the most rapidly growing form of strategic
alliances between MNCs. However, they can be complex to arrange. The text
provides an example of how General Mills and Nestle were able to gain synergy by
combining resources.

Functional Alliances

Strategic alliances that have a narrow scope involving only a single functional area of
the business are less complex than comprehensive alliances and therefore may not
take the form of joint venture. Typical functional strategic alliances include production
alliances, marketing alliances, financial alliances, and R&D alliances.

• A production alliance is a functional alliance in which two or more firms each

manufacture products or provide services in a shared or common facility. The text
provides several examples of production alliances in the auto and computer
industries.
• A marketing alliance is a functional alliance in which two or more firms share
marketing expertise or services. Typically, this type of agreement involves one
partner introducing its products or services into a market in which the other partner
already has a presence. The established firm provides the newcomer with
assistance in this process in exchange for a fee.

Discuss Going Global: Culture Clash at GM and Toyota

This Going Global Box emphasizes that strategic alliances that
“look good on paper” don’t always turn out as planned. The
Box discussed GM and Toyota’s alliance to sell cars in Japan.
Although the match seemed like a marriage made in heaven, it has proved to be a
disappointment for both partners. The Box fits in well with a discussion of the scope
of strategic alliances and with Review Question 3.
194 > Chapter 12

• A financial alliance is a functional alliance of firms that want to reduce the

financial risks associated with a project. Financial risk may be reduced when
financial contributions toward the project are shared or when one partner provides
the bulk of the financing while the other partner provides special expertise or makes
other kinds of contributions. The text provides several examples of financial
alliances.
• An R&D alliance involves an agreement whereby the partner agrees to
undertake joint research to develop new products or services. This type of
arrangement has evolved as a result of short technology life-cycles and
skyrocketing R&D costs. In most cases, R&D alliances do not take the form of joint
ventures, but rather cross-licensing. The text provides an example of the R&D
alliance between Siemens, Motorola, IBM, and Toshiba.
• An R&D consortium is a confederation of organizations that band together to
research and develop new products or processes for world markets. Governments
play a role in both the formulation and continued operation of R&D consortia.
• Until recently, U.S. firms were prohibited from entering R&D consortia because
of concerns about antitrust. Japanese firms, on the other hand, have been involved
in R&D consortia for years.

IV. IMPLEMENTATION OF STRATEGIC ALLIANCES

Firms, after concluding a SWOT analysis (see Chapter 10) may conclude that strategic
alliances are the best means of expanding internationally. Several issues that then
must be considered include selecting a partner, deciding on ownership form, and
evaluating joint management concerns.

Selection of Partners

• At least four factors (compatibility, nature of the potential partner’s products or

services, the relative safeness of the alliance, and the learning potential of the
alliance) should be considered when selecting a partner for collaboration.
• Compatibility and mutual trust are essential to the success of a strategic
alliance. Alliances that lack these elements will probably fail to succeed. For
example, the text notes that incompatibilities between General Electric Corporation
and Siemens caused their alliance to fail.
• The nature of a potential partner’s products or services may impact the
success of a proposed strategic alliance. Most experts recommend that because it
is difficult to cooperate with a firm in one market but battle it in a second market, a
firm should align itself with a partner whose products and services are
complementary to, rather than directly competitive with, its own. The text provides
an example of a strategic alliance in which the partners’ products are
complementary and an example of a strategic alliance in which the partners’
products are directly competitive.
• The Relative Safeness of the Alliance. Strategic alliances should be
undertaken cautiously and deliberately as part of the firm’s strategic plan. The
process of forming a strategic alliance should include a careful assessment of the
potential partner, its previously formed alliances, and its goals and objectives. The
text provides a detailed example of how Corning, Inc. and Asahi Video Products
developed their joint venture.
 International Strategic Alliances > 195

• The Learning Potential of the Alliance. The potential to learn from a partner
should be assessed prior to forming a strategic alliance. In addition, a firm should
be careful not to give away information that would put it at a competitive
disadvantage if a strategic alliance failed.

Forms of Ownership

• Firms considering forming strategic alliances must determine what form of

ownership will be involved. The most common form of strategic alliance is the joint
venture; however, in some cases joint ventures may not be possible or desirable
and limited partnerships may be employed instead.
• A public-private venture, a special form of joint venture, involves a partnership
between a privately-owned firm and a government. This type of arrangement may
be a result of several factors. First, governments may form an alliance with a firm to
obtain information related to the development of a particular resource. Second, a
firm may be pulled into a joint venture with a government if the country in question
does not permit wholly owned foreign operations. Third, firms entering centrally-
planned economies may have little choice but to establish government involvement.
In Central and Eastern Europe for example, joint ventures were the primary means
by which a firm could invest. A joint venture with an existing state-owned firm can
benefit a company because it gains access to the firm’s existing consumers. The
text illustrates this concept with an example of the alliance between Glaverbel and
Skklo Union.

Joint Management Considerations

• There are three obvious means that may be used to jointly manage a strategic
alliance: a shared management agreement, an assigned arrangement, or a
delegated arrangement. Discuss Figure 12.3 here.
• Under a shared management agreement each partner fully and actively
participates in managing the alliance. This type of arrangement is difficult to
implement because it requires a high level of coordination and near-perfect
agreement between participants. The text illustrates this concept with an example
of an agreement between Coca-Cola and France’s Groupe Danone.
• In contrast, under an assigned arrangement one partner assumes primary
responsibility for the operations of the strategic alliance. This type of arrangement
avoids the conflict and slowdowns that may be associated with a shared
management agreement.
• Finally, under a delegated arrangement, which is reserved for joint ventures,
the partners agree not to get involved in ongoing operations and so delegate
management control to the joint venture itself. Executives to run the alliance may
be hired from outside the operations, or may be transferred from the parent
company, but in either case have real power and autonomy in decision making.
196 > Chapter 12

V. PITFALLS OF STRATEGIC ALLIANCES

The five fundamental sources of problems that threaten the viability of strategic
alliances are conflict among partners, access to information, distribution of earnings,
potential loss of autonomy, and changing circumstances. These problems are
summarized in Figure 12.4.

Teaching Note:
The text provides several examples of strategic alliances that
have faced problems. Instructors may wish to raise the issue of
just when these alliances should be considered failures--how should failure be defined.
Instructors may wish to supplement the examples in the text by asking students to find
an announcement in the Wall Street Journal (or other business publication) of a
strategic alliance that has failed.

Incompatibility of Partners

• A primary cause of failure in strategic alliances is incompatibility among

partners. Firms may be able to anticipate incompatibility problems if the partners
carefully discuss and analyze why the alliance is being formed in the first place. If
there is no agreement among partners regarding issues such as what the alliance’s
strategy should be, how it is to be organized, or how it is to be staffed, the alliance
probably will not succeed.

Access to Information

• Collaboration implies that one firm (or both) may have to share proprietary
information with the other firm. This access to information issue may be a real
concern if a firm enters an agreement not anticipating having to share certain
information and then compromises the agreement when the reality of the situation
becomes apparent. The text illustrates this concept with an example of an alliance
between Unisys and Hitachi and an example of an alliance between Ford and
Mazda.

Conflicts over Distributing Earnings

• Firms involved in strategic alliances not only share costs and risks, they also
share profits. The basic distribution of earnings between partners is usually
negotiated as part of the original agreement; however, issues relating to the
proportion of earnings that will be reinvested, accounting procedures, and transfer
pricing may cause problems that could jeopardize the success of an alliance. The
text provides an example of the problems related to the distribution of earnings
facing the alliance between Rubbermaid and its Dutch partner DSM Group NV.
 International Strategic Alliances > 197

Loss of Autonomy

• A strategic alliance implies shared risks and profits and also shared control.
This shared control may limit the strategy of each participant. In some cases, a
strategic alliance may be the initial step in a takeover. The text provides an
example of this type of situation that involved Fujitsu and International Computers,
Ltd.

Changing Circumstances

• Changing circumstances may affect the viability of a strategic alliance. For

example, technological advances may make an agreement obsolete or economic
changes may alter the circumstances that originally motivated the agreement. The
text illustrates this concept by exploring the situation faced by Ford and
Volkswagen's South American joint venture.
CA

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Victoria's Secret

The closing case describes the operation of Slimline Ltd., a clothing manufacturer
located in Sri Lanka. Slimline supplies Victoria's Secret and Marks & Spencer. Slimline
is a Sri Lankan-U.S.-British joint venture.

Key Points

• The management at Slimline is considerably higher educated than average for a

Sri Lankan garment factory.

• Working conditions are better than average, with greater investments in

protective gear for workers, as well as air conditioned factories and ergonomically
advanced work stations. Even a gym is open to all employees.

• Each month Slimline produces 500,000 pieces of sportswear and baby clothes,
as well as 1.5 million panties.

• Workers receive significant productivity bonuses as part of their compensation

packages. Salaries at Slimline start at 7% above minimum wage.

• Slimline emphasizes teamwork as well as an egalitarian work environment.

198 > Chapter 12

Case Questions

1. Slimline Ltd. is a joint venture among three companies -- a local Sri Lankan firm,
a British firm, and a U.S. firm. What are the benefits of this joint venture to each of
these companies? Why did each choose to form a joint venture, rather than operate
its own wholly-owned subsidiary?

The joint venture format allows the British firm (Courtaulds Textiles PLC) and the
U.S. firm (Mast Industries Inc.) to capitalize on the local expertise of MAS, the Sri
Lankan partner. MAS is able to handle hiring and firing and other functions that
require an in-depth understanding of local culture and Sri Lankan law. MAS benefits
by having a guaranteed market for its products with Courtaulds and Mast, who
supply Marks & Spencer and Victoria's Secret, respectively. MAS also benefits
from the capital invested by the foreign firms, which allows Slimline to automate its
accounting and production systems and improve productivity.

2. From the perspective of each of the partners, are there any potential pitfalls to
joining this joint venture?

All partners must split the profits and split control over the operations.
Consequently, each partner is unable to make unilateral decisions. For MAS, the
security of built-in buyers limits its flexibility to sell garments produced by Slimline to
other potential customers. There is always a danger that MAS could produce
comparable garments at other factories and sell them to other British and U.S.
distributors. If this were done the products sold at Marks & Spencer and Victoria's
Secret would be less unique.

3. Although many human rights advocates are critical of the working conditions
found in many textile factories, Slimline appears to have gone out of its way to
provide its workers with first-rate working conditions. Why do you think Slimline has
done this?

The garments produced by Slimline are intended for an upscale market (Marks &
Spencer and Victoria's Secret customers). Quality is very important and the goods
command a premium price. The good working conditions reduce turnover, which
helps maintain high quality production. Also, good working conditions reduce
fatigue, which also promotes higher quality work.
W

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1. What are the basic differences between joint ventures and other types of strategic
alliances?

A strategic alliance is a business arrangement in which two or more firms agree to

cooperate for their mutual benefit. A joint venture, a special type of strategic alliance,
involves the creation of a new business entity that is independent of the parent companies.
This separate entity can then be broader in purpose, scope, and duration than other types
of strategic alliances. Joint ventures typically have formal management systems, while
 International Strategic Alliances > 199

other types of strategic alliances may be more informally managed. Strategic alliances are
usually considered less stable than joint ventures because they lack formal organizational
structures and have narrow missions.

2. Why have strategic alliances grown in popularity in recent years?

Strategic alliances have grown in popularity in recent years because they are an effective
means of competing in the global marketplace. In fact, in just a decade, the growth rate of
alliances quadrupled from 6 percent a year in 1980, to 22 percent a year in 1990.

3. What are the basic benefits partners are likely to gain from their strategic alliance? Briefly
explain each.

The basic benefits partners are likely to gain from their strategic alliances are ease of
market entry, shared risk, shared knowledge and expertise, and synergy and competitive
advantage. Strategic alliances can ease market entry because they allow firms to
overcome barriers such as entrenched competition and hostile government regulations
and/or reduce the cost of entry. Strategic alliances can also enable firms to reduce or
control exposure to risk. Firms can gain knowledge and expertise via strategic alliances,
as well as synergy and competitive advantage. In theory, strategic alliances should help
firms to achieve more and compete more effectively than if they acted independently.

4. What are the basic characteristics of a comprehensive alliance? What form is it likely to
take?

Comprehensive alliances involve collaboration at multiple stages of the process by which

goods and services are brought to the market. Most comprehensive alliances take the
form of a joint venture because it is difficult to effectively integrate the differing operating
procedures of the parent over a broad range of activities without a formal organizational
structure. Typically, comprehensive alliances involve only two firms and may evolve over
time. Firms involved in such alliances hope to achieve greater synergy through sheer size
and total resources.

5. What are the four common types of functional alliances? Briefly explain each.

The four common types of functional alliances are production alliances, marketing
alliances, financial alliances, and R&D alliances. Production alliances involve collaboration
in product manufacturing and may involve a shared or common facility. Marketing alliances
typically involve a situation whereby one firm with a presence in a particular market assists
a new firm in entering that market. Financial alliances are used by firms to reduce the
financial risks associated with a project. Finally, R&D alliances involve collaboration to
develop new products or services and help participants stay abreast of the rapid
technological change that is currently affecting high-technology industries.

6. What is an R&D consortium?

An R&D consortium is a confederation of organizations that bands together to research

and develop new products and processes for world markets. Some examples include
ESPRIT, BRITE, and RACE.

7. What factors should be considered in selecting a strategic alliance partner?

200 > Chapter 12

At least four factors should be considered in selecting a strategic alliance partner including
compatibility, the nature of the potential partner’s products or services, the relative
safeness of the alliance, and the learning potential of the alliance.

8. What are the three basic ways of managing a strategic alliance?

There are three basic ways of jointly managing a strategic alliance: through a shared
management agreement in which each partner fully and actively participates in managing
the alliance, through an assigned arrangement in which one partner assumes the primary
responsibility of managing the alliance, and through a delegated arrangement whereby
management of the operation is delegated to the joint venture itself.

9. Under what circumstances might a strategic alliance be undertaken by public and private
partners?

There are several circumstances that might warrant a public-private venture. First,
governments may form partnerships with a private firm to obtain assistance in the
development of a particular resource. Second, firms may seek an alliance with a
government if the particular country does not permit wholly-owned subsidiaries. Finally,
firms operating in centrally planned economies may be forced to seek government partners
if they are to have freedom to operate.

10. What are the potential pitfalls of strategic alliances?

The potential pitfalls of strategic alliances include conflict among partners (one of the
primary causes of failure), access to information (firms may prefer to keep certain
information secret), distribution of earnings (profits must be shared among partners),
potential loss of autonomy (control must be shared among partners), and changing
circumstances (as circumstances change, the rationale behind the formation of an alliance
may no longer exist).

Questions for Discussion

1. What are the relative advantages and disadvantages of joint ventures compared to other
types of strategic alliances?

A joint venture is a special type of strategic alliance in that a new business entity is created
that is legally separate and distinct from its parents. A primary advantage of a joint venture
is that the venture can have a broader purpose, scope, and duration compared to other
types of strategic alliances. Moreover, joint ventures tend to be more stable than non-joint
venture strategic alliances. Joint ventures in which there is shared management or that are
managed by one parent may have difficulties because there may be a tendency to try to
please management from the founding companies rather than focusing on what is best for
the joint venture. In contrast, non-joint venture strategic alliances are useful because they
allow participants to focus on a particular project, yet do so without creating a new entity.
Furthermore, non-joint venture strategic alliances can help firms overcome short-term
hurdles.

2. Assume you are a manager for a large international firm which has decided to enlist a
foreign partner in a strategic alliance and has asked you to be involved in the collaboration.
 International Strategic Alliances > 201

What effects, if any, might the decision to structure the collaboration as a joint venture
have on you personally and on your career?

Students will probably approach this question in different ways. Some students will take
the perspective that if they are assigned to work for the joint venture they will have more
exposure to different issues and situations than if they were to continue to work within the
large international firm or for a less structured strategic alliance. Students taking this
perspective are likely to argue that being a big fish in a small pond is better for their careers
than working as a little fish in a big pond. Other students are likely to point out that they
may be “left out of the loop” if the alliance is structured as a joint venture because they will
not be working directly with the parent company on a day-to-day basis as they would if the
venture were structured more informally. Finally, other students will point out that having
experience working within the environment of a strategic alliance is good experience
regardless of whether it is a joint venture or some other type of strategic alliance.

3. What factors could conceivably cause a sharp decline in the number of new strategic
alliances formed?

The number of strategic alliances being formed has been skyrocketing. Firms are turning
to strategic alliances because they are an effective way to compete in international
markets. There are several factors that could cause a sharp decline in the number of new
strategic alliances however. For example, war typically alters trade and investment
patterns, and therefore one could surmise that it might also affect the number of alliances
being formed. Similarly, a sudden increase in protectionism might cause a decline in the
number of new cross-border alliances being formed. In addition, antitrust regulation has
the potential to affect the number of new strategic alliances being formed.

4. Could a firm conceivably undertake too many strategic alliances at one time? Why or why
not?

A number of companies today operate within a web of strategic alliances. The text points
out for example, that IBM has over 40 active strategic alliances. However, it is important to
recognize that strategic alliances require strong commitment on the part of a firm if they are
to succeed. Therefore, it is conceivable that a firm could spread itself too thin by forming
too many alliances. However, the real issue is commitment to alliances rather than sheer
numbers.

5. Can you think of any foreign products you use that may have been marketed in this
country as a result of a strategic alliance? What are they?

Students will probably identify a number of products that have been marketed in the U.S.
as a result of a strategic alliance. Two of the more common products that might be
identified are automobiles and computers.
202 > Chapter 12

6. What are some of the issues involved in a firm’s trying to learn from a strategic alliance
partner without giving out too much valuable information of its own?

One of the primary benefits of a strategic alliance is the opportunity it provides for cross-
learning. However, with this benefit comes one of the primary disadvantages of strategic
alliances, the risk of giving away proprietary information. A firm should assess the value of
its own information and avoid giving away information that could result in a competitive
disadvantage if the strategic alliance is dissolved. In addition, care should be taken to
create a “learning objective” so that the opportunity to learn from a partner is not wasted.

7. Why would a firm decide to enter a new market on its own rather than using a strategic
alliance?

There are numerous reasons why a firm might decide to enter a new market on its own
rather than using a strategic alliance. Some of the more common reasons are protection of
proprietary information, distribution of earnings, and strategic autonomy. A firm may want
to protect proprietary information and consequently might internalize its expansion effort
rather than use a strategic alliance. A firm might want to capitalize on the full potential of a
market rather than share profits with a strategic alliance partner. A firm may want to
maintain its strategic autonomy and would therefore enter a new market on its own rather
than in conjunction with a partner.

8. What are some of the similarities and differences between forming a strategic alliance with
a firm from the same country and forming one with a firm from a foreign country?

Many of the issues involved with forming strategic alliances apply to both within-border and
cross-border agreements. For example, regardless of whether an alliance is formed within
borders or across borders, care should be taken in selecting partners and decisions must
be made regarding the form of venture and how it is to be managed. However, cross-
border alliances may be more complex than within-border alliances because of physical
and physic distance. Firms involved in cross-border alliances may have to adapt to new
cultures, political systems, and economic systems, and may have fewer face-to-face work
opportunities.

9. The joint venture between General Mills and Nestle was worked out in only 23 days. Most
experts, however, argue that a firm should spend a long time getting to know a prospective
partner before proceeding with an alliance. What factors might account for CPW being an
exception to this general rule?

The relatively short negotiation period between Nestle and General Mills may be a result of
the fact that both companies had already identified each other as potential partners. The
strong fit between the two companies may have also been a factor in the short negotiation
process. Nestle lacked a strong line of cereal, while General Mills, interested in the
European market, needed a partner that could facilitate its entry there.
 International Strategic Alliances > 203

10. Otis Elevator has sought to obtain first-mover advantages by quickly entering emerging
markets with the help of local partners. This strategy has proved very successful for Otis.
Should all firms adopt this strategy? Under what conditions is this strategy likely to be
successful?

Most students will probably agree that there is no “one-size-fits-all” strategy, and that
therefore, all firms should not hasten to adopt Otis Elevator’s strategy of being a first mover
without carefully assessing their situations. This strategy is likely to be most successful
when local partners are strong competitors in the host market. By linking operations with a
company that already enjoys brand recognition, has strong ties with local suppliers and
distributors, and possesses a firm grasp of the local business landscape, a firm can quickly
capitalize on the opportunities in new markets. However, as Otis has found out, finding
partners with these credentials is not always easy. In addition, many students may
suggest that firms approach new alliances with a degree of caution so that they do not
“spread themselves too thin.”
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Essence of the exercise
This exercise is designed to provide students with a better understanding of how governments
regulate strategic alliances, and how firms can find out about potential alliance partners.
Students are asked to assume the role of a marketing manager for a computer company and
consider the possibility of expanding internationally via strategic alliances.
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Essence of the exercise

This exercise is designed to explore a firm’s decision-making process in selecting a strategic
alliance partner. Students are asked to assume the role of the executive committee of a
company, evaluate three possible strategic alliance partners, and identify which partner would
be most appropriate.

Answers to the follow-up questions.

1. How straightforward or ambiguous was the task of evaluating and ranking the three
alternatives?

In answering this question, most students will probably create a list of criteria against which
each alternative can be compared. Most students will probably conclude that the task of
evaluating and ranking the three was fairly ambiguous in some areas, but straightforward in
others.

2. Determine and discuss the degree of agreement or disagreement among the various
groups in the class.
204 > Chapter 12

Instructors may wish to create a “master list” of decision criteria on the board and then list
each group’s analysis of each issue accordingly. In most cases, there will be a fair amount
of agreement on certain issues, such as the need for knowledge of the market, but
disagreement about other issues, such as the need for a financially strong partner.

Other Applications
This exercise asks students to identify an appropriate strategic alliance partner for
Resteaze, a mattress company that wants to expand into Europe. Instructors may wish to
extend this exercise and discuss what other options (in addition to a strategic alliance) are
open to Resteaze. Instructors can ask students to continue working with their groups to
identify and rank other modes of expansion available to Resteaze or raise the same issues
in a debate format.