In their paper titled “Alliance Capability, Stock Market Response and Long-Term Alliance Success: The Role of the Alliance Function,” they argue that companies that have experience, and, even more important, have a dedicated alliance function (“with the intent of strategically coordinating alliance activity and capturing [and] disseminating alliance-related knowledge”) achieve greater success with alliances.
For example, companies such as Hewlett-Packard, Eli Lilly and Parke-Davis have appointed a “vice president” or “director” of strategic alliances with his or her own dedicated staff. These units are responsible for spreading alliance-management know-how throughout the organization. Singh and his co-authors found that firms that establish a dedicated alliance function achieve greater stock market gains than companies without such a function, with the firms reporting that 63% of alliances succeed. On the other hand, firms without a dedicated alliance function achieve much lower stock market gains and report a long-term success rate of only 50%.
Emerging Market Challenges
What factors enter into the picture when firms are considering alliances in emerging markets? Wharton management professor Gerald McDermott, who lives in Argentina and has conducted research on the impact of domestic financial and industrial institutions on foreign investment strategies in Latin America and East-Central Europe, says several variables must be taken into account.
First, are both parties to the alliance developing adequate capabilities to make the alliance work, and are they preparing for a more sophisticated relationship going forward? “In general, we’re talking about the problem of asymmetry and control,” McDermott says. “Fights can break out and companies can get into downward spirals. You have to make sure everyone is investing adequately in capabilities.”
|“Studies show that about half of alliance partnerships fail. In Latin America, cross border and cultural factors make it even tougher to succeed.”|
Third, the parties must be prepared for shifts in the leverage that each of them possesses. “We always think of the big guy from the outside having leverage, but that’s not always true, according to McDermott. “In Argentina, for example, you generally don’t have restrictions on foreign ownership like you do in China. Local companies also have political contacts [that they can use to their advantage]. So you have to be aware of the changing bargaining power.”
Companies also need to be mindful that economic and political climates can differ sharply from one country to another, making alliances more likely in some places than in others. This is especially true in Latin America.
Some companies, in Brazil for example, may feel less need for alliances because Brazil enjoys a huge internal market for products and services, and companies there still have good opportunities to achieve growth through domestic sales, according to Martinez.
Mexico, on the other hand, is different. “Mexican groups probably have made more alliances than other Latin American groups, largely because of NAFTA [the North American Free Trade Agreement], and they have searched hard for alliance partners,” Martinez explains. “If you take out Brazil and Mexico, it’s largely an issue of survival for the rest [of Latin America], trying to avoid specific country risk. Argentine companies and others, like those in Peru, are looking for a way to give some solidity to their businesses in a rocky economic environment.”