Strategic Alliance and Performance of Organizations. In a study carried out by KMPG (2009) on Joint ventures, the study revealed that strategic alliances were on the rise. Companies forming joint ventures had specific reasons for opting for the ventures. The main reasons for the formation of strategic alliances were so as to enable the companies gain access to greater markets, reduce on costs, reduce risk as joint ventures can share or spread risk between partners better than alternative forms of corporate strategies hence improving on their profitability (KPMG, 2009). Foreign markets in particular, international Joint ventures (IJVs) tend to outperform wholly owned subsidiaries (WOSs) because of the benefits a local partner provides. Xxxxx (2005) on the other hand reveals that despite strategic alliances offering the promise of economic and other benefits, they often entail significant costs in their implementation. Due to their shared decision making nature, strategic alliances tend to be fragile relationships with a high failure rate; above 305 according to Beamish and Xxxxxx (1998), Park and Ungson (1997) among others. Lane and Beamish (1990) found out that breakdown of communications generally had significant consequences on strategic alliances which sometimes led to the eventual dismemberment of the venture.
Strategic Alliance and Performance of Organizations. The relation between alliance formation and firm performance shows contradicting evidence in the existing literature. Where Xxxxxx et all (1999), Xxxxxx (2000), and Xxxxxx et all. (2001), find a positive connection between alliance formation and firm performance, Xxxxxxxx (2006) measures an increase in operating risk as well as a negative effect on firm performance. To my knowledge the work of Xxxxxxxx is the only research that provides support for this negative connection. However, surveys among management positions report failure rates of alliances between 50 and 70 percent (Saebi & Dong, 2008; Park & Ungson, 2001). It must be noted though that these are subjective perceptions of managers, and may not be directly connected to financial performance measures. Although there is some evidence against performance increase resulting from alliances, during the last two decades alliance formation increased drastically, especially in the biotech and IT industries. Motivations for the pursuit of this positive relation between alliances and firm performance are found on the cost cutting side as well as in value creation. A common motivation as to how companies can benefit by entering alliances is explained by transaction cost theory (Xxxxxxxxxx, 1975). Because of market imperfection, firms may choose not to obtain resources from the market, but rather produce them internally. Where a market exchange may be inefficient because of the high transaction costs, coordinating production within the firm can be a good alternative. The literature states that when transaction costs are high, but not high enough to start producing internally, alliance formation may be an efficient alternative (Xxxxxx, 1995; Xxxx & Xxxx, 2003). An Alliance is somewhat in between the two extremes of the make or buy decision. Both firms produce part of the good, but there are still transaction costs through contracts and management of the alliance. Xxxxxxxxxx and Schoonhoven (1996) state that in difficult market situations, alliances can provide critical resources that may improve a firm’s strategic position. From this perspective the strategy of a firm should thus be based on its resources and capabilities (Xxxxxxx, 2004). Where the TCE approach looks at the nature of the transaction, this resource-based view focuses on the alignment of the available resources through alliance formation. In this sense alliances have an important advantage over M&A: A selection can be made of the required resourc...
