In the push for globalization , firms aiming to compete in several markets simultaneously while exploiting and utilizing assets specific to particular locations are increasingly forming strategic alliances. It is, however, important to note that these firms operate in sectors where innovation and quick responses to the innovation of competitors is key for their survival in the marketplace, and their need to be omnipresent is highlighted (Hagedoorn & Narula, 1998). The need for alliances, thus, rises from the high costs and risks associated with the duplication of the firm's value chain in so many different locations.
What are strategic alliances?
Before moving ahead, it is important to understand what strategic alliances are. Strategic alliances are described as inter-firm cooperative agreements which are intended to affect the long-term product market positioning of at least one partner (Hagedoorn, 1993). Following the changes in the alliance landscape during the nineties, alliances are now considered a key success factor for many industries. Firms may have different motivations for entering into a strategic alliance.
These traditionally included cost-economizing motivations, whereby at least one firm within the relationship has entered the relationship to minimize its net costs (Douma et al, 2000). However, more recently, firms have formed alliances in order to access and benefit from new technological developments - these alliances are focused primarily on long-term value enhancement through innovation - a steadily more expensive goal owing to rapid technological changes and shorter life-cycles (products become obsolete more quickly thus firms have little time to recover their investment).
Further, it is important to emphasize that firms may wish to form alliances internationally. This could be owing to country-size effects i.e. a small country firm may want to achieve economies-of-scale by seeking foreign demand. As smaller countries tend to be specialized in fewer sectors and niches (Hagedoorn & Narula, 1998), and if they need to seek technologies outside these sectors, they are obliged to seek access to these comparative advantages in other locations.
The automotive sector
During the last decade, the auto industry became global (Camuffo & Volpato, 2002). The globalization of the automotive industry emerged as a result of national boundaries proving to be too confining for the growth and competitiveness of principal manufacturers, General Motors, Ford, Toyota, Honda, Volkswagen and DaimlerChrysler (See Figure 2). The acceleration of globalization occurred as a result of the construction important overseas facilities and establishment of alliances between giant multinational automakers (Hiraoaka, 2001).
The expansion of GM, Ford and some Japanese firms into global business created structural changes in the world's automotive industry, reinforcing scale advantages in sourcing, R&D, manufacturing and marketing. European and US producers sought after Japanese automobile manufacturers as strategic partners owing to the competitive advantage they possessed of producing product variety at low cost, accomplished by investment in flexible manufacturing systems, computer-aided design and manufacturing and robotics, allowing Japanese firms to vary product features and run-length with little cost-penalty (Chan & Wong, 1994).
In addition, the social structure led the Japanese to use a team approach to market analysis, product design and manufacturing engineering that united the efforts of the suppliers and the assemblers to permit the rapid development of new products (Womack, 1988). In turn, Japanese manufacturers seek strategic alliances to reduce risks involved in establishing themselves overseas. Further, they aim at gaining some direct experience of foreign luxury car design as well as strengthening their knowledge in certain specialist areas.
It is important to note the three main trends in the automotive industry that have been favourable to strategic alliances: Firstly, due to technological evolution, improvements are aimed at higher performance, better safety and better emission standards. Researches on alternative fuels as well as manufacturing electric engines are making changes in the industry. This, coupled with high manufacturing costs gives rise to the need to find a partner to share such a burden and gain access to new markets and technologies. Secondly, the industry has witnessed differentiated demand for automobiles types and styles owing to increases in disposable income, specialization in society, urbanization and a more complex infrastructure (Chan & Wong, 1994).
To market and produce many different models to cater to consumer demand, manufacturers require a wider market-base to cover the development and production costs induced by such a 'proliferation of complexity' (Treece et al, 1992). Thirdly, government involvements1 in all car producing countries have promoted their own domestic industries and in some cases have taken them into public ownership. This emerged as a result of concerns relating to overall economic significance, speciality development and employment.
Culture and its Impact on Innovation/ Knowledge Transfer
When looking at international alliances, it is important not to undermine the role of national and organizational culture in the alliance. Culture differences between alliance partners have usually been considered a major factor that might influence alliance failure or unsatisfactory performance (Cartwright & Cooper, 1993). In the midst of various definitions of culture, one that vouches a general consensus refers to culture as 'patterns of belief and values that are manifested in practices, behaviours, and various artefacts shared by members of an organization or a nation' (Hofstede, 1980).
Hofstede found that whereas organizations from different nations differ in fundamental values, organizations from the same nation differ in organizational practices. Weber further went on to suggest that even though national and organizational cultures have been regarded as separate constructs, it is also widely accepted that organizational culture is nested in national culture. Further debates suggest that work units tend to have better performance when their management practices are compatible with the national culture (Newman & Nollen, 1996).
In the context of alliances, scholars have generally tended to argue that partnerships between culturally similar partners are likely to be more successful than those between culturally dissimilar partners. Cartwright and Cooper elaborate on this by referring to culture as 'social glue' serving to bind individuals and create organizational cohesiveness. They state that in alliances 'selection decisions are mainly driven by financial and strategic considerations, yet many organizational alliances fail to meet expectations because the cultures of partners are incompatible' and that the degree of cultural fit is directly correlated to the success of the combination. National and organizational cultural characteristics have, consequently a significant impact on the knowledge transfer process within and among the organizations2 causing a 'cultural shock' when these cultures cross, which is often accompanied by negative effects on work climate in international alliances.
In the automotive industry, for example, it is helpful to look at the case of General Motors and Toyota. In 1983, GM and Toyota entered into a joint venture, called New United Motor Manufacturing (NUMMI), with the objective of producing a version of Toyota's sub-compact Corolla model in a formerly shut-down GM plant in Fremont, California. Toyota, the operating manager of the joint-venture used Japanese supplies for automotive components until it could teach US suppliers how to meet its quality standards (Womack, 1988).
Due to adequate marketing and distribution activities in the US, Toyota did not seek its partner's market access to penetrate the US market. However, their motivations for the alliance were a response to US criticism against the tide of rising Japanese imports, thus enabling them to learn more about the US labour environment through the alliance. On the other hand, GM aimed to apply Japanese management techniques to a US unionized labour force, thus giving Toyota maximum freedom in the agreement to bring in their programmes and work methods.
Even though NUMMI faced great improvements in efficiency with labour productivity being comparable to that of Toyota's in Japan, techniques including new approaches to supplier relations, continuous improvement, teamed multi-skilled workers and efforts to eliminate inventories could not be transferred to GM. GM had to install these techniques in its own personnel so that they may be diffused throughout the company - giving birth to an entirely new corporate culture. Womack's (1988) interviews with several GM managers showed that there was a very partial understanding to NUMMI's procedures within the managers and that there was, in many cases, a defensive conviction that these techniques would never work in their plant. From a learning perspective, the knowledge transfer process is often defined as slow and painful, since Toyota's knowledge system was deeply imbedded in the company's history and culture, thus making it difficult for GM to change its attitudes and behaviours. It was, as highlighted above, the 'distance' in organizational culture that negatively affected the knowledge transfer process.
Canestrino (2004) argues that another very important dimension affecting a firm's openness towards international alliances is the group belonging feeling - namely individualism vs collectivism 3(Hofstede, 1980). This dimension clarifies the 'the extent to which culture encourages personal initiative and achievement, the importance of private life and personal separation, in contrast with a sense of community or collective characterized by a social framework' (Canestrino, 2004 p. 189). In regards to international alliances, individualistic cultures are generally associated with less cooperative behaviour whereas collectivism would relate positively to cooperation propensity of the firms. From a learning perspective individualism and collectivism seem to play an important role in affecting the knowledge transfer in the international inter-firm cooperation because of their impact on the stability of the alliance themselves, as well as the partners' cooperation attitude.
For example, in an alliance formed between Ford and Mazda4, Ford aimed to implement a fundamental change in its organizational purpose and corporate culture. This was due to Ford losing business to Japanese products in the US during the oil crisis in the 1970s and 1980s when the demand for big luxury cars fell dramatically. Ford began to send managers to Japan in order to observe workers and managers in the automobile plants of Mazda. Through this, they realized that the Japanese had used their people rather than their high levels of automation and advanced technology to their advantage. This observation, consequently led to Ford implementing employee involvement which was met with much resistance on the part of supervisors who thought that the change would lead to them losing their powers. It took a lot of effort and training to finally make the supervisors and managers understand the potential benefits of the programme, and develop the skills to respond to workers.
It is evident from the example above, that the individualistic culture of a firm may take form of opportunistic behaviour - as it happened in the case of Ford's supervisors who associated the implementation of employee involvement with the loss of power - and that this behaviour could play a negative role in the process of knowledge transfer in and alliance. On the flip side, the presence of collectivism (Mazda had a strong culture promoting employee empowerment), favours long-term and trust based relationships which leads members of groups to act in the interest of the group - consequently leading to a hospitable environment for knowledge transfer and innovation.
Organizational Structure in International Alliances
Companies that make proactive investments in establishing a formal structure and systems to manage their alliance activity are better positioned to enjoy greater alliance success and value creation with their alliance portfolio. The alliance management structure is essentially a management team that is explicitly responsible for coordinating and managing alliance activity within the company. Due to motives of entering new businesses, geographies and product segments, the alliance responsibility is often assigned to managers in the business development or corporate development function. However, in some alliances, a completely separate 'alliance management teams are setup by the two partnering firms. Companies that create a formal alliance management team adopt a variety of approaches to organize or locate an alliance team within their organization (Kale et al, 2001).
A company may set up separate alliance teams, each with an alliance manager supported by a technology or marketing manager to coordinate its multiple alliances with its strategic partners. These alliance teams in turn report to a corporate level alliance function. They implement or facilitate several important activities to drive alliance success and value creation. Firstly, these teams facilitate the learning and leveraging of alliance know-how and best practices embedded in prior alliance experience. Secondly, they provide additional value by building support for alliances among key external stakeholders, coordinating availability of internal organizational resources for alliances and measuring and monitoring performance of all alliances (Kale et al, 2001).
For example, in the case of the GM-Fiat alliance, the two companies have mandated all activities relating to design and manufacturing of powertrains to Fiat-GM Powertrain B.V. The company is equally owned by GM and Fiat Auto, with a Chairman from Fiat and a CEO from GM and operates many plants and R&D centres in Europe. Given the importance of powertrains in the personality and commercial value of an automobile brand, the company has a very delicate task which requires significant amount of work and efforts for convergence towards a compact package of solutions in the respect of engines and transmissions. The management of this particular joint venture (amongst others between Fiat-GM) aims to produce a package of innovative solutions which can be calibrated to the needs of the two partners, as well as position itself to as a supplier to other automakers (Camuffo & Volpato, 2001).
In doing so, the management team relies heavily on their developed competences in the past. For example, Fiat Auto has a relative leadership position in diesel engines and GM has a relative leadership position in gearboxes. Thus the management uses past experiences in this particular kind of technology to speed up the convergence process, with the result being an important innovation process for the partners aiming to meet the objectives of continuous improvement in the competitiveness of engines and transmissions. The benefits from the joint-venture will then be transferred to the mother companies of the alliance.
On the other hand, some alliances may be organized geographically. A separate alliance team may coordinate and support all alliance activities in a number of geographical locations. This is clear in Fiat and GM's joint venture for purchasing where the two partners have rationalised their purchasing activities through the establishment of a company called GM-Fiat Worldwide Purchasing B.V. The company operates on a worldwide scale but with the objective of supplying manufacturing and assembly plants directly managed by Fiat and GM. The alliance, headquartered in Germany, is organized on a regional basis with two organizations. One of these is for the Latin American market (whose head comes from GM), and the other one for Europe (run by a Fiat manager). Alongside the structure there are staff units (Cost accounting and management, IT, HR, Legal etc.) that are unique for both branches.
Further, as pointed out above, the management teams communicated this complex initiative to various stakeholder groups in order to gain support. This was especially true in relation to communication with suppliers, in order to demonstrate the strategic opportunity of increasing sales while lowering marketing costs the alliance presented for them (Camuffo & Volpato, 2001).
Types of Alliances
There are a wide range of types of cooperative agreements reflecting various degrees of inter-organizational interdependency and levels of internalization. However, within the rubric of collaborative experience, Narula & Hagedoorn (1999) considers two main groupings of agreements which can be regarded as representing different kinds of internalization: equity based and non-equity agreements. Equity agreements (joint ventures and minority equity alliances) tend to be complex forms to administer and control, and take longer to establish and dissolve; whereas non-equity agreements are easier to establish and dissolve and usually take the form of R&D agreements. It is safe to say that equity-based agreements represent a higher level of internalization and inter-organizational interdependence than non-equity agreements. Given the effect of globalization and fast evolving sectors leading to shorter product life cycles, the past two decades have seen a rise in contractual non-equity alliances, which provide greater strategic flexibility. This allows firms to conjure quick responses to rapidly changing technologies.
Due to the risks involved with innovative activity and the possibility of one partner benefiting more than the other in an alliance and thus terminating the agreement prematurely (mostly the case in cross-border alliances), firms in international alliances have tended to prefer equity agreements. However, with the development of supra-natural institutions such as WIP and WTO, the enforcement of contracts across border for non-equity R&D agreements has become easier. It is also important to note that choosing the type of agreement depends greatly on the objective and industry of the alliance. For instance, non-equity forms of agreements are more efficient for undertaking more research intensive activity since they promote more negotiation and intensive cooperation than equity agreements. However, where firms seek to learn and transfer tacit knowledge back to the parent firm, equity forms of agreements may be more appropriate (Narula & Hagedoorn, 1999).
An example of equity-based agreements can be found in the Ford-Mazda alliance, where Ford entered the alliance in order to fundamentally change its corporate culture and organizational purpose in order to improve productivity. Having witnessed the success of Japanese products in the US market, Ford intended to implement the strategies that led Japanese managers to attain this success. In order to transfer organizational knowledge, Ford had to establish long-term relationships with Mazda as the mere copying of the Japanese manufacturing processes, without the tacit know-how of how to operationalize them, would not have led to higher productivity levels. This was clear in the case of Ford's plant in Mexico which used Mazda's Hofu factory as a blueprint. The plant quickly became one Ford's top-ranking plant for quality and a model for renovating other facilities. Further, the Mexican plant followed Mazda's practice of building a nearby stamping plant to prevent damage to parts during transit (which was a regular occurence in Ford's previous centralized stamping plants system). The Mercury Tracer made in the Mexican plant was Ford's best built car (Chan & Wong, 1994).
On the other hand, the recent alliance between BMW, DaimlerChrysler and GM is one that aptly portrays the nature of non-equity agreements. Agreements were signed between the three automakers with the objective to develop a two mode hybrid drive system that reduces fuel consumption whilst not compromising vehicle capability. While the design for the system was to remain common, the technologies were to be adapted to the individual vehicle models, thus retaining each brand's distinctive character. This limited the degree of internalization and interdependence between the partners. Further, the underlying aim of the alliance was to create a shared technology platform for hybrid drives that would allow the partners to quickly integrate the best technologies in the market in order to exploit and strengthen the innovative potential of all the partners. The non-equity agreement would enable all participating companies to pool their development expertise and to respond quickly to rapid changes in technology in the sector.