The pros and cons of international business alliances   Leave a comment

THE ACADEMY OF BUSINESS STRATEGY

MARKETING EASTERN EUROPE BLOG
The pros and cons of international business alliances

AUTHOR
Yevgeniy Pilipchenko (CBS) MBA BA

Warren J. Keegan in his “Global Marketing Management” has dedicated one of the chapters to cooperative strategies and Global Strategic Partnerships (GSP). Interestingly, though, that the chapter starts with two quotes. Initially Mr. Keegan refers to Kenichi Ohmae – “In a complex, uncertain world filled with dangerous opponents, it is best not to go it alone”. However, that is followed by Michael Porter’s “Alliances as a broad-based strategy will only ensure a company’s mediocrity, not its international leadership”.

The antithesis of the two is, probably, an accurate reflection of the real world situation. Sure, a question of whether to cooperate with local partner while entering the market is not an easy one. It seems that it is much easier to penetrate the market with the help of a local partner. Definitely, under such an agreement New Entrant can overcome some barriers to enter like local distribution channels and relationships with local authorities and suppliers.

A further upside of an alliance is that a New Entrant will get not only a partner but also somebody who has knowledge of the local culture and is aware of the local practices that are clearly beneficial. Finally, some of the business-related tasks can be at least partially delegated to a local partner at a no or significantly low cost. However, the relationships between New Entrant and a local partner may put a former under a serious potential operational risk and should be discussed in more detail.

According to Warren Keegan, a partnership has some disadvantages. Not only each party must will to sacrifice some control, but the whole venture may lead to strengthening a competitor (W. Keegan, 336). In many cases a local partner in emergent markets seeks to get access to a global company’s resources and technology. It will be a good illustration if we refer to a recent article in The Economist. Describing British Petroleum (BP) and their local partners in Russia, the Economist clearly states: “BP is betting that Russia needs its expertise”.

Each party should understand that alliance is a long-term relationship. If they are not, Keegan stresses, they are simply supply agreements (W. Keegan, 337). A proper management is one of the key success factors of any GSP. That is why the divisive issues between the partners must be identified in advance. Clear lines of authority must be established and formalised. However, formalisation is not a success of implementation in itself. What managers need to have is a deep understanding of the soft issues of the organisation prior to making costly strategic decisions.

Although according to W. Keegan, some conflict is to be expected even among successful collaborators, in our opinion, the degree of that conflict and hence potential hazard can be significantly lessened, should a new entrant has a deeper knowledge about the potential issues of dealing with the local partners in emergent markets. Recent publications in media highlight the situation which is unfolding around the relationships between the parties in the TNK-BP joint venture.

It seems like BP and its Russian counterpart have a combat on some aspects of their business. Whatever the outcome of the feud, the central idea remains the same, big businesses in emergent markets will undoubtedly attract attention of the influential politicians and serious local players. A company planning to enter the game should prepare thoroughly for a possible battle. The Economist states that BP’s Russian venture offers big rewards and big risks The Economist.

However, The Economist concludes, BP will undoubtedly become embroiled in the legal mess, and that its reputation may suffer The Economist. Further on, The Economist is raising an issue of whether a responsible company should climb into bed with a dodgy one? Well, it is a very difficult chore. We are back to the initial antithesis – should a company go alone into a new market or should it go there with a partner? Definitely, this is a job of a company to decide which way to go.

The right decision (if any) depends on some major considerations. The decision makers will take into account an industry, an individual country, corporate values and social issues. By the same token, the journal raises a major question about the division of responsibility between corporate and political actors. Although authors agree that the energy business does not reward squeamishness, the central idea is stated explicitly – a company’s job is to make money for its shareholders legally The Economist.

Having looked at BP’s adventures in Russia, one may repeat the initial question: is it worth setting GSP? The question is really difficult to answer – BP has done well out of Russia: TNK-BP is a thriving business that contributes an eighth’s of the British giant’s production. BP is betting that Russia needs its expertise; that the Russian state is less likely to sabotage a joint venture in which it has a stake; and that because this is the first deal of its kind, the Russian government needs to make it work. So, BP had to make that GSP, probably, to expand their business.

In modern world the business tends to converge and globalize. The point we want to make is that companies should assess the situation and make their choices thoroughly. From Operational Risk Management’s perspective, BP has probably accepted risk when benefits outweigh the cost. Nevertheless, companies must have effective business continuity plans to respond to potential threats to their operations, people and supply chains. Those threats can be embedded either into specific industry, dominated by “unsavory state firms” or stem from a geopolitical situation in a given emergent market.

We should stress that according to research conducted by Marsh Risk consultancy, only 41% of respondents said that business continuity management had given them a better understanding of their business Marsh Consulting. Many make decisions under the uncertainty. The political risks and local partners can interrupt the operations and even threat to overall business continuity. Only by compiling a massive data of each individual partnership and analyzing those can we answer the question of whether it is worth partnering in one meaning. So far it is a job of each company to assess the situation and to learn from each individual case they come across.

ABOUT THE AUTHOR
Yevgeniy Pilipchenko (CBS) MBA BA is an approved Certified Business Specialist (CBS) with the Academy of Business Strategy and his specialist subject is Marketing Eastern Europe. He has achieved an MBA from NIMBAS Graduate School of Management and has a University degree in Linguistics from the Kiev Dragomanov University. He has been employed as a general Manager and as a Strategy Consultant for various companies and has experience within the FMCG, lotteries education, professional services and printing industries. His clients or employers have included Scientific Games Ukraine and Leeds, RAISIO GROUP, Furshet Chain, Julius Konig OHG, Business Club of Union Economists and the Institute of Foreign Relations. He has geographical working experience in the Ukraine, Russia and Poland and he speaks English, Russian Ukrainian and Polish. His service skills incorporate marketing in Eastern Europe, implementing strategic decisions, management of change and corporate service provision.
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To contact Yevgeniy Pilipchenko (CBS), please contact the The Academy of Business Strategy by forwarding an email, or alternatively please visit Yevgeniy’s CBS Blog.

Posted July 12, 2011 by sharonmelissamoore in Yevgeniy Pilipchenko (CBS)

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