Alliances - Marketing Strategy

At a strategic level, managers aim to ‘add value’ by ensuring the organization has the optimum level of assets and competencies. Increasingly, strategic thinking recognizes that it is neither wise, nor feasible, to attempt exclusively to provide or own this optimum level of assets and competencies. Rather than do everything themselves, it may be more feasible to enter into partnership arrangements with other organizations.For example, two manufacturers could set up a joint distribution system and both benefit from economies of scale. Telecommunications and computer manufacturers could combine their technical expertise to produce a range of integrated products. While the concept of alliances is now more common, it is hardly new. The history of business is littered with good, and bad, examples of collaborative ventures.

What motivates an alliance? There is no single answer to this question.Any number of factors can initiate such action. Common factors include:

  • Globalization :

    Businesses are increasingly able, or indeed compelled, to compete on a world scale. Alliances and joint ventures area means of responding to this challenge. Shortening product life cycles, the globalization of technology, and political change means the world is becoming a smaller place with more opportunity/necessity for collaboration. For example, parts and components can be source worldwide, or organizations can now more readily seek partners to distribute their products in previously inaccessible markets. Joint initiatives give access to expertise and contacts in local markets and greatly help the process of market entry. It should be noted that while world markets are increasingly open, some less developed economies (e.g. China) may insist conjoint venture agreements as a condition of market entry, thus ensuring inward investment.

  • Assets and competencies :

    As previously stated, there is are cognition that organizations cannot be truly effective at all activities. The move towards downsizing has seen organizations concentrate on core activities and contract out non-essential activity. Additionally, the cost (plus shortages of skills) associated with product development may facilitate joint activity.This allows market opportunities and new technologies to be developed at a relatively lower cost. Complementary activities and/or management skills can lead to inter-organizational synergy – the combined effect of two or more organizations working together is greater than their individual effect. To illustratesynergy, consider the following example. In-House Cuisine provides a restaurant delivery service – customers order via In-House Cuisine from a directory of top restaurants and In-House’s uniformed waiters collect the meal and deliver it to the customer. The scheme has now been extended to hotels, with the Scottish Tourist Board allowing hotels with limited restaurant services to retain their three-star status by using In-House Cuisine as a form of room service.

  • Risk :

    Collaboration is often born from the need to reduce risk. The sheer financial commitment may be so great that a consortium approach is required to spread the financial risk across a number of participants. A ‘go-it-alone’ strategy may incur other risks. Cooperative ventures can promote industry standards and common practice. For example, JVC’s alliance with Sharp and Toshiba helped establish VHS as the industry standard for video recorders. Thus, ‘go it- alone’ firms risk being isolated from accepted industry practice and technical standards. Additionally, joint activity can reduce the time taken to develop products,thereby reducing the risk associated with launching them.

  • Learning and innovation :

    Collaborative ventures provide great opportunities to learn and innovate. Technology and skills transfer are often essential ingenerating meaningful commercial benefit. Indeed, Morris on and Mezentseff(1997) attribute sustainable competitive advantage (generated via collaborative ventures) directly to learning and knowledge transfer. Consider the alliance between Rover and Honda. When active, this collaboration enhanced Rover’s expertise in total quality management. The expertise and skills gained during the venture proved more durable than the alliance. When examining the concept of alliances,it is important to consider the various forms such ventures may take. The scope of alliances ranges from highly formalized agreements involving ownership, to informal co-operation based on little more than a handshake. Johnson and Scholes(1999) summarize alliances in terms of four main categories.

Firstly, acquisition and mergers involve taking formalized ownership. This includes co-operative or hostile takeovers. Commonly, this is driven by:

  1. possible efficiency gains which lead to lower operating costing in areas of activity – procurement, transaction processing and operational scale, and
  2. synergy effects, where combined activity leads to greater ‘added value’ than the two organizations could hope to generate separately. Acquisition strategies normally look to benefit from eliminating duplicated activities.

For example,the merger of the Leeds and Halifax Building Society (subsequently converted into a bank) has seen the rationalization of the branch network.

Secondly, consortia and joint venture activities involve independent organizations entering into specific project agreements or setting up jointly owned ventures. Consortia are groups of companies in partnership, normally to develop large-scale projects. For example, the‘Euro fighter’ project brings together a Europe-wide consortium of defense, electronic and aerospace companies developing the next generation of military aircraft.

Thirdly,contract and licensing agreements are legal, contractual agreements whereby the right to a product/activity is assigned to an independent operator. Common forms include subcontracting and franchising arrangements. Such agreement can allow organizations to focus on core activities, while contracting out work to specialist operators. For instance,the prison service has experimented with contracted-out transport and custodial services to Group–4 – a private security firm.

Finally, networks are informal agreements of co-operation built on working relationships and mutual benefit, as opposed to contractual agree mentor ownership. Networks can also take the form of opportunistic alliances that,while informal, focus on specific opportunities. For example, a group of independent local retailers may join together and launch a customer loyalty card, as a response to increased competition from national retail chains.

For any alliance to stand the test of time, there needs to be strategic and cultural fit. Strategic fit essentially means that the core assets/ competencies of the partners are configured in such a way as to complement each other and offer more effective pathways to strategic goals than generic internal development. As previously stated, strategic fit relates to efficiency, synergy and, on occasions, legal necessity.

Strategic fit needs to be clearly defined and must offer sustainable competitive advantage. Cultural fit is vital if organizations are going to work together. For any partnership to be successful, there is a need for the partners to have similar aspirations, goals and attitudes. For example, joint ventures between a fast-moving entrepreneurial company and a highly risk-averse conservative organization could be difficult to achieve. The question of cultural fit is pivotal in the selection of a partner and type of alliance.

A marketing perspective on alliances can be illustrated by examining the development of vertical marketing systems (VMS).A VMS approach offers an alternative to the traditional view of distribution channels. Traditional distribution channels involve a chain of independent companies,each pursuing individual goals. Each channel member aims to optimize its position, normally at the expense of other channel members. The resultant tension and conflict between the buying/ selling organizations within the channel tends to lead to distrust, erosion of margins, higher costs and other lingering problems. A VMS approach aims to integrate channel members into one cohesive unit, with common objectives and distribution being actively managed across all channel members. Such an approach has the advantages of:

  1. reducing overall cost by avoiding repetition and reducing administration, and
  2. enhancing quality and effectiveness by means of joint problem solving and shared expertise.

Traditional and VMS marketing channels

Traditional and VMS marketing channels

VMS ventures tend to operate in one of the following ways. They can be corporate– all parties in the VMS having commonownership. Alternatively, it is possible to have an administrative VMS – independent organizations agreeing to conform to common standards and compatible interlinked systems, normally determined by the dominant partner. For example, Ford car dealerships, although independent, conform to service, stock-holding and marketing criteria set by the Ford

Motor Company. Finally, there are contractual VMS agreements which have legally binding obligations. For example, the SPAR retail chain is a group of independent retailers who sign up to a centralized buying agreement.To examine a practical VMS example, consider Marks &Spencer.

M&S has remained at the forefront of British retailing for longer than most commentators can remember. Although the mighty M&S has recently experienced troubled times, its enduring appeal and acknowledged strengths flow from its relationships with suppliers. Over decades, it has developed innovative and mutually beneficial supplier partnerships. Close working relationships enable the company to effectively manage the entire supply chain. Indeed, supply chain management will prove increasingly vital as M&S faces future challenges.

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