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Archived — Working Paper Number 13: The Development of Strategic Alliances in Canadian Industries: A Micro Analysis

by Sunder Magun, Applied International Economics, October 1996


Summary

Strategic partnerships come in many forms, ranging from precompetitive R&D consortia and co-production and co-marketing partnerships to cross-licensing and cross-equity agreements that do not result in a separate entity and equity joint ventures that do result in the creation of new legal entities.

The more obvious reasons for the emergence of strategic alliances in Canada and other industrialized countries are related to economies of scale or scope, resource pooling, and risk and cost sharing among alliance partners. But the driving forces behind the growth of alliances are more subtle, deeper, and more permanent. They include globalization of the world economy, systemic technological change, and the growing acceptance of the view that competition, by itself, does not necessarily ensure optimum, innovation-led growth. In effect, both competition and cooperation between individual firms are needed to ensure such growth in a dynamic, uncertain world.

The emergence of intense global competition, the high cost of R&D, and the need for complementary specialized inputs and skills have forced firms to alter their business strategies and to revise the scope and organization of their value-added activities. Their strategic goal is to create organizational flexibility in such "value-chain" activities as R&D, manufacturing, and distribution channels. Several firms have secured this flexibility by participating in a number of strategic alliances. Accordingly, developing organizational flexibility has resulted in the rapid growth of strategic alliances.

Global competitive pressures, the large and rising costs of R&D, and the faster rates of product obsolescence have increasingly induced large firms to form cross-border alliances. Indeed, a number of individual firms participate concurrently in a large number of international technology consortia in an effort to secure complementary technologies, to reduce the innovation time span, and to share risks in advanced technology development.

Interfirm alliances are not a new phenomenon: joint ventures have a long history in industrial organization. What is new, of course, is their relative significance as an organizational form in which the emphasis is on flexibility, on the alliance members' ability to generate innovation-led growth, and on the group synergy that alliances foster among members and that enables firms to combat intense international competition resulting from the globalization of the world economy and from technological advances. Moreover, government attitudes towards and expectations about the role of interfirm cooperation in promoting innovations or in sustaining or improving competitive advantage have changed radically. In the past, governments used to believe that interfirm cooperation was harmful to the economy because of its anti-competitive effects. As a result, the practice of interfirm cooperative agreements was discouraged directly or indirectly. The government stance today is radically different: most business alliances are now seen as beneficial to the economy and are being promoted by various policy initiatives. For instance, technology consortia are considered as the most effective mechanism to advance "frontier" technology.

When a firm enters into a strategic alliance, it is not motivated by a single goal but by a number of objectives. Through alliances, the firm may be seeking to gain access to new markets or new technologies, to cope with escalating R&D costs, to speed product or process development, or to attain cost competitiveness. More than half of the respondents indicated that their primary goal was to gain access to new markets in order to build global or domestic capabilities. This results largely from the small size of Canada's domestic markets. Several Canadian companies have grown by extending their markets into foreign countries through participating in strategic alliances. This growth strategy is particularly common among companies that produce niche products (software companies, for example). Two other important reasons why Canadian firms join strategic alliances include gaining access to new technologies or new resources, and reducing financial risks.

Canadian companies take part in several types of strategic partnerships. The most important include joint ventures, research consortia, and co-marketing. Joint ventures predominate with 27 percent of the total alliances, followed by R&D consortia with 15 percent, and co-marketing with 14. Cross-equity alliances, on the other hand, are not a popular form of partnership in Canada. Joint ventures are mostly found among firms in mining, in construction, and in oil, gas, and power, whereas research consortia are mostly seen in informatics, electronics, and computers. Almost three quarters of R&D consortia are observed among companies in this group. Most co-marketing and cross-licensing alliances are also found in this group, as well as in telecommunications.

Among all strategic partnerships in Canada, vertical alliances with distributors preponderate. These are observed mainly in informatics, electronics, and computers, and in telecommunications: four fifths of alliances with distributors are found in those two industries, which specialize in niche products and sell them through a worldwide network of distribution alliances.

In our survey of Canadian companies, sampled firms were asked to identify and rank the specific effects of strategic partnerships on their competitive advantage. The most important impacts include: improving the company's market and resource access; enhancing strategic growth by building world-class capabilities; and building financial strength by producing more incomes and lowering risks. The least important effects are related to increasing exports, increasing internal and external investments, and building the company's knowledge and skills by reducing the learning curve at all stages in the production process. These results are indeed surprising: one would have expected those least important effects to be ranked higher by Canadian firms.

The survey also enquired whether alliances were successful or not. Of all the alliances in which Canadian firms have been involved since 1980, two thirds were reported to have been successful. Companies gave several reasons for the success of their alliances. The three key reasons are: 1) effective support from senior management; 2) a clear sense of mission and objectives; and 3) a strong leadership team with personal commitment to the alliance's success. Teamwork, purpose, and trust among participants at all levels also ranked high. Canadian companies gave the lowest rating to such reasons as shared values and cultures among alliance partners, and incentives to share knowledge and skills.

Respondents were also asked to identify the reasons for alliance failures and to rank these reasons by importance. Some of the key reasons include a weak leadership team without strong commitment, false expectations about partners' capabilities, and weak support from senior management. On the other hand, such factors as ambiguous alliance mission statement, partners' values and cultures that do not match, and weak performance and review mechanism are considered as the least important reasons for the failure of alliances.

Almost all respondents believe that government can promote Canada's international competitiveness by encouraging strategic partnerships. However, that intervention should be indirect, providing only a supporting role. Several firms see a dual role for government. First, it can play a brokerage role by connecting potential partners. And second, it can provide, through its trade offices, background data about potential foreign partners. All Canadian firms believe strongly that modern alliances differ from what used to be called "coalitions" and that they do not create anti-competitive effects. Modern strategic alliances emphasize flexibility, the ability to generate innovation-led growth, and group synergy. They enable firms to combat intense international competition resulting from the globalization of the world economy and from rapid technological advances.

The growth of strategic alliances with foreign companies raises a number of difficult, troubling problems for governments about such issues as national sovereignty, national defence, and the control of the national economy. What is the nationality of cross-border alliances? Who owns the products and process technologies developed by cross-border R&D consortia? In the national-defence area, most governments seek to control strategic industries such as computers or telecommunications, but cross-border alliances in these industries, which are rapidly growing, have eroded that control. These are difficult issues; it will take some time to solve them because they will have to be handled at the multilateral level.

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