Page 109 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes confronting competition

When a high-volume producer decides to attack a new geographic market, defense is difficult if
it does not have comparable size. Alliance between companies is a response which has often led
to positive results. It is equally valid to attempt an attack on a leader that has consolidated its
own positions.

CLARK-VOLVO

In the earthmover sector, neither Clark Equipment nor Volvo had enough production volume
(the former in the United States, the latter in Europe) to take on the global leaders Caterpillar and
Komatsu. In the mid-80’s they decided to create an alliance.
overcoming Protectionist Barriers

Alliances can allow companies to avoid controls on importation and overcome barriers to
commercial penetration. For example, in Japan many companies have established that the best
and fastest way to achieve success in the market is to make an alliance with a local company. In
fact, the distribution system is controlled by a tightly-woven network of producers, distributors
and importers. Only an alliance with one of these can open the road to the final buyer.

Alliances can also be a way to respect the bonds posted by the “host” country regarding value-
added local content and participation in the capital of local businesses.

Dividing risks

For certain projects, risks of failure are high, and even higher when investments are elevated.
CFM International: The alliance (50-50 joint venture) between General Electric and Snecma was
made to plan, develop and produce a new airplane propeller. Over ten years of R&D work and
more than two billion dollars were necessary to sell the first engine.

economy of scale

There are many alliances designed to divide fixed costs of production and distribution, seeking
to improve volume. The alliances between airlines to manage reservation systems (Computer
Reservation Systems) jointly are among the most notable examples.

6.3.4 advantages of strategic alliance

In the past, joint ventures focused on the representation of companies in various countries or
geographic areas. In the past decades, the phenomenon of joint ventures for predefined activities
has become more prevalent. An alliance can impart to the company a relative advantage in size
or an ability to learn the field faster, or provide a complement to areas in which it is lacking.

Example: An alliance between a startup with an advantage in development and
production with a company with proven marketing skills.

When the joint venture is performed in a formal manner, by establishing a separate legal entity for
it (also known as the joint venture), it is similar in nature to a partial acquisition in consideration
for shares. This is because the transaction creates an entity that combines the relative advantages
of both parties and ties their futures together, at least with respect to the field in question.

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