International Expansion and Strategic Alliances

Balancing Integration and Responsiveness through Learning

Alliances and Learning

n  Remember Porter’s Diamond?

n  designed to analyse home-country advantages of large, well-established firms which expand abroad in search of new markets, natural resources, or cheap labour

n  within clusters, strong links with customers and suppliers, government agencies and universities can help firms adapt and innovate, generating national competitive advantage

n  Firms may enter a new location in order to join a new cluster (Frynas and Mellahi 2011: 152-154)

n  Uppsala model of international business expansion

n  Firms make a range of alliances as they expand abroad

n  This helps them learn quickly about new business environments, overcoming psychic distance (Frynas and Mellahi 2011: 157-164)

Psychic Distance

n  Psychic distance can be defined as the distance that is perceived to exist between characteristics of a firm’s home country and a foreign country with which that firm is, or is contemplating, doing business or investing (Frynas and Mallahi 2011: 157)

n  High psychic distance (that is, subjective perceptions of large differences between countries) can discourage the firm’s international expansion into a given country because it generates uncertainties among business decision-makers

n  Systematic CAGE analysis (Ghemawat 2001) can reduce this problem and support a more balanced assessment of risk

Making Alliances in the Process of Internationalization
(Bartlett et al, 2008: 10)

What is a Strategic Alliance?

n  A formal and mutually agreed, contract-based commercial collaboration between companies

n  Contrasts with social networking and guanxi relationships: informal, personal, high-trust (Yeung and Tung 1996, in Merchant 2008)

n  Alliance partners pool, exchange or integrate specific business resources

n  Yet they remain separate businesses, making alliances distinct from mergers and acquisitions

n  International strategic alliances involve firms from at least 2 different countries (Frynas and Mellahi 2011: 187)

Range of Strategic Alliances

Can We Collaborate with Competitors Too?

n  Hamel, Doz and Prahalad (1989) Collaborate with your Competitors – and Win. Harvard Business Review, Jan/Feb, Vol 67, Issue 1, pp. 133-139

n  Co-operation is usually restricted to a specific project, often innovative

n  A risky strategy

n  Information and resources are shared

n  One partner may have more to learn,

                and/or learn more effectively than the other, gaining competitive advantage

n  The stronger partner may limit the weaker one’s access to necessary resources, then exploit their dependence

Late Movers and Born Globals

n  Emerging-economy or high-tech start-ups (Ghemawat and Hout 2008; Frynas and Mellahi 2011: 160-161))

n  Expand abroad at a very early stage in the firm’s development

n  Being small, face high risks when they collaborate

n  Often founded by people with previous international experience, strong informal networks and high tolerance of risk

n  Expand fast through acquisition or organic growth

n  Collaborate rarely and with care

n  to learn about new technologies or business models, rather then foreign political and social contexts

Joint Ventures: High Commitment, High Risk?

(Beamish and Lupton 2009)

Beamish’s research: designed to critique the Popular View of the early 1990s, which stereotyped Joint Ventures as

n  A transitional organization form

n  Less profitable than wholly-owned subsidiaries (including acquisitions)

n  Pose greater risks than strategic alliances

n  Impossible to manage

n  A sure way to lose one’s technology

n  Only undertaken as a last resort

Early 1990s Research Findings
(Bleeke and Ernst 1993, 1995
as cited by Frynas and Mellahi 2011: 201)

n  Average life span for a strategic alliance is about 7 years and many alliances end up as an acquisition by one of the partners.

n  However, the eventual termination of an alliance does not necessarily mean failure.

n  Bleeke and Ernst (1993) suggest that a strategic alliance is successful if it passes two tests:

1.       Both partners must achieve their own initial strategic goals for the alliance

2.       Both partners must recover their financial costs of capital

Joint Ventures:
Recent Research Findings
Surveyed by Beamish and Lupton (2009)
(see also Bartlett et al 2008: Reading 6-1)

n  Average age of international Joint Ventures: nearly 10 years (longer than acquisitions)

n  Profitability tends to be higher than that of wholly owned subsidiaries, especially in distant locations (CAGE)

n  Managing has become easier: researchers’ findings can help

n  Joint Ventures are especially popular for new foreign direct investments in Asia Pacific

Mergers and Acquisitions:
The Riskier Alternative

n  Mergers and acquisitions have a very high failure rate - many do not increase profits (Stonehouse et al 2004: 398-399; Alexander and Korine article in Harvard Business Review, 2008)

n  Causes of failure

n  lack of research into target business

n  cultural incompatibility

n  lack of communication

n  loss of key personnel

n  paying too much - high financial risk

n  lack of growth in target company’s market

n  legislative measures

Typical Features of Successful Alliances
(Bartlett et al 2008: Reading 6-1, by Beamish)

n  complementary knowledge, competences, skills, activities, technologies, products

n  minimised overlap of activities

n  trust and shared goals

n  recognition and acceptance of cultural differences

n  linked strategies and management

n  Partners feel comfortable together – and each side is competent to perform its agreed role

Complementary Knowledge and Learning

The Evolution of Trust between partners with shared goals

(Frynas and Mellahi 2011: 204)