10 Important Tenets of Strategic Alliances | Financial Management

This article throws light upon the ten important tenets of strategic alliances. The tenets are: 1. Tenet of Maximization 2. Tenet of Flexibility 3. Tenet of Clarity 4. Tenet of Value Addition 5. Tenet of Autonomy 6. Tenet of Ownership 7. Matching Tenet 8. Tenet of Mutual Trust 9. Tenet of Cultural Compatibility 10. Tenet of Transparency.

Tenet of Strategic Alliance # 1. Tenet of Maximization:

Selfishness is the paradigm of the perfect joint venture. The alliance partners must strive to maximize benefits to each other besides to the immediate benefits to the firms coming together. The arrangement offers the parties an option on the future opening new doors and opportunities to both the partners.

The longer both partners can extract gains from their collaboration, the longer will the relationship last. Conversely, alliances self-destruct when one partner gets more from it than the other. Therefore, the starting point is to shortlist the benefits that one can expect from the other.

Tenet of Strategic Alliance # 2. Tenet of Flexibility:

Another fundamental principle of alliance is that the conditions governing the creation and the continuance of joint venture and other collaborative arrangements change continuously in view of change in government policy, market conditions and corporate imperatives. These changes force the partners to review their own objectives which in turn may rob the alliance of its raison d’etrc.

At this stage, the arrangement either has to be renegotiated under a fresh set of assumptions and conditions or it must be disbanded. It will, therefore, be in fitness of things to look upon their collaborative arrangement as essentially mortal enterprise, whose existence should be reviewed and if necessary renewed at intervals instead of being assumed to be immortal.

However, no joint venture should start without objectives common to both partners. The JVS between Godrej Soaps and Proctor & Gamble for marketing and distributing soaps and detergents and between Coca Cola and Parle Group for bottling and distribution of soft drinks olisivetigrated precisely because the objectives of the partners started overlapping.

It is, therefore, essential to differentiate the gains of the partners so that they strive to maximise them. For example, Times watches and Titan Industries obviously had their eye on the same watch market when forming their JV. However, while Timex entered the JV to leverage its partner’s powerful distribution and retail chain, Titan’s objective was not market shares, but protection against other rivals.

As a result, both partners are focusing on getting their own objectives fulfilled, with the harmony between the objectives ensuring that there is no collision of visions. Titan industries even transferred its best selling. Aqura brand to the JV in order to make it worth.

Timex continued its best selling Aqura brand to the JV in order to make it worth. Timex continued the relationship so that protection afforded by the partnership was not withdrawn.

Tenet of Strategic Alliance # 3. Tenet of Clarity:

In order to ensure smooth functioning of joint venture, it is imperative to delineate the roles and responsibilities of the partners. A crucial factor behind the smooth functioning of Wipro-GE is the clear demarcation of responsibilities, based naturally on the unique competency of each.

While technology and globalization are GE’s preserve, human resources, finance, corporate affairs and legal issues are those of Wipro’s. This role definition will also help the partners to gain synergistic benefit. However, the role of the partners should be reviewed constantly in view of the change in the comparative advantages of each partner over a period of time.

Tenet of Strategic Alliance # 4. Tenet of Value Addition:

The basic premise of an alliance is the pooling of complementary skills. As such, the partners should strive to add value not only to the joint venture but also to each other by complementing their resources. Indian companies entering JVs can use their classic strengths—quick market access, distribution depth and knowledge of local conditions — not as stand-alone skills, but as supporting elements to their transnational partners’ abilities.

The foreign partner wants to know how to tailor its strategies and products according to the needs and requirements of the local market. This can be provided by the Indian partner. Likewise, transnational’s can add value to their Indian Partners’ contributions by complementing the latter’s local conditions with intelligence from their own wisdom.

Although it is Xerox that contributes the product know-how to Modi Xerox, 80 per cent of the JV’s products have been indianised in design and application specifically because of the inputs provided by the Modi Group in terms of its knowledge of what local customers really want.

Tenet of Strategic Alliance # 5. Tenet of Autonomy:

One of the basic requisites for the successful functioning of any alliance is its autonomy, for the fact that only an autonomous organisation can succeed in the marketplace, delivering to the partners the benefits they seek.

Joint venture or any other form of alliance should not be an appendage or node of either of the partners. This is why RPG’s Goenka leaves the effective management of his group’s JVs to a management committee which meets at two-month intervals to iron out all issues relating to the partnership and meets the CEO’s to review operations.

Further, the partners must have the freedom to exit from the alliance. For, only the security that comes from the knowledge that it is bound to the relationship can give each partner the freedom to pursue its strategies without feeling trapped. This is why Timex and Titan frequently explore the possibility of breaking their JV, checking whether either partner would be better off by going it alone.

Tenet of Strategic Alliance # 6. Tenet of Ownership:

One of the reasons for the fall out of any form of alliance is ownership. At the time of formation of alliance, when the partners are unsure about the commercial viability of the alliance, they agree to settle for minority stakes. But as the venture succeeds, establishing ownership control often becomes an issue.

For instance, the Indian partner often wants an increased holding for greater managerial control. Likewise, the transnational partner may need 51 per cent so as to corner the major portion of the gains of the venture. In view of this conflicting interest, the partners should meet periodically and thwart out the issue amicably otherwise the venture’s possibility of success will be killed.

Tenet of Strategic Alliance # 7. Matching Tenet:

At times alliances collapse because one of the partners finds itself unable to finance the JV’s needs after its initial contribution to the equity. A JV continues to work if the partners are investing their resources as per the agreement. JV’s can fall apart due to poorly planned financing.

For instance, Voltas had to pull out of its joint venture with Pepsi once it realised that it was not possible for it to sustain the losses that Pepsi anticipated the venture to ride in its bid to corner the soft drinks market.

It is, therefore, desirable for the partners to determine in advance the financial requirements of the venture, pattern of funding the requirements and audit their financing capacities. They should discuss the issues threadbare so as to avoid any misunderstanding in future.

Tenet of Strategic Alliance # 8. Tenet of Mutual Trust:

Overarching element of a strong partnership is mutual understanding, trust and respect for each company’s organization. This includes executive commitment to one another, trust in each other’s capabilities and the willingness to work together intimately on multiple fronts.

Many alliances have failed because of lack of mutual respect and trust. Alliances between Apple and IBM and HLL and Godrej doomed from the beginning because the partners entered into the deal surreptiously and suspiciously.

Tenet of Strategic Alliance # 9. Tenet of Cultural Compatibility:

Cultural compatibility between the partnering firms is imperative for successful relationships. If they hold different perceptions, values and beliefs towards critical issues, alliance is sure to boomerang soon. Numerous promising deals have failed because people ignored and underestimated the powerful differences in processes across cultures.

This is why prospering organizations have to encourage a high degree of cultural cohesiveness by focusing on common ground to nurture a spint of collaborative activity.

Tenet of Strategic Alliance # 10. Tenet of Transparency:

Above all, transparency is important ingredient of alliance success. To avoid and avert chances of paranoia and misunderstanding, the partnering firms have to share all relevant information, involve and inform those who have to make the alliance work at the operation.

Submitted by : Professor Brandon, Category : Strategic Alliance