Market globalization and impressive market growth force a lot of companies to declare themselves in the position of not having the critical strategic dimension, necessary for a successful competition gigantic markets. As a consequence, companies may be forced to resort more and more, to newer cooperation types, which were inconceivable in traditional economic development and when national markets prevailed. Signing alliances among companies may change the force field on national and international markets and may profoundly reconfigure the respective markets.international business, globalization, alliances, coordination costs

Georgiana Cebuc

English

Research Papers in Economics

  27 
 
 
THE ROLE OF STRATEGIC ALLIANCES IN 
INTERNATIONAL BUSINESSES 
 
Georgiana Cebuc
∗ 
 
Abstract 
Market globalization and impressive market growth force a lot of 
companies to declare themselves in the position of not having the critical strategic 
dimension, necessary for a successful competition gigantic markets. As a 
consequence, companies may be forced to resort more and more, to newer 
cooperation types, which were inconceivable in traditional economic development 
and when national markets prevailed. Signing alliances among companies may 
change the force field on national and international markets and may profoundly 
reconfigure the respective markets. 
 
 
1.  The architecture of cooperation: managing coordination costs and  
appropriation concerns in strategic alliances 
 
One of the fastest growing trends for business today is the increasing 
number of strategic alliances. According to Booz-Allen & Hamilton, strategic 
alliances are sweeping through nearly every industry and are becoming an 
essential driver of superior growth. Alliances range in scope from an informal 
business relationship based on a simple contract to a joint venture agreement in 
which for legal and tax purposes either a corporation or partnership is set up to 
manage the alliance 
Corporations have increasingly seen alliances as attractive vehicles 
through which they can grow and expand their scope, and the rate at which 
interfirm alliances have been formed in the last two decades has been 
unprecedented. A notable characteristic of this growth has been the increasing 
diversity of interfirm alliances. The nationalities of partners, their motives and 
goals in entering alliances, and the formal structures used to organize the 
partnerships have all become increasingly varied. The variety of organizing 
structures implies that firms face numerous choices in structuring their alliances. 
This study examines why firms choose the specific governance structure they do 
                                           
∗ Georgiana Cebuc is Assistant Professor of Economics and International Business at the 
Romanian American University in Bucharest. 
Romanian Economic and Business Review – Vol. 2, No. 4   28 
in alliances. It explores some of the conditions at the inception of an alliance that 
influence the formal structure used to govern it.  
Partners may provide the strategic alliance with resources such as 
products, distribution channels, manufacturing capability, project funding, capital 
equipment, knowledge, expertise, or intellectual property. The alliance is a 
cooperation or collaboration which aims for a synergy where each partner hopes 
that the benefits from the alliance will be greater than those from individual 
efforts. The alliance often involves technology transfer (access to knowledge and 
expertise), economic specialization, shared expenses and shared risk 
The governance structure of the alliance is the formal contractual structure 
participants used to formalize it. Prior research has distinguished among such 
formal structures in terms of the degree of hierarchical elements they embody and 
the extent to which they replicate the control and coordination features associated 
with organizations, which are considered to be at the hierarchical end of the 
spectrum. At one end are joint ventures, which involve partners creating a new 
entity in which they share equity and that most closely replicate the hierarchical 
control features of organizations. At the other end are alliances with no sharing of 
equity that have few hierarchical controls built into them. Organizational scholars 
have long studied the basis for hierarchical controls within organizations and 
viewed them as a mechanism to manage uncertainty. Prior research on contract 
choices in alliances and the extent of hierarchical controls they embody has been 
influenced primarily by transaction cost economists, who have focused on the 
appropriation concerns in alliances, which originate from pervasive behavioral 
uncertainty and contracting problems. Following this perspective, scholars have 
suggested that hierarchical controls are an effective response to such concerns at 
the time the alliance is formed. Thus, the greater the appropriation concerns, the 
more hierarchical the likely governance structures for organizing the alliance. The 
logic for hierarchical controls as a response to appropriation concerns is based on 
their ability to assert control by fiat, provide monitoring, and align incentives. The 
operation of such a logic was originally examined in make-or-buy decisions. The 
same logic by which firms choose between the extremes of making or buying is 
also expected to operate, once firms have decided to form an alliance, in their 
choice of governance structure: when firms anticipate appropriation concerns, 
they are likely to organize alliances with more hierarchical contracts. While 
researchers have made significant advances in classifying alliance governance 
structures and in identifying their determinants, our understanding of alliances is 
limited by two factors inherent in much of that research. First, the research on 
alliances focuses on the anticipated appropriation concerns as the primary basis of 
the choice of governance structure. Building on the idea that an important feature 
of hierarchical controls is their ability to manage potential moral hazards, 
transaction cost economists suggest that hierarchical controls arise in alliances 
when participants anticipate such concerns. Even resource dependence theorists,   29 
who have looked primarily at the origin of ties rather than their structure, have 
suggested similar moral hazard concerns as a reason why firms may transform 
pure exchange relations into power relations. 
While appropriation concerns originating from contracting obstacles, 
combined with pervasive behavioral uncertainty, can clearly be an important 
concern, once firms decide to enter an alliance, there is another set of concerns 
that arises from anticipated coordination costs. By coordination costs we mean the 
anticipated organizational complexity of decomposing tasks among partners along 
with ongoing coordination of activities to be completed jointly or individually 
across organizational boundaries and the related extent of communication and 
decisions that would be necessary. Coordination considerations are extensive in 
alliances. Litwak and Hylton  noted that the specialized coordination in 
interorganizational relations is a challenge, "since there is both conflict and 
cooperation and formal authority structure is lacking." As a result, the anticipated 
interdependence resulting from the logistics of coordinating tasks can create 
considerable uncertainty at the outset of an alliance that is different from 
appropriation concerns. The uncertainty for participants concerns the way 
activities will be decomposed and integrated and the extent to which there is 
likely to be an ongoing need for mutual adaptation and adjustment.  
The distinction between coordination costs and appropriation concerns can 
be understood with a hypothetical example. Imagine that an alliance is formed 
between two firms that have complete confidence in each other and face no 
appropriation concerns whatsoever. Despite this frictionless situation, they must 
still coordinate the division of labor and the interface of activities and products 
between them. This creates considerable uncertainty that alliance partners 
consider at the time they form an alliance and attempt to answer in structuring the 
relationship.  
Hierarchical controls can be an effective solution in situations of high 
anticipated coordination costs. As noted by Barnard (1938), Chandler (1977), 
Thompson (1967), and others, an important basis for hierarchical controls is' their 
ability to provide superior task coordination, especially in situations involving 
high interdependence and coordination. For small businesses, strategic alliances 
are a way to work together with others towards a common goal while not losing 
their individuality.  
Alliances are a way of reaping the rewards of team effort - and the gains 
from forming strategic alliances appear to be substantial. Companies participating 
in alliances report that at much as 18 percent of their revenues comes from their 
alliances. But it isn't just profit that is motivating this increase in alliances. Other 
factors include an increasing intensity of competition, a growing need to operate 
on a global scale, a fast changing marketplace, and industry convergence in many 
markets (for example, in the financial services industry, banks, investment firms, 
and insurance companies are overlapping more and more in the products they   30 
supply). Especially in a time when growing international marketing is becoming 
the norm, these partnerships can leverage your growth through alliances with 
international partners. Rather than take on the risk and expense that international 
expansion can demand, one can enter international markets by finding an 
appropriate alliance with a business operating in the marketplace you desire to 
enter. 
Businesses use strategic alliances to: 
•  achieve advantages of scale, scope and speed  
•  increase market penetration  
•  enhance competitiveness in domestic and/or global markets  
•  enhance product development  
•  develop new business opportunities through new products and services  
•  expand market development  
•  increase exports  
•  diversify  
•  create new businesses  
•  reduce costs.  
Strategic alliances are becoming a more and more common tool for 
expanding the reach of your company without committing yourself to expensive 
internal expansions beyond your core business 
 
2. Stages of Alliance Formation 
 
A typical strategic alliance formation process involves these steps: 
 
•  Strategy Development: Strategy development involves studying the alliance’s 
feasibility, objectives and rationale, focusing on the major issues and 
challenges and development of resource strategies for production, technology, 
and people. It requires aligning alliance objectives with the overall corporate 
strategy. 
•  Partner Assessment: Partner assessment involves analyzing a potential 
partner’s strengths and weaknesses, creating strategies for accommodating all 
partners’ management styles, preparing appropriate partner selection criteria, 
understanding a partner’s motives for joining the alliance and addressing 
resource capability gaps that may exist for a partner. 
•  Contract Negotiation: Contract negotiations involves determining whether all 
parties have realistic objectives, forming high calibre negotiating teams, 
defining each partner’s contributions and rewards as well as protect any 
proprietary information, addressing termination clauses, penalties for poor 
performance, and highlighting the degree to which arbitration procedures are 
clearly stated and understood.   31 
•  Alliance Operation: Alliance operations involves addressing senior 
management’s commitment, finding the calibre of resources devoted to the 
alliance, linking of budgets and resources with strategic priorities, measuring 
and rewarding alliance performance, and assessing the performance and 
results of the alliance. 
•  Alliance Termination: Alliance termination involves winding down the 
alliance, for instance when its objectives have been met or cannot be met, or 
when a partner adjusts priorities or re-allocated resources elsewhere.. 
•  The advantages of strategic alliance includes 1)allowing each partner to 
concentrate on activities that best match their capabilities, 2)learning from 
partners & developing competences that may be more widely exploited 
elsewhere, 3) adequacy a suitability of the resources & competencies of an 
organization for it to survive. 
 
3. Risks of Strategic Alliances 
 
Strategic alliances can lead to competition rather than cooperation, to loss 
of competitive knowledge, to conflicts resulting from incompatible cultures and 
objectives, and to reduced management control. A study of almost 900 joint 
ventures found that less than half were mutually agreed to have been successful 
by all parties. 
An alliance can fail for many reasons: 
•  failure to understand and adapt to a new style of management 
•  failure to learn and understand cultural differences between the organizations 
•  lack of commitment to succeed 
•  strategic goal divergence 
•  insufficient trust 
•  operational and geographical overlap 
•  unrealistic expectations 
 
4. More and Bigger Alliances 
 
The IT deals, in turn, are only part of the unstoppable trend in world 
business towards more and bigger alliances of all kinds. On the day that IBM and 
Toshiba unveiled their latest partnership, Wendy's, the fast food chain, announced 
a 400 million$ merger with a Canadian coffee and doughnuts chain, Hortons. The 
two have been allies for four years, coming together to build 'combo' units selling 
both hamburgers and doughnuts.  
The reasons for the alliance are strikingly clear from the numbers. 
The combos save about a quarter of the costs, and sell a fifth more than 
either a Wendy's or Hortons on its own. That's often the basis of an alliance: to   32 
reap the synergies of sharing capital and operating costs while tapping a bigger 
market than either partner could achieve independently. The word synergy 
(meaning that two plus two supposedly makes more than four) was once 
fulsomely used to justify takeovers and fell into disrepute when their promised 
payoffs didn't arrive. But in their quieter way, alliances seem to be delivering the goods. 
That's after a discouraging start, when alliance results appeared to be no 
better than those of allegedly synergistic acquisitions. It isn't just that 
managements have become more adept at handling strategic alliances (though 
they plainly have). The improvement results, first, from necessity: and second, 
from intrinsic aspects of the alliance relationship. Necessity is the mother of more 
than invention. If a project is absolutely vital to your future, the incentive to make 
it work is absolutely compelling. 
Even three-way partnerships can pay off where necessity rules. The 
PowerPC chip mentioned above has been widely hailed technically. Nobody 
noted the managerial achievement involved in bringing so complex a device into 
production and to market. But Motorola, Apple and IBM all had very powerful 
motives in their respective confrontations with Intel. Without an advanced 
microprocessor, Motorola would have been forced out of the market: Apple could 
never have competed with its MS/DOS rivals: and IBM would have been wholly 
at Intel's mercy. 
As it happens, Apple has probably gained most of the trio and IBM least, 
because the latter found prohibitive the inherent disadvantages in offering two 
directly competing PC lines. That happens with alliances - they evolve over time 
as circumstances change, and may even develop (as with Hortons and Wendy's) 
into full-scale merger. So the partners have to be flexible for the alliance to work. 
That flexibility is one of the key, intrinsic characteristics that explain how so 
many alliances have resisted the inflexible forces that commonly mar straight 
amalgamations. 
 
5. Focus and direction 
 
Another powerful factor is that, for an alliance to be effective, each side 
must have a clear benefit in view and in realization. This clarity of purpose is 
linked with two other essentials of good management and winning strategy: focus 
and direction. The alliance is focused on a specific, uncluttered shared objective, 
and execution is placed firmly in the hands of an operating management whose 
task is equally clear. A clear line, moreover, is drawn between the operators and 
their overlords. There's no confusion between the two roles, as there is inside 
nearly all companies. 
The good alliance in fact closely resembles a first-class piece of project 
management - the mode which is taking over much work inside large 
organizations. With external alliances also growing fast, the whole pattern of   33 
strategic formation and execution is plainly changing towards genuine 
partnership. That changes the nature of the corporation - every corporation. 
Consider the examples of the four major companies in quite different businesses 
mentioned above. Their alliances are so important that none of the four could now 
realize their ambitions without their many partners. 
Smith Kline Beecham's necessities included tapping into drug-related 
research fields, like biotechnology, where it had no position itself. At Allied 
Domecq, plans for developing as a global force in spirits depended on continued 
success with partners in markets like Japan. For Pilkington, alliance with a 
Japanese competitor was the key to expanding in automotive glass in the US and 
other markets. At GKN, alliances were the foundation for its attack on global 
markets for automotive drive-trains. 
In all these relationships, the most striking element is their durability and 
relative smoothness. They became taken for granted, but only because the 
respective partners had worked hard, and were still working, to ensure that the 
benefits were mutual and the management effective. Whether the lessons of allied 
success are being transferred into the internal management of the allies themselves 
is another matter. But that's the next logical step - and the next necessity. 
Too many companies joke about the 'tubular bells' or 'silos' that 
characterize their organizations: separate compartments which never unite in the 
common cause of corporate success. Sheer difficulties in communication used to 
explain (though not justify) these harmful internal divisions. But Intranets and e-
mail sweep away the difficulties. Departments, divisions and separate businesses 
can keep each other fully informed at all times and in real time. Nothing less 
makes any sense. 
If companies genuinely want to grow, especially globally, the alliance 
route is sure to be required, both inside and outside. Externally, the approach is 
identical whether the partnership dynamic is all or any of these: scale, pooling 
expertise, cracking new markets, cost reduction, minimizing and optimizing 
investment, competitive advantage, or sharing technology, high or low.  
In high-tech, especially in information and communications, alliances are 
indispensable, not least in developing and marketing the technology that binds 
customers with their allies and enables them to achieve genuine synergies. The 
old adage, 'if you can't beat 'em, join 'em', has a new and universal twist: 'join 'em, 
and you can beat anybody.' 
I would say that this new concept will change the way that we do business.  
   34 
References 
 
David C. Mowery, Joanne E. Oxley, Brian S. Silverman, Strategic 
Alliances and Interfirm Knowledge Transfer. 1996. Strategic Management 
Journal, Vol.17 
Yoshino and Rangan, Michael Y. and U. Srinivasa. 1995. Strategic 
Alliances – An entrepreneurial approach to globalization, First Edition. 
Trott, Paul. 2005. Innovation Management and New Product 
Development, Third   Edition. Pearson Limited Edition. 
B. Barney. 2007. Gaining and sustaining competitive advantage. 
 
 
 
 
 

Gaining and sustaining competitive advantage.

Innovation Management and New Product Development, Third Edition. Pearson Limited Edition.

Strategic Alliances and Interfirm Knowledge Transfer.

The role of strategic alliances in international businesses

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The role of strategic alliances in international businesses

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