Chapter 14 Outline

Strategic Alliances

Strategic alliances refer to cooperative agreements between potential or actual competitors. In this section, we are concerned specifically with strategic alliances between firms from different countries. Strategic alliances run the range from formal joint ventures, in which two or more firms have equity stakes (e.g., Fuji-Xerox), to short-term contractual agreements, in which two companies agree to cooperate on a particular task (such as developing a new product). Collaboration between competitors is fashionable; the 1980s and 1990s have seen an explosion in the number of strategic alliances.

The Advantages of Strategic Alliances

Firms ally themselves with actual or potential competitors for various strategic purposes.²² First, as noted earlier in the chapter, strategic alliances may facilitate entry into a foreign market. For example, Motorola initially found it very difficult to gain access to the Japanese cellular telephone market. In the mid-1980s, the firm complained loudly about formal and informal Japanese trade barriers. The turning point for Motorola came in 1987 when it allied itself with Toshiba to build microprocessors. As part of the deal, Toshiba provided Motorola with marketing help, including some of its best managers. This helped Motorola in the political game of securing government approval to enter the Japanese market and getting radio frequencies assigned for its mobile communications systems. Motorola no longer complains about Japan's trade barriers. Although privately the company admits they still exist, with Toshiba's help Motorola has become skilled at getting around them.²³

Strategic alliances also allow firms to share the fixed costs (and associated risks) of developing new products or processes. Motorola's alliance with Toshiba also was partly motivated by a desire to share the high fixed costs of setting up an operation to manufacture microprocessors. The microprocessor business is so capital intensive-Motorola and Toshiba each contributed close to $1 billion to set up their facility-that few firms can afford the costs and risks by themselves. Similarly, the alliance between Boeing and a number of Japanese companies to build the 767 was motivated by Boeing's desire to share the estimated $2 billion investment required to develop the aircraft.

Third, an alliance is a way to bring together complementary skills and assets that neither company could easily develop on its own. An example is the alliance between France's Thomson and Japan's JVC to manufacture videocassette recorders. JVC and Thomson are trading core competencies; Thomson needs product technology and manufacturing skills, while JVC needs to learn how to succeed in the fragmented European market. Both sides believe there is an equitable chance for gain. Similarly AT&T struck a deal in 1990 with NEC Corporation of Japan to trade technological skills. AT&T gave NEC some of its computer-aided design technology and NEC is giving AT&T access to the technology underlying its advanced logic computer chips. Such trading of core competencies seems to underlie many of the most successful strategic alliances.

Fourth, it can make sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm. For example, in 1992, Philips NV allied with its global competitor, Matsushita, to manufacture and market the digital compact cassette (DCC) system Philips had developed. Philips's motive was that this linking with Matsushita would help it establish the DCC system as a new technological standard in the recording and consumer electronics industries. The issue was important because Sony had developed a competing "mini compact disk" technology that it hoped to establish as the new technical standard. Since the two technologies did very similar things, there was at most only room for one new standard. Philips saw its alliance with Matsushita as a tactic for winning the race.²⁴

The Disadvantages of Strategic Alliances

The advantages we have discussed can be very significant. Despite this, some commentators have criticized strategic alliances on the grounds that they give competitors a low-cost route to new technology and markets. For example, Robert Reich and Eric Mankin have argued that strategic alliances between US and Japanese firms are part of an implicit Japanese strategy to keep higher-paying, higher-value-added jobs in Japan while gaining the project engineering and production process skills that underlie the competitive success of many US companies.²⁵ They argue that Japanese successes in the machine tool and semiconductor industries were largely built on US technology acquired through strategic alliances. And they argue that US managers are aiding the Japanese in achieving their goals by entering alliances that channel new inventions to Japan and provide a US sales and distribution network for the resulting products. Although such deals may generate short-term profits, Reich and Mankin argue, in the long run the result is to "hollow out" US firms, leaving them with no competitive advantage in the global marketplace.

Reich and Mankin have a point. Alliances have risks. Unless a firm is careful, it can give away more than it receives. But, there are so many examples of apparently successful alliances between firms-including alliances between US and Japanese firms--that their position seems more than a little extreme. It is difficult to see how the Motorola-Toshiba alliance or the Fuji-Xerox alliance fit Reich and Mankin's thesis. In these cases, both partners seem to have gained from the alliance. Why do some alliances benefit both firms while others benefit one firm and hurt the other? The next section provides an answer to this question.