The main aim of the research paper is to ascertain the extent of participation, the types of alliances used and the problems faced by these firms which are basically into developing and manufacturing telecommunications, transport, information, lethal platforms, and components for the operation of these platforms for military organisations. Exposure to decreasing defence budgets of nations, global competition, and open market practices, has made the environment of the defence equipment manufacturing firms, which have constraints for technology transfers and use of popular corporate strategies due to the very nature of their business, unpredictable, uncertain, and a threat to their survival. In such a situation, strategic alliances are a good option for these firms. But given the political and commercial constraints, the best practices of the alliance formation may not be relevant to these firms. This paper looks at how these firms are practising strategic alliances.
The Defence Industry Environment
It appears that the issues facing the defence industry and the new emerging constraints have attracted a lot of attention of contemporary authors, but the responses to these issues and their effects are somewhat still unclear to the industry. Since the end of the cold war in early 1990s, the trend in Europe is that of declining defence expenditures, shutting down of many such defence equipment manufactures and the reduction of employees in this sector. Two other important factors that influence the sector are the decreasing control of the state in arms manufacturing and the break up of the military industrial complexes. Also, due to reduction in Russian threat, the customer base has reduced, but competition has increased. This has been highlighted by the example of the Aerospace industry, wherein only four models exist, but every contract is vital for the company’s survival. This condition has led to increasing alliances even between competitors in an attempt to prevent or reverse poor performance. The authors have adopted Cosentino’s seven symptoms of change in the defence industry as more costly programs, cuts in military expenses, growing Asian markets, reducing government support, demand for return on investment, new competition, and demanding customer requirements. The globalisation of arms market and the diminishing national control over arms supplies has resulted in competitive disadvantages for firms which have persisted with purely national procurement and manufacturing strategies. The authors have summarised the reasons for the changes in the defence industry as declining budgets of governments, demand for greater accountability in defence procurement, growing demand for latest and best technology, declining market size, and increasing competition from global players. The authors observe that the conditions, which existed previously, have resulted in conditioning of employees of these firs to aberrant business practices. But this disadvantage is negated by their common cultural backgrounds.
Types of Strategic Alliances
Strategic alliances are agreements between firms to cooperate with each other in some way for varying lengths of time. What differs is the degree of co-operation, structure and duration. Strategic alliances have gained popularity across many industries and the literature available or the studies conducted are not industry specific, but mostly cross-sectoral. There are many ways of classifying strategic alliances. They can be classified into four categories based on the nature of allying firms as pro-competitive (inter industry), non-competitive (intra industry, non competing), competitive (direct competitors), and pre-competitive (unrelated industries). They can also be classified as horizontal (between competitors), vertical (between members of supply chain), or diagonal (between firms in different industries). In any case, what is common to all these alliances is transfer of knowledge, which may or may not be equal in both directions for the allying firms. Strategic alliances include collaboration, joint ventures, consortia, licensing agreements, offset agreements and essentially any form of co-operation or exchange of resources between two or more partners.
Drivers of Strategic Alliance Formation
The drivers of strategic alliance formation include global economic downturns, new economic opportunities, the need for survival within the firm and the collective fear of risk inherent in business. Also, the process of selection of the right type of alliance is a mix of selecting suitable ones and eliminating unsuitable ones. The process is also dependent on the dominant drivers during the alliance formation and the tailoring of the type of alliance is done to suit the needs and goals of the allying partners. The primary driver of strategic alliances seems to be globalisation, or the advent of global competition, due to which such alliances are observed commonly across various industries like automobile, pharmaceutical, aerospace, etc on a global level. What needs to be examined is whether firms are adopting this as defensive business strategy for survival, or proactive strategy to reduce competition.
Motives of Strategic Alliance Formation
The motives pertain more to specific sectors or firms within the industry as opposed to drivers, which create an overall need for change within the industry. It is necessary for the motives to fit into a strategic plan. Examples of motives are acquisition of technology, or resources, or attaining economies of scale, which seems relevant to the defence industry. If they do not fit into the strategic plan, they may pose hurdles in further strategic moves.
Strategic Alliance Life Cycles
The authors have adopted the concept from Doz and Hamel, who have developed a process for alliance formation which is classified under four headings as operational scope, configurations and contributions, alliance governance, and alliance interface. These are not unambiguous and the whole process can be looked at as a map of alliance formation, with different kinds of alliances having different starting and ending points.
Learning, Trust and Culture
Various researches have proved that a lot depends on the inter-relation of these three parameters in a strategic alliance. During the period of alliance, the firm that learns more from its partner, stand to gain more from the alliance. Hammel refers to this as internalisation of partner’s skills. Such internalisation is primary motive of many firms in entering alliances and on termination of the alliance, they are still successful in their motive. The most attractive resources to internalise are leading edge technology and management techniques. For such alliances, the structure, culture, and communication patterns are not as important as the learning process. The authors touch upon the issue of trust by mentioning that the best practices of interaction between senior executives of partnering firms, shared values, effective communication, and a multi-disciplinary effort between the firms is responsible for good trust building. Culture and its compatibility, especially in pooling of resources for research and development work is also an important aspect of strategic alliance, relevant to defence manufacturing industry.
Defence Manufacturing and Strategic Alliances
Not surprisingly, there is a tremendous growth in the strategic alliances in defence manufacturing industry as a result of the factors mentioned above. However, one factor that goes against this phenomenon is the sovereignty of operations as a result of the state determining supply and demand of this industry, which is a strategic economical d military asset. The advantages of such alliances have been adopted from Draper as acquisition of technological assets, lowering of unit costs, and vertical development of supply chain. The objectives of the nation to maintain its proprietary technology are contrast with the objectives of joint ventures, which are to gain technological resources for the second tier countries, and to gain access to cheaper manufacturing and sourcing for the first tier countries, besides the joint objectives of larger market access and amortisation of defence research. An option to full blown cross border mergers is collaboration which has the advantage of sharing of non-recurring costs, interoperability, economies of scale, lesser chances of scraping of projects amongst others. But the chief deterrent is the issue of sharing workload in proportion to investment made, leading to excessive capacities, complex industrial arrangements, and impedance to free technology transfer.
Alliance Life Cycles Within the Defence Manufacturing Industry
Due to the decline of number of firms in this industry, the firms lay emphasis on reputation and experience in strategic alliances as well as the technology to choose their partners from the limited pool. In the first phase of alliance formation, the opportunities from the business venture are checked for fit with the firm’s strategic plan. In the second stage, a cost benefit analysis is done. The further life cycle is very well demonstrated with a diagram, which highlights stages like Partner selection, Agreement on goals, Development of relationships, Binding initial agreement, and Ensuring equality. Also, this industry is characterised by typically high research costs and the risks were formerly covered by the large national defence budgets. But with reducing budgets and the demand for cutting edge semiconductor technology, this risk has now blown beyond proportion for firms to handle it alone. An unsuccessful bid may result in a financial hiccup whereas an uncompetitive product would result in shutting down of a large part of production units.
Results of Empirical Investigations
The formation of strategic alliances varies between the sectors within the industry due to varying corporate culture. The levels of cross border cooperation vary between sectors, with electronics leading the pack and ordnance and small arms lagging far behind. The structure of alliance depends on the size of the partners, with the SMEs preferring licensing agreements and the larger players preferring collaboration, for commercial and governance reasons. On the other hand, joint ventures allow the marriage of complementary competencies and provide an opportunity to gain contracts from the partners’ markets. In partnerships involving partners of unequal sizes, friction is caused due to different perceptions of life cycle and time. The development of the structure in the defence manufacturing industry depends very much on the position of the firms within the industry’s hierarchy and its ability to select the best structure to fit into its overall group structure. Yet this is very much customer driven and depends on the governments, which are the major customers. If the goal of the alliance is knowledge transfer, there is a lot of communication at lower levels in the student teacher mould, and this diminishes with time. Also, it depends on the sizes of the firms. The nationalities of firms induce superiority or inferiority complexes in partners based on history. Relationship development is important and is demonstrated with the help of the example that though UK and US have compatible cultures and one would expect successful strategic alliances between them, that is not the case and there arise many misunderstandings between partnering firms. This also demonstrates the importance of cultural compatibilities and the need for the senior executives of the partnering firms to make conscious efforts to internationalise and remove cultural interpretative difficulties. Legality of the agreement is given particular emphasis because of the high cost of cutting edge technology and the sensitive nature of the industry. The agreements ensure that the resources promised by the partners are released, that the potential demands are not inflated and the technology is not sold to a rival government to be used against the firm’s nation. Firms use this initial period of agreement formation to try to identify any hidden agendas on the part of the prospective partner by analysing what the partner is looking for and why. Issues of equality of control and risk are sensitive to handle and have importance only in equity based alliances. In a working alliance, communication gaps are a major problem, owing to difference in language, culture and management styles. The degree of communication required depends on the type of alliance, being maximum in joint ventures and least in licensing. The older executives tend to neglect the market dynamics, owing to an orientation towards protected industry as it used to be. Also, it can be hypothesised that the degree to which an alliance is formally reviewed depends on the size of the firm. Contrary to the literature, which says that alliances in this industry are formed for operational reasons like gaining economies of scale and share risk, the research finds that the alliances are formed for strategic reasons like maintaining market share and market power.
The authors say that contrary to the belief, globalisation is not the primary driver for alliances in the defence manufacturing industry, which is consolidating. They point out that the high technology, which is tools for many industries for operations, is the product for this industry and its expenses and relationships are well documented. To gain the advantages of controlling the partnership and the prevention of the partner’s internalisation of its competencies, the firms in this industry prefer collaboration, which are also easier to manage, and can be structured to accommodate legal changes to initial agreements, like workshare proportions, sales estimates, etc, including change of partners. The nature of the strategic alliances also depends on the nationality of firms, with the US firms showing significant orientation for collaborations and licensing agreements. Also, the US firms indulge in a lot of alliances and most of them are to gain technology which they have not already developed. But they later impose restrictions such that market development for their partners, using the US technology becomes impossible. UK, France and Germany are next in the number of alliances, with UK- France partnerships being primarily in electronics and Germany’s involvement in land vehicles, aircrafts, etc. The authors also point out that the effect of commercial practices on corporate culture needs to be investigated. The authors end with a note on convergence of mutual perceptions. The give examples of The US firms perceiving European short tem partners as less beneficial in the long run and UK experiencing competition from other European countries to partner with US. The authors are quick to point out that the future of European markets is difficult to predict and that a lot would depend on Government support and influence.
The drivers for change in the defence manufacturing industry have rightly been identified. In today’s world, no country has the economy to sustain long term war, except the US. Owing to this, the market for the industry in question is definitely reducing. The other observation is about government control over this industry. With the primary intention of building efficiencies in this industry and to incorporate accountability, the states are making conscious efforts to privatise the industry. As a result, the support which the industry had to cover financial risks is fast disappearing. Also, the sensitivity of the industry, makes it difficult for the players to operate in the open economy environment and to indulge in technology transfer. All these key issues have definitely made strategic alliances a key strategic policy. This also the reason why the industry is consolidating. Also, the issue of costs of research and development is another prime driver. But what needs a deeper thought is the way the companies exercise this strategic tool. For this analysis, the concept of life cycle of the alliance is very useful. But a detail study of some of the failures need to be done in the context of the lifecycle. What kind of partnership can go wrong at what stage with what kind of mistakes needs to be found out. The strategies for success, in this case lie in searching the reasons for failure. Also, the prices of most of these equipments is prohibitively high. So the strategic alliances for firms belonging to nations, which do not have the potential to buy the equipment, is a sensitive issue. It need to be found that what kind of companies look for partners in such countries. Are sourcing considerations the only ones for such alliances, and the benefits derived for the smaller partner need to be looked at. The other major consideration is the influence of European Council on such partnerships. Also, the organisations like NATO should have some effect on them. What needs to be found out is the stage of the lifecycle in which these factors gain importance. Also, the extent to which these factors influence is not known. Another important part is that the customers drive the decision about the kind of alliance that the partners enter into. But does this not conflict with the aim of the organisations? This a question to which answers can be provided only by scrutinising case studies of attempts to form strategic alliances. The one other important issue is the legality of the agreements. The issues involved are sensitive and the partners try to make these as watertight as possible. The effect of this on the trust and information sharing between partners is of prime importance. The transfer of knowledge and it use later on is dependent on these agreements, and the US seems to be taking complete advantage of thefact for maximum benefit. And the final point that comes to the mind is the effect of such alliances on the relations between the nations of the partnering firms. In some cases, the relations between the nations have an effect on the strength and structure of partnerships. In some cases, it is the opposite, and the relations between the nations may be based on the strengths of the partnerships.
To conclude, I would like to say that the best practices for the success of strategic alliances are based on the structure of industries. It is pretty obvious that when it comes to defence industry, the structure is significantly different from the other industries. So, the best practices in other industries may not be viable in the case of the defence industry. But the recommendable practices need to be identified to help the industry benefit from the experience of the other firms in theprocess of such strategic alliances.
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