Page 110 - DMGT545_INTERNATIONAL_BUSINESS

Unit 6: Modes of Entering International Business

Many startups decide that the best way to rapidly expand their business is to enter into strategic notes
alliances with established companies which serve a different but similar market. The many
benefits of strategic alliances are listed below:
1. Access to distribution channels,
2. Access to technology, expertise or intellectual property,

3. As a means to raise capital,
4. New products for your customers,
5. Lower R&D costs,
6. Economies of scale, and

7. Raise brand awareness.
6.3.5 Disadvantages of strategic alliance

Alliances are costly, not only due to cash leaving the company’s hands, but rather due to returns
from which it could be denied. First, joint ventures involve the investment of managerial time
resources in establishing the venture, managing it, and resolving possible conflicts of interest
between the partners over the functioning of the venture. Even when a proper set of contracts,
incentive schemes, and various transfer prices from the partners to the joint venture resolve
most conflicts, almost no joint venture manages to entirely avoid conflicts between its respective
parties.

Moreover, alliances can create indirect costs by blocking the possibility of cooperating with
competing companies, thus possibly even denying the company various financing options.

Example: An alliance with Ericsson in the area of cellular communications could reduce
the likelihood of contracts with Nokia, thereby putting the company at risk that if Ericsson is
weakened, so will be all the companies that depend upon it.
Joint ventures also expose the company to its partners, and the unique technologies that it has
are sometimes revealed to its partner company, which could later become a competitor or could
utilize the fruits of the venture or the know-how better than the startup itself. In addition, strategic
partners may often lead the company in directions that serve the partner company better than
they do the company itself.
Although a material part of the costs of joint ventures may be forecasted during the negotiations
for its establishment, in many cases the balance of power between the parties changes during
the course of the venture’s life, and the parties to it may have a change of mind. For instance,
many joint ventures that were signed before the stock market crises of 2001-2002 between public
companies and startups never materialized due to the drop in the stock prices of some such
public companies. The fact that some of the private companies had meanwhile raised capital and
actually had become stronger than the public companies, utterly changed the balance of power.
Likewise, the non-raising of capital by the startup could motivate the public company to try to
renegotiate the terms of the venture, while taking advantage of the startup’s weakness. A change
in the competitive environment in the field could also affect the alternative cost of the venture.

Example: If Nokia were to increase its share in the cellular market, then the alternative
cost of the venture with Ericsson (namely, the economic value of the reduced opportunity to do
business with Nokia) would be augmented overtime.
The problem with strategic alliances is that there are a number of problems which must be
overcome for them to be a success, including:

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