The role of strategic alliances in the development of technology

Tec~~ovat~o~, 14(4) (1994) 243-257

The role of strategic alliances in the development of technology Cathy S. Howarth Deakin University, Australia

Burwood

Campus,

221 Burwood

Highway,

Burwood,

WC 3125,

Abstract changing forces worldwide ure creating the need for high-technology companies in A~tralia to consider new types of business arrangement. One such arrangement is a s~ategi~ alliance. There are a variety of di~erent types of strategic alliance available to such companies to enable them to keep pace with technology development worldwide, and to provide them with the resources to meet the demands created by the changing forces of national and international competition and AustraliaS increasing reliance on international trade. Essentially, these forces can be seen as either a pressure of resource scarcity or the pressure of coercion. Strategic alliances formed to counter these forces are not, however, without their costs, which must be given careful consideration in the decision to enter into a cooperative business arrangement with another company.

1.

Introduction

This paper begins with a brief analysis of some of the significant forces that are creating a pressure for change across business, industry and government on a worldwide basis. The focus of this paper is on the high-technology industry, with particular attention given to this industry within Australia. The nature of the high-technology industry in Australia is examined, with attention firstly given to issues of definition. Some of the features and trends of this industry in Australia are explored, with one important outcome being the identification of the need for new types of business arrangement. Strategic alliances are proposed as one alternative to meet this need. A strategic alliance is defined, and examples are given to

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demonstrate how this type of business arrangement can form an appropriate response to meeting the pressures for change. The forces for change are then considered in greater detail. From this analysis two broad pressures emerge: the pressure of resource scarcity and the pressure of coercion, The paper considers how strategic alliances can provide an appropriate response to both of these pressures. Finally, the costs of strategic alliances are considered in order to identify the need to weigh up what can be gained against what potentially may be lost through this type of business arrangement.

2.

Changing

forces worldwide

One of the significant trends in business and industry today is the downsizing of large companies

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@ 1994 Eisevier Science Ltd

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and the increase in the number of small, new companies. Another significant trend is the deveiopment of smart infrastructure to assist the changing form of public and private enterprise. This includes a re-assembling of people and resources; the creation of advanced networks in areas such as communications, transport and information technology; and greater integration of the environment, government, industry and business. Rapid changes in technology are occurring worldwide. New industries are being created, while traditional industries are being regenerated by the application of advanced technologies to their manufacturing and production processes. Technologies with diverse applications are creating opportunities in a variety of markets. Another global trend, pa~icularly in technologybased industries, is the development of strategic alliances for research and development (R&D) among the three sectors of industry, government and research institutions. “These alliances promote cooperation between firms, between ,firms and universities and they facilitate the transfer of technology from publicly funded institutions. Their rationale is to share the costs and the rirks of the development of new technologies and prodigy and to increase the pool of knowledge to meet the challenge of giobal competition” [ 11.

Significant growth is taking place in the gross domestic product (GDP) of some developing nations. In particular, in 1992, growth in GDP in South-East Asia was predicted to grow by 7-9% and to maintain this pace for the rest of the 1990s [2]. Such a growth provides opportunities for other nations to secure markets in these places. Countries that are currently facing a domestic recession are also pressured to respond to this situation by seekinn entrv to such overseas markets to sell their excess production. In addition, as the current situation in the European Community continues, the pressure to pursue other markets is increased. Finally, one cannot ignore the increasing globalization of markets, with its subsequent increase

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in both domestic and international tition. 2.1.

lmplicatjons

levels of compe-

for Australia

The implications for Australia stemming from these trends are significant. Australia depends on international trade and must therefore complement the world economy. From 1985 to 1988 world trade increased by 150% from US$3.6 trillion to $5.4 trillion [3]. Trade barriers in the large and important markets are undergoing scrutiny and change, but barriers against those outside the large trading blocs may be strengthened. Australia, being on the outside of major trading blocs, must become intemation~ly competitive with its exports to survive. One area where Australia is considered to have the potential to become more internationally competitive is in high technology. Key areas for development and high growth prospects in this area have been recognized for some time. For example, in 1983 many of the following areas were identified as ‘sunrise industries’ by science and technology policy makers in the Australian Labour Party: aerospace, advanced materials, advanced production technologies, computer software, environmental management, info~ation technology and communications, marine science and and technology, medical equipment, pharmaceuticals, biotechnology-particularly RDNA products and diagnostics. One example of the potential of the high-technology industry is the area of biotechnology. In the United States alone, this is again a booming industry, and product sales are expected to reach US$4 billion by the mid-1990s. 2.2.

The Australian industry

high-t~hnology

While there have been continuous acknowledgments of the need to develop Australia’s technological capabilities, progress has not been rapid. The trends outlined above put further pressure on Australia to meet this need. These trends are

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The rule of strategic a//iances

also creating demands for new types of business arrangement to advance Australia’s high-technology capabilities. A brief look at this industry can verify the need for such arrangements, especially in the area of new ventures and small businesses. Firstly, though, just what is included under the label of ‘high technology’ deserves some brief clarification. 2.2.1. High technology-a definition High technology has been defined as including both the tool and the know-how for using that tool [4]. Tools are described as either objectembodied or document-embodied elements of technology. The former includes products, materials, machines, structures and factories, while the latter includes charts, diagrams, relations and processes. Know-how is classified into either person-embodied or institution-embodied. Personembodied know-how includes knowledge, skills and creativity, while institution-embodied focuses on the framework or infrastructure that facilitates the development and transfer of technology. Sharif [4] suggests that these include organizations, linkages and management. Organizations operating in the high-technology industry employ high levels of R&D and significant degrees of specialization and product differentiation. 2.2.2.

Features of the industry The environment of high-technology

ventures is both uncertain and complex. The current economic environment (of low business investment, high interest rates for small business, high unemployment and subsequent declining consumer purchasing power) creates high risks for the successful start-up of new ventures. The Small Business Development Corporation study (1990) on business survival has shown that two-thirds of new ventures fail or begin to fail within their first five years [S]. The risks of successfully developing new ventures are extremely high. But despite these difficult conditions, there is no shortage of those willing to start new ventures, especially in the area of high technology. How then can business risks be reduced to ensure a greater survival rate of these

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ventures? One such option is to spread the risk by forming an alliance with another company that can provide access to and contribution of vital resources. This strategy can provide relief to those Australian businesses affected by the limited availability of capital and the unwillingness of many financial institutions to provide working capital to small businesses. Other benefits to be derived from this type of arrangement are given considerable attention later in this paper. A brief look at some recent trends among small manufacturers highlights the growing amount of cooperation between companies in similar industries and those located close together. For example, some high-technology companies in Melbourne are forming cooperative a~angements with one another, involving the provision of components.’ There are also a number of small manufacturers across a range of industries who are showing significant increases in exports. These include small manufacturers of high-technology machinery who have found and established niche markets worldwide. An example of such companies expanding their global markets is Australia Numerical Control Automation (ANCA) which was established in Melbourne in 1978. In 1991 the direct exports of this company were more than 73% of company revenue, representing a growth in exports for the year of approximately 60%. Total exports are estimated at having grown by more than 700% since 1987-88 [2]. Similarly Cochlear, a bionic ear manufacturer, which began commercialization in 1978 of a device emerging from research conducted at the University of Melbourne, now has 90% of the world market for hearing implants [2]. Some relevant statistics from the Commonwealth Scientific & Industrial Research Organization’s (CSIRO’s) Institute of Industrial TechnoIogies indicated that in 1991: l

l

l

exports from manufactured exports exceeded rural-based exports by A$14-1-14.2 billion; manufactured exports grew by 16.9% a year between 1986-87 and 199CL91; total exports from manufacturers involved in

245

C.S. Howatth

substantial value-adding processing 8.6% to 13.8% from 1986-87 [2].

grew from

The breakdown of exports by the Australian Bureau of Statistics shows growth across a range of industries including tool makers, aerospace, production techniques and laser equipment. For example, in 1991-92, 58.6% of machine tool sales worth A$48.6 million were exported, a figure which is up 27.6% on the previous year [2]. 2.2.2. Research and development Research and development (R&D) is an area central to the high-technology industry. Mechanisms that facilitate both the R&D process, and the transfer and commercialization of technology that emerge from this process, are seen as highly important. A brief look at what is happening with R&D in Australia reveals a problem in terms of the relevance of its R&D to industry. As the 1986 report by the National Science and Technology Analysis Group (NSTAG) highlights, Australia has considerable strength in research and development but the relevance of such research to industry is questionable [6]. Other issues influencing the effectiveness of R&D in Australia include: a low level of private sector investment in R&D, lack of scientists, and limited linkages among industry, government and research institutions. To date, government involvement in technology transfer has primarily focused on the development of the necessary infrastructure in an industry where the associated risks make it difficult for firms, particularly small to medium sized ones, to invest adequately in R&D. The focus of the current science and technology policy, however, is seeking to alleviate these concerns to an extent by increasing the pool of funds available, while at the same time trying to establish a more equal balance between public and private sector funding. One of the ways of dealing with the forces affecting this industry and taking advantage of the opportunities, particularly in export markets, is to consider new types of business arrangement. One such possible arrangement is that of a strategic alliance. The following section deals with the issue

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of definition of a strategic alliance before going on to consider the benefits of such arrangements to the development of technology.

3.

Strategic

alliances-a

definition

It is not the intent of this paper to go into an in-depth analysis of what constitutes a strategic alliance, nor to discuss what the literature has to say about this. To summarize the author’s analysis of this area, it is important to view the formation of a strategic alliance as part of the key decision maker’s (DM’s)~ overall strategy for the organization, such that the formation of a strategic alliance becomes one element in a set of important decisions that determine the direction of an organization for the short and/or long term. Thus a strategic alliance can be distinguished from other interorganizational relationships (IRS) which may be formed for reasons other than the pursuit of the organization’s strategic objectives. For example, Schermerhorn [7] refers to the value expectancy theory, wherein key DMs pursue IRS because of their belief in the value of cooperation itself, that is, the perception that cooperation is a good thing to achieve. IRS formed in this way can be viewed as actions undertaken to satisfy and support the value system of the key DM. The formation of IRS may also be motivated by the ‘vested’ interests key DMs have in other organizations, or because the key DMs are well known to each other. An important element of the above discussion is the decision to engage in an IR as a means to the pursuit of strategy. It is argued that this is what differentiates a ‘strategic’ alliance from other forms of IR. Further analysis of the concepts of ‘strategy’ and ‘strategic’ is important here. It has been suggested that strategy involves a set of important decisions that influence the relationship the organization has with its environment, and which determine its structure, processes and performance [8, 91. In addition to this, it is also necessary to distinguish strategy as a unified and integrated course of action designed to ensure that the major goals of the organization are achieved.

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Thus an alliance, if it is to be considered part of the key DM’s strategy for the organization, must be consistent with the overall strategy and contribute to the achievement of major goals and objectives. If it does, then it can be considered to fall into the realms of a ‘strategic’ alliance, where ‘strategic’ is defined as serving the ends of a strategy.3 From this brief discussion, the following definition of a strategic alliance is proposed: A strategic alliance is a cooperative arrangement between two or more organizations that forms part of and is consistent with their overall strategy, and contributes to the achievement of their major goals and objectives.

A strategic alliance must also be distinguished from other forms of relationship where one or more of the partners loses its original identity. This occurs in the event of either merger or acquisition. In the former, two or more organizations will join together to form a new entity, while in the latter the acquirer usually retains a large part of its original identity, with the organization being acquired changing its identity. One of the issues that this definition raises, however, is how a measure of fit between the strategic alliance and overall strategy can be determined. No exact solutions are proposed at this stage, but the following examples serve to illustrate some level of consistency and fit between an alliance and the key DM’s overall strategy. In the first example, the DM can be viewed as a prospector whose dominant objectives are the location and exploitation of new product and market opportunities [lo]. The prospector’s dominant beliefs are to do with innovation and breaking new ground, involving high risk and the search for new opportunities. An alliance consistent with these objectives could be one that gives the DM access to new technologies or new markets. The second example is that of a DM who is seen as a ‘defender’ whose dominant objectives are a desire for a secure and stable niche in the market [lo]. The defender’s dominant beliefs are to do with conservatism and control, involving low risks

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and well-tried potential solutions. An alliance consistent with these objectives may be one which enables the DM to control costs or spread the risk of R&D and product development.

4. Benefits of strategic technology development 4.1.

alliances in

Generic forces for change

Having identified the need for the Australian high-technology industry to deal with changing forces worldwide, the question arises as to what benefit strategic alliances can provide to this industry. The first way to address this question may be to revisit the analysis of driving forces for change but to consider such forces in more generic terms. In doing so, the level of analysis chosen is again that of the individual/s or key decision maker/s (DM/s) within the organization. The first question asks, in more specific terms, what factors prompt key decision makers to consider or reconsider their strategic direction in terms of their major goals and objectives for the organization. Several reasons are evident; these include: decline in performance; perception of increased uncertainty in the external environment and perceived need to reduce this uncertainty; recognition of a change in core product lifecycle; desire for growth and/or diversification; increasing domestic and/or international competition; change in consumer values, behaviour, and purchasing power; new government policy and regulations; deregulation; threat of takeovers; and changes in cost and availability of capital. These generic forces are given further consideration in the following discussion. In relation to models of change, the recognition by the key DM that a review of strategy is appropriate is comparable with the first phase of Lewin’s model of change [ll]. This is referred to as the ‘unfreezing stage’, which is characterized by the creation of a felt need for change and acts to prepare the DM for change. It involves disconfirming existing attitudes and behaviours to

247

C.S. Howarth

create a felt need for something new at the level of corporate and business strategy. For example, recent changes at IBM have been driven by both internal and external forces, such as loss of profits and increasing competition. The product lifecycle theory provides some explanation for the creation of a felt need for change in the key DM in relation to the strategic plan. A basic assumption of this theory is that significant changes in competitive position can occur during certain phases of the product lifecycle. These are seen to be in the early and late stages, or the periods of development and decline. During these stages the basic nature of competition is likely to change [12]. This in turn creates a high level of uncertainty for organizations involved in the particular market, and may pressure them towards conservative use of resources as they seek to formulate a new strategy. Having perceived a need to review the organization’s strategy, the key DM then looks at the alternatives available to achieving the major goals and objectives for the organization. One possible alternative is to form an alliance with one or several organizations. The key question that flows from this is: under what circumstances would this course of action be chosen as part of strategy? The argument proposed here is that a strategic alliance will be chosen as part of strategy when it is perceived by the key DM that the major goals and objectives for the organization are impossible to achieve alone. Two factors are suggested to underpin this position. The first is a perception by the key DM that the organization, working alone, has insufficient resources or lack of access to resources needed to achieve its goals. The second factor is that a coercive pressure, seen as emanating from some external source, serves as a motivator for ‘voluntary’ inter-organizational cooperation [7]. These two factors, resource scarcity and coercive pressure, are discussed in more detail below. 4.2.

Response to resource scarcity

There is evidence to suggest that the formation of a strategic alliance provides one mechanism for

248

overcoming the problem of resource scarcity, and that strategic alliances give the partners to the alliance access to resources that might not otherwise be available to them [13-U]. This may include access to technologies, access to capital, access to raw materials or natural resources and access to information. This motivation may arise from the need for determinacy [16]. That is, organizations act to protect themselves against uncertainty and will take steps to gain access to resources that enable them to make more informed decisions about their environment, whether this is materials, technology, capital, knowledge or information. This is certainly consistent with the earlier proposition that an increase in environmental uncertainty is a driving force for change, to which key DMs can react by seeking access to the experience, knowledge and information of a strategic partner. When one of the driving forces for change is an increase in domestic and/or international competition, this may create the need for key DMs to consider any or all of the following: diversify their product mix, upgrade their production technology, and expand into new markets. If a DM faced with this situation is unable to generate the necessary resources to meet these needs, the formation of a strategic alliance provides one mechanism for overcoming this problem. For example, one objective of the consortium ESPRIT is to provide organizations within the European information technology industry with the necessary technologies to meet the competition in the 1990s

PAThere is considerable support for the resource dependency model, which suggests that resource scarcity “forces organizations to enter into more cooperative activities with other organizations” [18]. This view has considerable support in the literature [N-22]. In addition, it is considered that such cooperation is one way to stretch resources to meet the organization’s needs [22]. The earlier discussion suggested that a change in product lifecycle was a driving force for the key DM to consider a change in strategy. Due to the transitional nature of the market in the development and decline stages of this lifecycle

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The role of strategic

and the competition that occurs within these stages, there is a greater need for strategic alliances [23]. The lack of certainty and information prompts key DMs to enter into strategic alliances to gain access to the knowledge and experience of others [24]. A strategic alliance may also provide a way to learn more about another organization’s technology. In periods of uncertainty and turbulence strategic alliances can provide new ways to compete. Motorola used a strategic alliance as a new way to compete in the semiconductor business and regain its market share when Japanese memory chips flooded the market in the United States between 1983 and 1986. A strategic alliance formed with Toshiba allowed Motorola to get back into the semiconductor business and compete in the advanced dynamic memory access random (DRAM) chips market [25]. The lifecycle theory is especially pertinent to industries that develop or rely heavily on high technology. This is because of the rapidly accelerating pace of technological change and the level of sophistication of new technologies. One reason for technology-intensive companies forming strategic alliances is to enable them to keep up with rapidly decreasing product and process lifecycles, which, previously measured in decades, have now collapsed to less than five years [26]. In considering the early stage of a product’s lifecycle, organizations need to minimize the engineering and design phase in order to get a product into the market quickIy [27]. A reduction in research-to-production time allows organizations to deal more effectively with the increasing level of competition, especially foreign competition. Through the sharing of competences and resources, strategic alliances can provide a means for organizations to get their products to market more rapidly and thus beat the competition to the starting line. In relation to the development and diffusion of new technologies, strategic alliances can allow partners to gain faster access to new technologies, diffuse new technologies more rapidly [28], decrease development times, reduce the risks associated with the development of leading-edge technologies [26] and reduce the risks in ironing

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out bugs in new or upgraded systems [27]. These benefits occur due to the sharing of costs; the gaining of access to the partner’s technology and learning; the pooling of limited resources and skills, thus avoiding redundancy in activities; and the gaining of access to new markets and distribution channels. An example of an organization benefiting from its partners’ expertise in technology diffusion is Formula International, a high-technology organization established in Perth, Australia, in 1982 which has developed a ‘silicon brain technology’. Its new partners, SRI International, California Security Associates of Illinois and Johnson Controls of Milwaukee, will enable it to widen and develop applications for its technologies. Strategic alliances can also include access to extensive distribution channels; access to new markets; and access to advanced supplier networks. The American Telephone and Telegraphic Company (AT&T) formed a strategic alliance with Italtel Societa Italiana Telecomunicazioni in 1989 to gain access to additional overseas markets in the telecommunications industry. A change in consumer demands and values can have a significant impact on an organization’s product and/or service line and creates pressure for the mobilization of additional resources to meet these demands. In the area of personal computers, buyer demands for fully integrated and compatible lines of products are creating a need for previous rivals to consider greater compatibility in their technologies. A recent and quite significant example of this is the alliance between IBM and Apple to develop a new range of desktop computers. One of the benefits for the consumer is that the alliance intends to make it easier for Apple’s Macintosh computer to work with IBMbrand machines. This will be achieved through the integration of Macintosh computers into IBMbased systems. Two further objectives include the use of the same Motorola microprocessors in new models, and the setting of multimedia standards for combinations of text, graphics, video and sound. The following examples illustrate the use of

C.S. Howatth

specific types of strategic alliance in overcoming the problem of resource scarcity. 4.2.1. Joint ventures This type of alliance involves the creation of a new entity in which both partners take an active role in the formulation of strategy for the new entity. Specialization ventures are a particular type of joint venture arrangement wherein each partner brings a special competence to the venture. For example, one may be involved heavily in the marketing side and the other in the development and production. This is the case with the recent agreement between BIS Trading Systems and IBM. Under this agreement IBM will market DRone, a trading room information and communications system developed in Melbourne by BS Microcomp Australia, now a unit of the BIS group in the UK. The following benefits are achievable from specialization ventures. Members can achieve: a form of quasi-vertical integration without large investments in fixed costs; increases in learning; economies of scale; and they can compensate for existing weaknesses through their partners’ strengths [29]. For example, Canon of Japan has benefited from its alliance with Eastman Kodak, which has allowed Canon to learn about new imaging and optical technologies for use across industries. 4.2.2. Consortia Consortia generally involve a combination of organizations and research centres that come together to engage in research projects within a specific industry. A local example is the recent agreement between the Australian Software Foundation (ASF) and the Eureka Software Factory (ESF-linking thirteen leading companies and research centres from six European countries). The focus of the agreement is for cooperation on R&D in software engineering products and services. The Australian consortium includes Ernst & Young IT, Computer Power, the Defence Science and Technology Organization, CSIRO’s Division of Information Technology, the Aus-

250

tralian Centre for Unisys Software, and the University of Queensland. Consortia benefit member organizations by spreading the risk of developing new products and processes, as they generally involve many organizations across different industries. Such an alliance would seem to be particularly viable for organizations with low risk strategies, seeking to contain costs. In technology-intensive industries the necessary R&D skills and facilities may be lacking to undertake R&D internally. This is especially so for small to medium organizations. A recent, local Queensland initiative at the Mount Gravatt College of Technical and Further Education provides the opportunity for such organizations to take advantage of an alliance with a centre of research. A new A$l-4 million computer design and modelling facility provides software and hardware services to local manufacturers in the product development process, allowing for the modelling of prototypes without the need for extensive tooling. 4.2.3. Keiretsus and Chaebols The formation of keiretsus in Japan was initially a response to a scarcity of resources in certain areas. Keiretsus sought to direct scarce resources into what were considered to be areas of opportunity, and also attempted to reduce risk through diversification and government backing [29]. A keiretsu usually involves a combination of 25-50 different industrial organizations formed around a large trading organization or bank. A chaebol involves a similar arrangement around either a bank or a holding organization which is generally dominated by a founding family. The Japanese keiretsus and South Korean chaebols are the eastern equivalents of western consortia. Korean chaebols also developed out of a desire to direct scarce resources into what were seen as rapidly growing industries [29]. Lei & Slocum [29] suggest several benefits accruing from such alliances. These include: rapid response to changes in the market; long term focus; economies of scale; creation of a technological critical mass; faster learning, due to the fact

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The role of skzJtegic

that members compete in many different industries; the competences gained in one indust~ can be shared across other industries; and horizontal integration and technical coordination with suppliers gives members a new competitive advantage.

Licensing ventures can be considered as the least sophisticated form of strategic alliance in which companies do not take equity positions in one another [29]. For example, in the manufacturing industry such an alliance may represent a purchase of technology by one partner in return for market entry into a new market. One might ask, though, why would an organization consider licensing its technology to another organization, especially one which may be a potential or existing competitor? A possible explanation is that the partner who developed the technology may lack the capacity to produce and/& distribute it on a large scale. This was the case with Sun Microsystems, which formed a strategic alliance with NV Philips. Under this alliance Sun Microsystems licensed its microprocessor designs to NV Philips, as Philips had a greater capacity to produce and distribute the chips. Somewhat similar in concept to licensing, franchising generally involves the exchange of a total business system in return for royalty fees or some other form of profit sharing. Licensing and franchise agreements enable organizations to move into markets quickly, without the need for large direct investments. Such agreements with foreign distributors provide a successful way for organizations to gain quick access to international markets. Licensing is also one way of gaining access to new technologies that can have a significant impact on an industry without the associated R&D costs. This approach also enables an organization to avoid the costs of obsolescence associated with both plant and product. 4.2.5. Transnational strategic alliances These are simply strategic alliances that span national boundaries. That is, they involve two or more organizations in two or more countries. For

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example, in the People’s Republic of China most transnational corporations form strategic alliances with Chinese enterprises or the Chinese government 1301. Transnational strategic alliances could involve any of the four specific types of alliance identified above. The formation of strategic alliances with organizations in foreign markets may provide access to cheaper labour and capital needed for the production process. The development of alliances with companies within lesser developed nations (which currently represent approximately 88% of the world population) can enable organ~ations to take advantage of low labour and natural resource costs. It has been suggested that “any rice paddy in the world can be transformed in less than a year to a state-of-the-art automated manufactu~ng facility operated by $2-an-hour labour” [26]. They also provide a way for organ~ations to extend their markets without overdrawing on their management and financial resources. Consistent with the strategy of cost containment is that of increasing efficiency and building economies of scale. For small to medium sized organizations this may be possible only in conjunction with a foreign strategic alliance partner. 4.2.6. Shared value-adding ventures Such a venture involves an activity which adds value, usually to an already existing product or line of business. Both partners share jointly in the value-adding activity. For example, IBM and Siemens came together in such a venture for the production of computer chips to be marketed in Europe and North America. Other examples include Philips-Sony for the joint product developcompact discs, and ment of audiovisual Olivetti-Canon to develop copiers and image processors. 4.2.7.

Gove~~~eff~~ndust~/researc~ a~/ia~ces

centre

Strategic alliances involving the three sectors of government, industry and research centres can also facilitate the development and diffusion of new technologies. The relevance of much of

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Australian R&D to industry could be improved through greater exchange of information. This in turn would facilitate the transfer and commercialization of technology. Attempts to achieve this in the past have been fragmented. Some universities and research institutions have established their own commercializing arms in order to facilitate the process. For example, in Queensland, Uni-Quest and QSearch have operated as the commercializing arms of the University of Queensland and Queensland University of Technology respectively. CSIRO also has its own commercializing arm in Sirotech Ltd, which is responsible for the transfer of technology to industry or other potential users. The new Cooperative Research Centres Programme is a further initiative designed in part to facilitate linkages and develop alliances among the three sectors of government, industry and research centres. This programme is an initiative of the Australian government (through the Department of the Prime Minister and Cabinet, Office of the Chief Scientist). The major objective of this scheme is to establish up to fifty research centres over the next five years. These centres will enable research activities to be concentrated in one location to achieve higher levels of research and development. Researchers from a number of organizations will be brought together in these centres. Their charter is also to facilitate networking, enhance the integration of research and industry, and improve research education and training. Greater application of technology advancements in industry is expected to flow from this initiative by involving the users of research in centre activities. The primary focus of research will be on the natural sciences and engineering. Other examples in Australia of alliances involving foreign companies, research institutions, government bodies and Australian companies formed to support R&D activities are included in the Appendix. The importance of industry/research links in Australia, and the benefits derived from the clustering of high-technology firms in close proximity to high-quality research centres, cannot be

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ignored [31]. The latter has been seen to provide valuable sources of information on scientific and industrial developments and a source of highly qualified human resources. The fo~ation of the Technolo~ Quadrangle in Queensland was an initiative aimed at coordinating and concentrating research in the areas of information and communication technologies, biotechnology, natural resource development, space engineering, population and health services, material science, mining and geological sciences. This quadrangle originally involved the four universities of Bond University, University of Queensland, Queensland University of Technology and Griffith University. Its first major activity was the establishment of Unilink, a communication link between the four universities, which was coordinated by the Centre for Information Technology and Communications (CITEC). A further success for the quadrangle was the attraction of Digital Equipment Corporation to establish its R&D activities at the Bond University Research Park. The development of alliances between companies, and between companies and research institutions, should be a key part of their strategy towards the advancement of technology at both a national and an international level [32].

5.

Coercive

pressure

Coercive pressure from external forces will usually manifest itself through government imposition of tariffs, barriers, and conditions of entry into foreign markets. International linkages can provide a way of circumventing trade regulations and barriers [33]. Some markets require technology sharing as a condition of entry. For example, the Australian government operates a programme called Partnerships for Development as a major element of its Information Industries Strategy. This programme encourages transnational companies to develop Australian activities as part of their global R&D programmes by forming partnerships with Australian organizations. The transnational organiza-

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tions are then exempt from the requirements of the Australian Civil Offsets Programme. As an example, one transnational member of the programme, Microsoft, has, as a major part of its commitment to the programme, a collaborative agreement between itself and Macquarie University. The focus of this alliance is to improve Australian software development, create new software products and provide access to international markets when a product is developed. In countries such as Russia, where the government makes it exceedingly difficult for both foreigners and local people to start up new businesses, the formation of a strategic alliance with a local organization provides one way of getting to know a region and its culture, and, more specifically, ways to get around the obstacles to doing business there.

6.

Costs

In considering the viability of a strategic alliance as a mechanism for achieving strategic objectives, the key DM will also need to give careful attention to the potential costs and risks involved. These must be weighed against what is sought from the strategic alliance. A question which appears to have been largely unaddressed in the literature in this regard is how a key DM weighs up the costs against what is hoped to be gained from the alliance. The following discussion identifies the nature of the potential costs and risks involved. A number of costs and risks are associated with strategic alliances. From these, three major problem areas can be identified. The first area deals with the potential influence of one strategic partner over the other in relation to the determination of major goals and policies, and control over spending. The second area relates to the time and resources involved in actually coordinating the activities of the partners in the alliance. Finally, the third area refers to potential losses to competitive position. These factors are presented in Table 1 and discussed in further detail as follows.

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TABLE

. . . .

1.

Classdicatmn

wth

strategic

requrred

for coordtnatton

.

Difficult to manage Slow, complex decision

Loss

of compentwe advantage

.

Become complacent Create a competitor Provide easy and cheap access to own technologies Misuse of trademarks Loss of quality control

. . . .

6.1.

alliances

Lose autonomy Lose flexibility Reduce strategic alternatives Relegation to an inferior positlon

Ttme and effort

.

of costs associated

makmg

Loss of autonomy

A major cost is the potential loss of autonomy [34]. Partners must ask themselves whether their own objectives and independence will suffer under the alliance. The resource dependency theory also highlights this cost, which arises from a significant resource dependence by one partner on the other, such that the decision-making autonomy is reduced with increased inter-organizational dependence [21, 351. The commitment to joint decision making can also constrain unilateral and arbitrary decision making [21]. Such a situation can also reduce the alternatives available to the weaker partner in relation to its strategic decision making. The weaker partner is likely to suffer loss of flexibility in terms of its ability to use its resources in alternative ventures [33]. This situation has been seen to occur often in both joint ventures and transnational alliances [29]. Within the latter, the domestic partner, if in cooperation with a large foreign multinational, often does not learn enough to gain independence but becomes merely the distributor. Consortia provide an example of the risk of loss of autonomy. In particular, it is not uncommon that some member organizations may find themselves relegated to an inferior position if their own industry is in a weak or declining stage. It has

253

been argued that the most successful R&D efforts are local and involve an independent research organization or university [36]. 6.2.

Costs of coordination

Strategic alliances themselves can both be difficult to manage and involve slow, complex decisionmaking processes, due to the participation of two or more parties. The need for coordination and reconciliation of goals between the partners can become both tedious and time consuming. Simply maintaining the relationship requires resources for coordination, for example transportation and communications, and time. The complexity of the situation also increases if the partners differ in any of the following areas: culture, size, ideology, and strategic purpose. Management and coordination problems arising from any of these differences can undermine the potential and/or stability of the alliance [37]. 6.3.

Loss of competitive

position

Reliance on another organization for skills and assets central to one’s own competitive advantage can create the risk of losing one’s competitive advantage because the partners to the alliance often reduce their own efforts at upgrading [36]. That is, when organizations form an alliance with a competitor, a sense of security is created, which may be due to two factors. The first is the sense of having eliminated a competitor (the strategic alliance partner), while the second is the sense of having created a stronger force (the partnership) with which to deter other competitors. This sense of security can then lead to a tendency towards mediocrity, or a belief that continuing innovation is no longer necessary. Organizations in linkages with rivals will thus fail to innovate and will become caught up in problems of coordination 1361. The failure of the new alliance to respond to changing market conditions and demands through continuing upgrading and innovation can provide an opportunity for other, less complacent competitors to take a leading edge.

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A further concern is that the formation of a strategic alliance may also creure a competitor and result in the giving up of profits. This can occur by giving the partner access to one’s own information, technology, distribution channels, markets etc. Thus one partner may be able to profit at the expense of the other. Such a situation will obviously threaten the stability of the alliance. For example, with both licensing and joint venture arrangements, organizations run the risk of giving potential competitors easy and relatively cheap access to their new technologies. This may result in their being outpaced by their new partner in the future. Such a situation is especially dangerous when the technology is an integral part of the organization’s core business. Two examples suffice to highlight this. The first is that of RCA during the 1960s. This organization licensed its colour television technology to a number of Japanese organizations which later outpaced RCA in related new technologies. The second example is that of General Electric (GE) which entered into a joint venture arrangement with Samsung to produce microwave ovens. The outcome is that Samsung now competes with GE in its full line of household appliances 1291. The objective of forming a strategic alliance with a rival in order to reduce the level of competition, especially local competition, can also lead to problems. Porter argues strongly for the value of a high level of local competition between rivals. He suggests that the most competitive industries in Europe were those with a high level of local competition, creating the pressure to advance [38], for example, German cars and chemicals, Swiss pharmaceuticals, Swedish heavy trucks and Italian clothing. The same is true of Japan, where success is not due to cartels and collaboration but to the intense com~tition within industries; e.g. Japan has nine car manufacturers, fifteen TV manufacturers and ten facsimile producers [38]. Under franchise arrangements, the franchiser runs the risk of franchisees misusing trademarks and failing to maintain quality control. This can result in the franchise name gaining a bad

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The role of strategic alliances

reputation. Such a situation is more likely if the franchise is service related and requires a lot of training and a high level of managerial skill. Similarly, for other types of agreement, there can be effects on prestige, identity and strategic position [20, 391.

on R&D activities in Australia; export goods or services amounting to 50% of its imports into Australia annually; and, by year 7, average across all exports 70% of local value-added content.

References 1 R. Costello,

7.

Conclusion

In the future we can expect an increase in the number of strategic alliances as global pressures force organizations to share resources and work together. The existing evidence of, strategic alliances in the high-technology industry is considerable as organizations seek to keep up with the ever-increasing pace of technological change. Strategic alliances can provide a wide range of new possibilities and opportunities for the development of high technology in the global marketplace. They are, however, not a new phenomenon; rather, organizations are becoming more aware of their potential in a demanding and rapidly changing economic environment. One outcome of the increase in strategic alliances will be the undermining of nationalistic economic and security policies, leading to an increasing global economy [26]. The decision to form a strategic alliance, however, is not a simple one and careful consideration must be given to weighing up the costs and benefits with what is hoped to be achieved from it. Time, patience and thoroughness will be required.

Notes ’ Examples of such companies include ANCA, Laser Lab, Morand and TED [2]. * The term key decision maker (DM) is used to refer to the senior executive in an organization who has been granted responsibility and authority to make decisions in relation to the area of strategic direction. 3 From the Concise Oxford Dictionary. 4 Under this programme a transnational organization is required to: spend 5% of its local turnover annually

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Science policy and business.

Council Bulletin,

Business

58 (1989) 16-25.

2 D. Forman, The new heroes who make and export. Business Review Weekfy (October 1992) 42-48.

3 N.C. Fussell, Australia must adapt to changing demands of world trade. Q-Bizz, 2(2) (Spring 1990) 5-6. 4 M.N. Sharif, Technology

techno-economic

and economics. Basis for policy analysis. Science and Public

Policy, 15(4) (1988) 217-229. 5 Small Business Development, Better Business Guide.

Australian Government Publishing Service, Canberra, i990. 6 National Science and Technology Analysis Group (NSTAG), Science and Technology in the Budget: A Review of Government Support. Canberra, October 1986. Jr., Determinants of inter7 J.R. Schermerhorn, organizational cooperation. Academy of Management Journal, 18(4) (1975) 846856. Operationalizing 8 D.C. Hambrick,

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9 H. Mintzberg, Patterns in strategy formation. Management Science, 9 (May 1978) 934-948. 10 R.E. Miles and C.C. Snow, Organizational Strategy, Structure and Process. McGraw-Hill, New York,

1978. 11 K. Lewin, Group decision and social change. In: G.E. Swanson, T.M. Newcomb and E.L. Hartley (eds), Readings in Social Psychology. Rinehart and Winston, New York, 1952, pp. 459-473. 12 M.E. Porter, Competitive Strategy: Techniques for Analyzing

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New York, 1980. 13 G. Hamel, Y. Doz and C. Prahalad, Collaborate with your competitors and win. Harvard Business Review (March-April 1989) 133-139. 14 K. Ohmae, The global logic of strategic alliances. Harvard Business Review (March-April 1989) 143-154. 15 R. Johnston and P.R. Lawrence, Beyond vertical

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integration-the

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Harvard Business Review (July-August 1988) 94-101. 16 J.D. Thompson, Organizations in Action. McGraw-

Hill, New York, 1967. 17 G. Devlin and M. Bleackley, Strategic alliancesguidelines for success. Long Range Planning, 21(5) (1988) 18-23.

18 M. Aiken and J. Hage, Organizational interdependence and intra-organizational structure. American Sociological Review, 33 (1968) 912-930.

19 W. Evan, Toward a theory of inter-organizational relations. Management Science, 11 (1965) 217-230. 20 S. Levine and P.E. White, Exchange as a conceptual framework for the study of interorganizational relationships. Administrative Science Quarterly, 5 (1961) 583-601.

21 J.D. Thompson and W.J. McEwen, Organizational goals and environment: goal-setting as an interaction process. American Sociological Review, 23 (1958) 23-31.

cal Change and Spatial Impacts, 21-24 August 1985. CSIRO.

Science policy and business. Business Council Bulletin, 58 (1989) 16-25. 33 K.R. Harrigan, Strategic Flexibility: A Management Guide for Changing Times. D.C. Heath, Lexington, 32 R. Costello,

MA, 1985. 34 J. Pfeffer and G. Salancik,

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Harper, New York, 1978. 35 R.L. Warren, The interorganizational field as a focus of investigation. Administrative Science Quarterly, 12 (1967) 39H19.

36 M.E. Porter, New global strategies for competitive advantage. Planning Review (May-June 1990) 4-14. 37 K.R. Harrigan, Strategic alliances and partner asymmetries. Management International Review (Germany) (Special Issue), 28 (1988) 53-72. 38 M.E. Porter, Europe’s companies after 1992. The Economist,

22 B. Black and H. Kase, Interagency co-operation in rehabilitation and mental health. Social Service Review, 57 (1963) 26-32. 23 M. Lambkin and G. Day, Evolutionary processes in competitive markets: beyond the product life cycle.

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39 H. Gueztkow, Relations among organizations. In: R. Bowers (ed.), Studies on Behaviour in Organizations. University of Georgia Press, Athens, GA, 1966, pp. 13-44.

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24 P.J. Buckley and M. Casson, A theory of cooperation in international business. Management International Review, 28 (Special Issue) (1988) 19-38. 25 M. Selwyn, Making marriages of convenience. Asian Business, 27 (1991) 26-29.

26 B. Merrifield, Strategic alliances in the global marketplace. Research-Technology Management, 32(l) (1989) 15-20.

27 J. Baranson, Transnational strategic alliances: why, what, where and how. Multinational Business, 2 (1990) 54-61. 28 P. Lorange and J. Roos, Why some strategic alliances succeed and others fail. Journal of Business Strategy (January-February 1991) 25-30. 29 D. Lei and J.W. Slocum, Global strategic alliances: payoffs and pitfalls. Organizational Dynamics, 19 (1991) 44-62. 30 M.B. Teagarden and M.A. Von Glinow, Sinoforeign strategic alliance types and related operating characteristics. International Studies of Management and Organization, 20(1, 2) (1990) 99-108.

31 P.W. Newton and K. O’Connor, The location of high-technology industry: an Australian perspective. Proceedings of Workshop-Innovation,

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Technologi-

APPENDIX:

Recent technology

alliances

MIM Holdings has allocated A$1 M over a five year period to the Mining and Metallurgical Engineering Department of Queensland University for research into specific areas in the minerals industry. Murdoch University’s Institute for Science and Technology Policy is looking for outside support for research into microwave radar to promote the industry and to provide for the needs of Australian and ASEAN civil and defence markets over the next few years. The Australian government has awarded a $140 M Radar Sensor Procurement Program to the French aerospace company Thomson-CSF and Leighton Contractors Pty Ltd, for the replacement of all air traffic control radar sensors at airports around Australia.

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Vol. 14 No. 4

The role of strategic

Airbus Industry (French) has signed a Pre-Qualified Offsets Supplier Status (PQOSS) agreement with the federal government. This involves collaboration and technology transfer with local industry, and could mean up to $300 M of work for local industry. NEC was the first Japanese computer sign a Partnership for Development with the government.

company to agreement

CSIRO and Boeing have entered into an international research agreement under which $11 M worth of projects will be carried out. It will help Boeing meet its offset commitments. CSIRO and ICI have joined in a three-year project worth $0.5 M to develop the world’s first genetically engineered viral insecticide. CSIRO,

OTC

Technovation

and the University

Vol. 14 No. 4

of Newcastle’s

alliances

commercial company Tunra have developed antenna tracking controller, to be marketed Adelaide-based company Codan Pty Ltd.

an by

Cathy S. Howarth, BMHS (Ed)- (Queenslandj, MBA (Ottawa). is currently a Semor Lecturer in Management and Organizations at MelDeakin Umversity, She Australia. bourne, teaches primarily in the areas of organizatlonal behaviour. organizational design, human resource management and strategic management. Prior to pursuing an academic career she worked in the following areas: management consultancy. public sector, tr Cathv’s current research strategic alliances, entrepreneurship and innovation, power in organizations, and orgamzatlonal structures. She is currently co-authoring a book on strategic alliances.

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