Internal Development and Strategic Alliance

Internal Development and Strategic Alliance Should firms go it alone or pursue a strategic alliance? This essay will compare internal development (organic development) with strategic alliances and look at whether it is better for the organisation to go it alone or partner with other organisations.   Internal development is where strategies are developed by building up the organisation’s own resource base and competences, Johnson and Scholes, (1999). Strategic alliances are when two more parties form a collaborative agreement to exchange or combine resources to pursue a development strategy, but remain separate legal entities, Bennett (1996). Joint ventures, licensing, networks are examples of types of alliances. There are many benefits that can be achieved from going it alone that may not be available through an alliance.   First of all, when an organisation develops a highly technical product the organisation through the process of development, may begin to understand its organisation better, and thus learn ways of building up or acquiring competences.   This type of learning and development may not be as extensive if alliance partners are involved in the development process.    Similarly when an organisation enters new markets through direct investment (going it alone) it can gain advantages (e.g. local market knowledge, competences in selling to new markets) that it may not have gained through working through distribution alliance partners. By going it alone – the organisation receives the full benefits of undertaking a development venture – including all the profits, patents, technical know-how and resulting competitive advantages. With alliances, depending on the agreement, any success (profits, patents, know-how) has to be shared between partners.    By undertaking internal development the organisations can exercise greater co-ordination and control over the investment and the objectives of development. With an alliance (e.g. JV), however, organisations may lose that autonomy and find it harder to control the development because decisions have to be taken on a joint basis.   Many alliances have failed due to differing objectives or motives by alliance partners.   For example, one partner may go into an alliance for short term learning gain, whereas the other partner may see the alliance as more strategic, long term and replacing one area of its value chain, Wit and Meyer (1998). With internal dev elopment there can be a greater degree of control and co-ordination, and perhaps a greater chance of the development objectives being met, without disputes. Going it alone may be a preferential route for those firms who are particularly sensitive about exposing or giving away core competences or skills that provide the organisation with a competitive advantage in the market place.   If an organisation believes that the risks of exposure of its core competences are too great through an alliance, it is more likely to use internal development – because core competences can be internalised.   Going it alone may make sense to an organisation which is pursuing development which is characterised as â€Å"fit led innovation†.   When the organisation is able to use or realistically grow its resources and competences to meet the market opportunity.   However, if the level of innovation required is more â€Å"stretch led† the organisation may have to carefully consider whether it should pursue internal development or other methods of development in order to meet its market opportunity.   For some organisations going it alone may be the only option available to them – especially if they are working in a field which is breaking new ground or where there are no other suitable partners available, (Johnson and Scholes, 1999). Therefore going it alone can offer organisations many benefits over other methods of development. However, the method is often criticised for being a slower form of development (Johnson and Scholes, 1999), requiring a higher overall capital outlay (Wit and Meyer, 1998) and has the downside that the organisation bears the full costs and risks if the development (e.g. product development or market development) fails.   By going it alone an organisation can miss out on all the benefits available to them from alliances.   The benefits of alliances will now be discussed in relation to the Xerox-Fuji 50:50 joint venture alliance case study, (Hill, 2000). The alliance between Xerox and Fuji gave each company significant benefits over and above, them going it alone.   Firstly, both companies benefited from sharing the costs of their market and technology development.    Fuji and Xerox, were able to bring the â€Å"best of the best† from both companies.   They were able to pool their resources, competences, skills, technology know-how together to create a new, fresh entity, with defined objectives for both parties Wit and Meyer (1998).   Fuji, had the local knowledge of markets, distribution channels and Xerox, excellent skills and know-how in manufacturing and sales, thus the alliance enabled both companies to benefit from each other’s competences.   Through an alliance mutual l earning can take place which can complement each other’s companies strengths or weaknesses.   By going it alone you can limit yourself to the organisation’s own skills and competences and only what you can realistically develop internally. The Xerox and Fuji alliance meant that both organisations were able to limit their risks of development. Xerox was able to test the market for its products before committing itself to a new market (Hill, 2000).   It could remove its investment without too much difficulty.   If it had gone it alone, market entry may have been harder and more risky for Xerox.   Certainly alliances can be preferable if an organisation is undertaking a risky development – as failure can shared between partners. Alliances due to their nature, can also provide faster methods of development than which can be created through internal development. However, alliances have been criticised for: i) their high failure rates – 60% after 2 years fail, (Dawes, 1994) ii) Risk of exposing competences and technical know-how to partners iii) Disputes, relationship issues that result from working with other partners iv) Profits and advantages having to be shared between partners iv) the less autonomy and control available to partners compared with going it alone. In answer to the question should firms go it alone or pursue a strategic alliance – I   believe it really depends on the current situation of the organisation (internal and external).   There may be circumstances where an organisation would be better to go it alone – especially if the organisation was concerned about exposing its core competences, felt that its existing resources and competences would be sufficient to meet the market opportunity, and it needed high levels of control over its development decisions.   In other circumstances – the organisation may find it cost prohibitive to develop in-house, be experiencing strong competitive pressures and thus need to seek partners to support them on high research and development costs, or obtain specific skills, technical know-how to take advantage of a market opportunity.   As outlined above internal development (going it alone) and alliances have different advantages and disadvantages for different orga nisations.   Therefore the choice over which development method would need to be taken on a case by case basis. BIBLIOGRAPHY In the preparation of this assignment I have consulted the following research sources: Bennett, R. (1996) International Business: Pitman Publishing Oxford University: (1990) A Concise Directory of Business: Oxford University Press Hill, C. (2000) International Business: Competing in a Global Marketplace: McGraw Hill Needle, D. (1995) Business in Context, An introduction to Business and its environment, Second Edition: International Thompson Business Press Bleeke J. and Earnst D. (1992) Collaborating to Compete: Wiley and Sons Dussauge, P. Garrette B., (1999) Co-operative Strategy: Competing Successfully through Strategic Alliances: Wiley Lorange P. and Roos J., (1993) Strategic Alliances: Blackwell Lynch R. (1993) Business Alliance Guide: The Hidden Competitive Weapon: Wiley Sandaram and Black (1995) The International Business Environment: text and cases:  Prentice Hall Rugman and Hodgetts (1995) International Business: A Strategic Management Approach: McGrawhill Matsura, N. (1991) International Business, A New Era: Harcourt Brace Jovanovich (HBJ) Dawes, B. (1994) International Business: A European Perspective: Stanley Thorne Johnson and Scholes (1999), Exploring Corporate Strategy, Prentice Hall