INTERNATIONAL STRATEGIC ALLIANCES

 Selection Of Partner

EVOLUTIONARY PERSPECTIVE ON PARTNER SELECTION CRITERIA

A firm will ally with another only if it foresee a probability of future strategically or financially

benefits from the collaboration (Stuart, 1998). These benefits can stem from the

resource endowments of the other firm or its aspiration to achieve a certain objective. The

partner selection decision involves a comparative assessment of these two factors across

potential allies. However, the importance of each criterion is likely to change over time.

To account for these changes we utilize industry life cycle reasoning and a three-stage

entry game with an early exploratory stage, an intermediate development stage, and a maturity

stage (Williamson, 1975). We focus on emerging markets and not established industries,

so we merely utilize the evolutionary insights of the model.

From the firm’s perspective, initially when a market is formed it must decide on

whether to enter, and if so, the timing of entry. When balancing the risks of premature

entry and the costs of missed opportunities, the firms that value the net potential as high

will have a stronger aspiration to enter than those who value it to be low (Lilien & Yoon,

1990). The underlying reason motivating entry, however, changes over the industry life

cycle (Agerwal & Audretsch, 2001). Thus, deciding not to enter early in the life cycle

does not imply that the firm will refrain from participating in market-entry-alliances before

this stage for strategic reasons. For firms, contemplating on entering emerging markets,

where allying is necessary for entry, it is important to avoid such alliance partners.

Hence, in order to make appropriate partner selection decisions they must not only assess

the resource endowments of potential allies but also understand how they will value the

potential of entering, and when they will do this.

  

 Partner Selection Criteria in the Exploratory Stage

The early phase of an industry life cycle, where the market is still emerging, represents

by definition a change from status quo. It is characterized by high degree of both technology

and market uncertainty (Nelson & Winter, 1982) and requires product or service innovations

from the firms participating in creating the market. Resources forming the basis

for previous competitive advantages may not be valuable in the emergent market if

changes are competence-destroying (Tushman et al., 1986) and hence uncertainty about

what the right and what the wrong resources are prevails. Thus, early entrants face the

risk of being displaced in the market, because of wrong or unlucky technical or market

choices. Under these conditions, there are three key reasons why aspiration levels may

take precedence over resource endowments as criterion for partner selection. First, an

emergent market represents a change from status quo, and firms that have been successful

in the previous market may not want things to change. Thus, firms, which, as a result of

their success, have strong resource endowments, may expend resources to deter entry and

market development. They may do this by entering into alliances only to learn and to delay

the development of the new market, so they can extract the remaining profits from the

existing market. In addition, firms with strong resources may refrain from early entry and

wait until initial uncertainties have been resolved because they are confident that they

have the strength (for instance financial resources to heavy marketing spending) to capture

the market even in late entry. Strong firms can also seek to reduce risks by adopting

an option perspective on entry decisions (Miller & Folta, 2002). While this may be advantageous

for the firm in question, it is not in the interest of a potential partner, as it implies

less than full commitment. Second, early entry involves risks due to high uncertainty

about technologies and future demand and firms with strong aspirations are more

inclined to take risky actions than firms with strong resource endowments. Firms with

strong resource endowments often have a valuable brand name and hence have more to

loose from taking risky actions than firms with no brand name. Sullivan (1991) found

that because brand equity is a key resource for incumbents they tend to enter later than

new-name brands. Moreover, extension of brands with large customer bases to new technical

subfield typically happens later than extension of brands whose base is small. Third,

in the early phase rapid adaptation to change is an essential competitive parameter. Firms

with strong resource endowments may be unable to quickly adapt to change (Henderson

& Clark, 1990) as they typically are large, which in general makes them less adaptable

but also because they may have developed certain routines that are not easily adjustable

(Nelson et al., 1982). Several authors argue that there is a negative correlation between

weak resource bases and post-entry survival rates (Geroski, 1995; Helfat et al., 2002).

However, this is not necessarily important as partners can function as “stepping-stones”

by facilitating early entry and then being replaced over the course of the industry life cycle

if desired. In sum, we argue that firms wishing to enter an emergent market should not

choose its ally primarily on the basis of its stock of resources but rather on the degree and

strength of aligned aspiration levels.

P1: In the exploratory stage the strength of aspiration levels is a more important criterion
for partner selection than the strength of resource endowment

 Partner Selection Criteria in the Maturity Stage

Firms contemplating on market entry in the maturity stage face a different competitive

environment than the early movers. In the maturity stage technology and market uncertainty

have been resolved and few changes take place in the market.6 Established customer

connections stabilize the rate of change of market shares of the largest firms in the

industry (Agerwal et al., 2001; Klepper, 1996), while reduced uncertainty intensifies

competition between the firms in the market (Afuah et al., 1997). In this stage firms that

remain on the market will be determined to stay, and as growth rated decline and some

firms do better than others, some exits the market, not voluntarily but because they are

forced to. Whereas product innovations and improvements of functionalities are important

in the exploratory stage, in the maturity stage process innovations and cost reductions

for the end-customers are central (Adner & Levinthal, 2001; Klepper, 1996). The maturity

stage persists or is replaced by a decline phase where the demand decreases and may

fall to zero.In such an environment firms with strong resource endowments may be better allies

than those with strong aspiration levels. This is first because the market structure allows

the strong firms to remain strong until the next disruptive change occurs (Klepper,

1996). Intensified competition among defined players makes resource strengths increasingly

important. Notably, however, the strong firms in this stage are not necessarily the

same as the strong firms in the exploratory stage. Second, the incentive to innovate is

manifested differently for process and product innovation. Product innovations attract

6 Naturally the maturity stage ends with uncertainty as a new exploratory growth stage in an emergent marketwill replace it.

new buyers, and hence the incentive for product innovation is conditioned by the demand of new buyers. In contrast, process innovation, which is more important in this phase,

typically lowers a firm’s average cost of production and the value of such a reduction is

proportional to the total output of the firm, the incentive to engage in process innovation

is greatest for the largest firms (Klepper, 1996). Thus, it makes most sense for strong firm

to engage in process innovation and thus thrive in this stage. In sum, the aspiration levels

of firms in the maturity stage become a less important criterion for partner selection. Instead

it is important to ally with firms that have the strength in terms of resources and capabilities

to stay on the market.

P2: In the maturity stage the strength of aspiration levels is a less important criterion for
partner selection than the strength of resource endowments

 Partner Selection Criteria in the Development Stage

In between the exploratory and the maturity stages lies the development stage. In this

phase the technical subfield has evolved and dominant designs and standardized technologies

are emerging (Anderson & Tushman, 1990). Hence, given that a product succeeds

and makes it to the development stage, uncertainty will be reduced compared to the

growth phase but higher than in the maturity stage. This implies that the potential for

seizing significant new market shares is reduced – yet not disappeared. At first, few firms

will supply the products, but entry then expands as demand rises resulting in output increases

and price falls. In the development stage the competitive imperative is neither

market exploration nor market exploitation but staying in and developing the market.

This does not eliminate the importance of product innovations, as the market still needs

to be expanded, but in the particular subfield process innovations becomes relatively

more important (Klepper, 1996).

In this competitive environment firms that are present on the market have proven

their aspiration to enter the new subfield. Moreover, strategically slowing down market

development through alliance participation is no longer possible. With limited threat of

opportunistic alliance participation what becomes increasingly important is whether potential

partners have the resource endowments to stay. Thus, while the relative high im13

portance of aspiration levels decreases, the relative low importance of resource endowments

in contrast increases. There may be both advantages and disadvantages associated

with allying with strong resource-based firms versus strong aspiration-based firms in the

development phase as success requires market expansion through product innovation as

well as efficiency through process innovations, which the two types of firms are likely to

support differently. As a result neither aspiration levels nor resource endowments take

precedence, which may result in partner selection decision being based on alternative criteria.

P3: In the development stage the strength of aspiration levels and the strength of resource
endowments assume equal importance for partner selection

Note that we do not claim that firms with strong resource endowments necessarily have

low aspiration levels for market entry or vice versa. Our arguments only pertain to the

prioritization of partner selection criteria. The above discussion and propositions are

graphically summarized in figure 1.

Figure 1: The Relative Importance of Resources and Aspirations

What exactly is a strategic alliance? It’s any cooperative agreement where companies come together for a specific duration and/or project and add value to each other through the alliance.  Resources, skills and/or capital are pooled for mutual gain.  Agreements can cover things like:

• Start-ups

• Marketing

• Outsourcing

• Research & development

• Licensing

• Production

A tangible growth trend

A visible growth trend

An encouraging growth trend

Growing trend

According to Industry Canada, international evidence suggests that strategic alliances have been on the rise for several decades, with an estimated annual growth rate of 25%. This makes sense in our increasingly global economy. Consider the many potential benefits for your business:

• Diversifying your product/service lines and markets

• Providing access to new markets and product knowledge

• Reducing or sharing potential risks

• Blocking competition

• Avoiding ‘reinventing the wheel’

• Reducing innovation costs

• Shoring up gaps in your business

• Accessing new resources

• Enhancing your capacity to bid on large contracts

• Strengthening customer, supplier and other relationships

• Increasing your export capabilities

Despite the many potential benefits, strategic alliance partnerships can fail without careful consideration by both parties. Here’s how to begin and ensure success:

1. Select your partners carefully. Look for peers and who are like-minded and share your ethics. Viable sources include networking events, online groups or social networking, industry and trade publications, trade associations, government agencies, and even through your banker, lawyer, or accountant. Make sure the alliance is a win-win situation. For example, if you plan on tackling the global market, your potential partner may be international, but may lack the product knowledge you have.

2. Be clear about your expectations and desired outcome. Identify the kind of alliance you want--marketing, licensing, distribution, technology, R & D, etc Calculate the amount of time you can both realistically commit to the project. Determine how much you can afford to invest and lose, should your alliance fail.  You would be wise to negotiate a formal contractual arrangement for further peace of mind. 

3. Communicate, communicate, communicate. Many business relationships fail because of faulty assumptions and poor communication. What’s obvious to you may be unclear to your partner, especially if you are dealing across cultures or in different languages. To avoid failure, take notes, have minutes of meetings recorded, and document all agreements and actions to be taken.

4. Set specific timelines. Set trial timeframes to get an idea of your partner’s work ethic, management style, attention to detail, and true commitment. Be cautious about taking things to the next level before testing the waters. If your partner misses the first deadline, how will he or she ever meet future ones?

5. Establish exit clauses. Decide upfront—before anything goes wrong—on an exit strategy that will suit you both should the alliance fail. It’s better to lose a partner in the early stages of a joint venture than to lose your good name in the marketplace. Brainstorm possible best and worst case scenarios.

6. Celebrate your successes. If the partnership is working well, don’t forget to take a breather now and then and enjoy your mutual accomplishments. To maintain both your motivation, it’s important to celebrate the milestones in your alliance, such as the acquisition of your first big corporate account or receiving an award for exceeding industry standards. A lot of work and a little bit of play go a long way in a maintaining a healthy and successful strategic partnership.  

The possibilities for women business owners and entrepreneurs to create strategic alliances are endless. Do your homework, target a strategic and motivated alliance partner, and be prepared for benefits and potential risks that may come your way. It can be a delicate balancing act to maintain your autonomy and preserve your interests.  By sharing resources, costs and risks, your strategic alliance may catapult your growth in a