Cross-border alliances

Cross-border alliances are a rapidly growing phenomenon in our business world and has increased enormously in the last decade. Alliances represent strategic responses to the powerful forces of globalisation, technological change, deregulation and time-to-market concerns. These forces have made the business environment vastly more competitive, complex, and uncertain than ever before. Companies are turning to alliances in order to manage their uncertainty and risk and specifically to access a wide range of competencies, technologies, and markets.

However, the success rate of alliances has been mixed-as many as 70% of them fail. (web1) This essay explores the issue of common sources of incompatibility in cross-border alliances, which can lead to poor performance or even to the failure of them. Firstly the essay begins by giving a definition of cross-border alliances. Secondly it examines the common sources of incompatibility and finally the essay assesses what can be done to minimise them.

Culpan (1993) defines cross-border alliances as business arrangements whereby two or more firms of different countries choose to co-operate for their mutual benefit. Generally, co-operation between international companies can take many forms, including contractual arrangements (such as license agreements, marketing agreements, and development agreements), minority equity investments, and joint ventures that are operated as separate legal entities (such as corporations, limited liability companies, or partnerships).

(web2) As Griffin and Pustay (1999) mention, the partners in cross-border alliances may agree to pool marketing expertise, R&D activities and/or managerial talent. Regardless of the form of cross-border alliances, firms that enter into alliances expect to benefit in certain ways. One benefit is the potential ease of market entry, since choosing a strategic alliance as an entry mode may reduce the costs of entry and may help to overcome possible obstacles like government regulations.

Moreover by entering into an alliance, a firm can share its risk, obtain economies of scale more quickly and/or acquire knowledge and expertise that it lacks. Finally alliances create synergy and competitive advantage. A current example of a successful cross-border alliances is the oneworld alliance which brings together eight of the world's biggest and best airlines, providing its customers and carriers with services and benefits no airline can deliver on its own. One-World is the only of the global alliances whose members combined reported a net profit for the past year.

(web3) However such a success is not always the case, since incompatibilities among the partners in a cross-border alliances are a primary reason for ineffectiveness, poor performance or even the failure of these co-operations. Kitching (1974, cited by Jackson 95) found that of 407 European acquisitions by US firms in the time between 1965 and 1970 only fifty per cent could be termed as successful. A current example is the failure of the co-operation between Rover, based in Birmingham and BMW, with their headquarter in Munich. (web4)

Jemison and Sitkin (1986, cited by Cartwright and Cooper 1996) argue that the selection of a suitable partner for an alliance is concerned to be a rational decision-making progress, involving an informed choice with regard to issues of availability, price, potential economies of scale and projected earning ratios. If incompatibilities in an alliance appear, the rational economic factors which prompted the initial decision are called into question. The result of such an approach of financial reductionism is that financial questions are deserving only of financial answers.

In the traditional way of analysing the poor performance of alliances, many saw the reason in the poor selection decision, incompetence in management which does not allow realising the economies of scale and furthermore sudden and unpredicted changes in market conditions, like technological advances which may have rendered the agreement obsolete. These factors were and are often seen as sources of incompatibility that might lead to a failure of an alliance. However, conceptualising the alliance only as a financial and strategic activity, rather than a human activity such explanations are incomplete and inadequate.