Companies that need to widen their international presence to access new markets can use strategic alliances to get there. International partnerships not only enable firms to access global markets, but they also strengthen their competitiveness by leveraging the partner’s resources.
WHY ALLIANCES MAKE SENSE
Internationalization presents significant challenges that firms face all the time. Major obstacles include the following:
- In-country differences in customer requirements, the legal system, culture, and language
- The firm’s limited resources and limited marketing knowledge of the market
- Local competition against established players
- Competition against larger multinational enterprises (MNEs) with a broader scope
- Critical timing in the race to exploit market opportunities
For these reasons, companies use strategic alliances to improve their internationalization process.
Several alliance options are available to a company entering a new market. Grouping them into types helps to streamline an approach that best fits with the market entry strategy of the firm.
Exhibit 1. Type of International Alliances
1. Single Local Alliance
A company can establish an alliance with a local partner to speed up entry into a new foreign market. The objective is for the new entrant to gain market access to leverage its assets, technology, or products in conjunction with the local partner given its knowledge of the market and access to distribution.
A local alliance is ideal for a late entrant looking to enter an established market where the competition is intense and the distribution difficult to access. The type of domestic partner may be a manufacturer, a distributor, a reseller, or a retailer – the decision depends on where the firm needs to position itself in the industry value chain.
2. Multiple Local Alliances
A company can engage in alliances with multiple local partners to access specific markets. This choice is ideal in situations where the target market is large and structured into diverse segments. A prime example consists of a market comprised of industry verticals, where the new entrant can establish several independent alliances without incurring conflicting interests.
For example, foreign companies entering China’s electronics and information technology (IT) markets mainly function by a domestic network of partners. The primary reasons are the size and the complexity of the Chinese market. The complication in this type of arrangement is having to manage multiple relationships simultaneously.
3. Single Global Alliance
A firm that operates in a global industry may need to enter into a global alliance to be competitive. Compared to a local alliance, a global one can accelerate the internationalization of the firm because it covers a wide geographical area and allows the partners to enhance each others’ core capabilities.
The objective of a single global alliance is for the two partner firms to pool resources and capabilities and go to market on a worldwide coordinated basis. A prime example is Spain’s Aguas de Barcelona (Agbar), a leading Spanish firm in water supply and distribution. The firm set up a global alliance with France’s Suez (a leading French firm in water supply and distribution) to co-invest and pursue common markets in Africa and Latin America.
4. Multiple Global Alliances
Companies that need to accelerate their international presence look for multiple global alliances to secure market access. As in the previous strategy, the firm seeks to expand its international scope through multi-country alliances, though in this case, it aims to grow by multiple, independent partnerships, instead of only one.
By engaging in multiple global alliances, firms can speed access to several foreign markets. Also, having several global allies means that the firm assumes a lower risk in the process, with the added advantage of gaining knowledge and contacts specific to foreign markets. These alliances are widely used in high-tech start-up companies where speed to market and global presence are essential.
Strategic alliances are valuable instruments for companies that need to enter new markets. They are particularly useful for business opportunities that are large, uncertain, and where speed to market is essential. Under these conditions, a strategic alliance makes sense provided it aligns with the market entry strategy of the firm.
The choice of strategic alliance depends on the company situation and its strategic objectives. Upon entering new markets, firms encounter disadvantages in competing with local firms and are limited by their resources and capabilities. In this case, local alliances help to provide marketing knowledge of the market and facilitate the distribution of products.
Firms competing in global industries have a higher incentive to enter into global alliances. These lead to a faster acceleration of internationalization and are particularly useful for firms that face global competition. Global alliances cover broader geographical areas and allow the partners to enhance each other’s core capabilities.
In general, strategic alliances have a 50% rate of success. As a result, successful market entrants adopt best practices, including the following:
- Alliance Strategy Formulation: Understanding the overarching expansion strategy, evaluating the new market, and developing the right alliance model.
- Execution: Executing the alliance involves selecting the right alliance partner and negotiating useful terms of the agreement.
- Management: Managing an alliance requires establishing the governance of the strategic partnership and the performance metrics and managing the partnership.
So, if you are contemplating entering a new market with a strategic partner, take a disciplined approach to develop your market entry strategy and your alliance strategy. It will increase your odds of success.