Monday, August 31, 2009

Strategies Used by Malaysian Companies when enter into an Alliance

By Ahmad Bashawir & Muhammad Subhan
(The article has been published in the journal of business management, Prasetya Mulya Business School, Jakarta - Indonesia)

Introduction

In the last two decades, the world market environment has changed dramatically. Breath taking advances in communication technology, increased world commerce, deregulation, privatization, and lowering of trade barriers have to a great extent integrated individual country markets into one global market. Rapid developments and diffusion of industrial technology have also resulted in a regular stream of new products coming into the market. At the same time, the enormous capital requirements for research and development and increased product sophistication have meant that companies can seldom undertake all operations alone. Irrespective of how large and resourceful a company is, it cannot have a competitive advantage in each and every step of producing and marketing a product for world markets. Consequently, strategic alliances are often the instrument international companies choose to maintain or advance their competitive positions.

The proliferation of strategic alliances has generated much discussion among practitioners and business academicians on the conceptual foundations of alliances (e.g., Doz and Kosonen 2008; Culpan 1993; Ohmae 2008; Sheth and Pravatiyar 1992; Varadarajan and Cunningham 1995), on their performance (e.g., Ainuddin et al. 2007; Chowdhury 1992; Geringer and Frayne 1992) and conditions for their success (e.g., Bleeke and Ernst 1993; Dussauge and Garrette 1999; Lorange and Roos 1991). While recognizing that there are many possible scenarios of strategic partnering, and that there is no single determinant nor simple measure of alliance success, general agreement exists that there are some essential conditions for the successful formation and performance of cooperative alliances. These include compatible objectives, complementarity of strength, mutual commitment, trust and equitable sharing of benefits. Underlying these essential conditions, however, is always the strategic orientation of the company, which determines why alliances are entered into, what resources are committed to them and how partners are selected.

This paper presents an exploratory overview of the strategic orientation and performance of strategic alliances entered into by Malaysian companies in the Asia Pacific including China, Hong Kong, Indonesia, Japan, the Philippines, Singapore, South Korea, Taiwan and Thailand. A strategic alliance is here broadly defined as any corporate linkage form or agreement ranging from but not including, an arm’s length vendor customer relationship to a corporate merger. It includes equity and non equity joint ventures, joint product development, technology swaps, collaborative research programs, licensing, contract manufacturing, information exchange agreements, sharing of complementary assets, and reciprocal distribution, promotion and servicing arrangements (Hamilton et al. 1996).

Research Background and Methodology

The Asia Pacific Region, like the rest of the world, is now in the throes of three major problems gripping the globe, that is, the global financial and economic crisis, the spectre of rising energy and food prices and the danger of imminent infectious pandemics. World leaders, individual countries and organizations such as the Asia-Pacific Economic Cooperation (APEC) are working round the clock to find solutions to the current world crises.

Regardless of those recent three major problems especially the global economic chaos, Asia Pacific has been the most vibrant economic region of the world in the last two decades. With Japan and China as the world’s second and third largest economies and with India rapidly emerging to claim its rightful place, few will deny that the time for Asia has come. Undoubtedly, Asia Pacific particularly Asia will be the powerhouse and economic dynamo of the world’s economy and this has opened up many new market opportunities including Malaysia. Malaysia, as a nation state in the Asian Pacific region is within that category of Asian countries whose GNP collectively amounts to a quarter of global GNP and may climb to half by the middle of the next century.

In 2007, Malaysia’s trade with twenty countries in Asia Pacific were valued at US$850,794.39 million, which was increased almost US$100 billion that of 2005 (MITI 2008). Presently, Asia Pacific accounts for 76.6% of Malaysia’s total trade of about US$1109, and USA, Singapore, Japan, China, South Korea and Taiwan are among Malaysia’s top ten export markets. In addition to merchandise trade, Malaysia’s business activities in Asia Pacific include extensive direct investment and exports of project management, engineering consulting and other industrial services. Most of this is in infrastructure and resource development such as telecommunications, transportation, energy, mining and environmental management (MIDA 2008; Matrade 2008).

In their business pursuits, many Malaysian companies are linking themselves with foreign companies in strategic alliances. This represents part of a global trend; but for several reasons strategic alliances are especially pivotal for Malaysian companies in Asia Pacific.

First, Malaysian companies are late comers in the international arena, and in Asia Pacific in particular. Because of the country’s history and geography, Malaysian companies have traditionally been oriented toward Western Europe and America in their foreign trade and investment; the great majority has had little experience in Asia Pacific. In contrast, the U.S.A., Japan and many Western European countries have had a long history of political ties with Asia Pacific countries. Their companies in Asia Pacific are generally more established and better connected than Malaysian companies. Second, few of Malaysia’s multinational companies are large by world standards. Among the 500 largest corporations (Fortune Global 500) of the world in 2008, only one was a Malaysian company that is Petronas (www.cnn.com, 29 November 2008). This number is much smaller than those of the U.S.A, Japan and most Western European countries which are, in many industry areas, Malaysia’s major competitors in Asia Pacific markets. As foreign marketers in Asia Pacific, Malaysian industrial companies are usually smaller in size and more limited in capability. Third, the Malaysian economy is traditionally resource based, and its industrial competitive advantages are in resource and skill intensive industries. In world markets, a small number of large multinational corporations based in the U.S.A., Japan or Western Europe dominate marketing and control distribution in these industries. In order to successfully compete, Malaysian companies must position themselves in niche markets within the industry, or get themselves into the industry network by linking either directly with these multinationals, or with local Asia Pacific companies that have industry network connections.

There are no official records of corporate linkage agreements between Malaysian and foreign companies. Based upon the records from Business Expectations Survey (BES) conducted for the period of June 2007 to September 2007 conducted by Department of Statistics Malaysia, as well as reports in the business press, slightly more than one thousand Malaysian companies and organizations had business interests in Asia Pacific up to mid of 2007 (MIDA, 2008). Of this number, 433 were industrial companies and the rest were government agencies, bank offices, consultants, legal firms, investment service representatives, business associations and cultural organizations. A survey was conducted on these 433 companies to study the operations of their strategic alliances in Asia Pacific, if any. The survey instrument employed was questionnaire sent to the executive in charge of each company’s Asia Pacific operations. It contained 16 questions covering company background, extent of use of cooperative alliances, alliance objectives, formation and management, experience to date, and the company’s perception and evaluation of the alliance relationship and its success. The questionnaire had been pre-tested in a smaller scale pilot survey. The questions were mostly derived from the wide body of literature on the formation and governance of international business alliances, but some were specifically designed for the targeted Malaysian companies. The companies’ perceptions and opinions on performance and success were measured using seven point Likert scales.

There are many discussions in the literature of the essential organizational and human factors for successful partnering. Those about organizational factors generally focus upon compatible objectives (Lorange and Roos 1991), complementarity of strength and contribution (Hamel and Prahalad 1996; Porter and Fuller 1986), a common set of values (Perlmutter 1997) interdependence, and equitable sharing of benefits. Those about human factors tend to emphasize the importance of commitment (Perlmutter 1997), coordination, harmony and trust (Parkhe 1991).

Despite the abundance of discussions, there has been no developed model for measuring alliance success, and there is little systematic knowledge about what makes alliances succeed (Bleake and Ernst 1991). Because cooperative alliances are seldom simple relationships with a single purpose, and the partners may have different orientations and motives, even what constitutes success is elusive. Measures of alliances success may be objective or subjective, but neither is totally satisfactory (Geringer 1991; Mohr and Spekman 1994). Objective measures include cash flows, sales, income and market share. These yardsticks are tangible and precise, but raise the question of how to determine what proportions of the changes in these measures can be attributed to the alliance. Furthermore, they cannot be applied when a company’s alliance objectives are qualitative in nature, such as acquiring technology or pre-empting competition, or when the alliance is undertaken for amorphous purposes in highly uncertain and risky settings (Anderson 1990). Subjective measures are based upon the respondent’s perceptions of how pleased or satisfied the company is with the alliance. These measures are imprecise; there can be substantial personal bias in both expectations and assessments.

Despite the obvious limitations, only subjective measures were used in the present questionnaire survey. Objective measures were not used because the pilot survey revealed that Malaysian companies generally did not have precise and measurable targets for their strategic alliances with Asia Pacific companies. Moreover, solicitation of information on cash flows, sales, incomes and market shares in the questionnaire would deter these companies from responding. They would either be unwilling or unable to provide the information, and this could lower the rate of response significantly. Hence, no attempt was made to request such information, or to use it for assessing the degree of alliance success. Instead, respondents were simply asked to subjectively rate the success of their alliances along a seven point scale based upon their own perceptions and expectations.

A total of 182 companies (42.0 % of population) responded to the survey. Ten undelivered questionnaires were returned by the post office because the companies had either moved and could not be traced. Of the responses, eighty four replied that they did not have strategic alliances in Asia Pacific even though they had business interests therein. Two companies admitted that they had strategic alliances, but refused to participate in the survey. Ninety six companies filled out the questionnaires, but three were incomplete and had to be discarded. The next two sections are based upon the response of the remaining 93 companies.

In examining the strategic orientation of the responding companies, mean values of items constituting different measures in the questionnaire were used. The items were not rank ordered in the questionnaire by the respondents; they simply assigned values on a seven point scale for each item presented to them. Regarding alliance performance and success, attribute variables included their experience in business alliances and their perceptions of difficulties encountered by the companies in alliance formation, objectives and motives, working relationships with alliance partners, and opinions on alliance benefits and governance. In the analysis, independent attribute variables were factor analysed and correlated with subjective success ratings using ordinary least square multiple regression methods to decompose the partial effects of each of the predictor variables and to eliminate redundancy. The normality of the frequency distribution of the dependent variable, the linearity of the relationship, and homoscedasticity of the residuals were also tested. The data reduction method used was principal axis factoring-varimax rotation. The cut off value used for factor loadings was >.50. The factor analysis was run separately among items used to measure each category. Eigen values greater than one was taken as the cut-off for factor recognition. Factor scores were computed using mean values of the items loading on to the factor.

Factor analysis revealed clear theoretically justifiable groupings of the indicators into a parsimonious structure. The results were checked with principal component analysis using the oblimin rotation methods. No significant difference was revealed in the factor loading patterns when different methods of factor analysis and rotation were used. Nor were any problems detected in the use of ordinary least square regression methods.

Strategic Orientation

The great majority of Malaysian companies’ with strategic alliances in the Asia Pacific are as expected, medium to high tech companies, and are small in terms of employment. Of the ninety three companies, forty two (45.2%) consider themselves as high tech companies, forty six (49.5%) as medium tech, and only five (5.4%) as low tech. Thirty three companies (35.5%) have a work force of less than fifty employees, nineteen (20.4%) have fifty to 100 employees, and the remaining forty one (44.1%) have more than 100 employees. A total of 661 strategic alliance agreements in one form or another have been entered into by these 93 companies with local companies in Asia Pacific. Their strategic orientation can be reflected by (i) the functional activities covered by the agreements, (ii) partners’ contributions and responsibilities, and (iii) their objectives and motives.

(i) Functional Activities: In the cooperative alliances between Malaysian and Asia Pacific companies, the sales and marketing function activities (distribution, sales promotion, market information exchange) covered by the agreements far outnumber the production and product development function activities (product servicing and maintenance, contract manufacturing, licensing with technology transfer, joint product development, collaborative research and development). There are 39 multi purpose joint ventures, and 14 other activities such as legal representation, consulting, engineering services, shipping arrangements and use of office facilities. Of the 863 functional activities specified, 618 or more than two-thirds (69.3%) are in sales and marketing functions and 245 (28.4%) are in production and product development functions (Table 1). This spread of functional activities covered by the agreements indicates that most Malaysian companies have a marketing orientation in their strategic alliances with Asia Pacific companies.


Table 1
Strategic Alliance Functional Activities
_______________________________________________________________________________
Functional Activity Number
_______________________________________________________________________________

Distribution 252
Sales Promotion 234
Market information exchange 132
Product servicing and maintenance 91
Contract manufacturing 52
Licensing with technology transfer 43
Multi purpose joint ventures 39
Joint product development 32
Collaborative research and development of technology 27
Others 14
Total 916
______________________________________________________________________________
Notes: 1. Number of strategic alliance agreements = 661
2. One alliance agreement may cover more than one functional activity
Others include legal representation, consulting, engineering services, shipping arrangements and use of office facilities.




(ii) Partners’ Contributions and Responsibilities: With regard to partners’ contributions and their responsibilities in the strategic alliances, Table 2 reveals that even though local distribution/promotion is the most frequently mentioned responsibility for both parties, Asia Pacific partner companies shoulder this responsibility much more frequently than the Malaysian partner companies. The second most common contribution/responsibility mentioned is employee training or Malaysian companies and local management for their Asia Pacific partners. On the whole, Malaysian companies shoulder two to three times more contributions/responsibilities related to production and product development, whereas their Asia Pacific partners’ contributions/responsibilities center more often on local management and marketing. This suggests that Malaysia-Asia Pacific strategic alliances often represent vertically integrated ‘X’ alliances in which the partners have different strengths, and not horizontally integrated ‘Y’ alliances intended to achieve economies of scale (Porter and Fuller 1986).

Also, it is noteworthy that among the 661 strategic alliance agreements, only forty three (6.5%) involve equity contribution by Malaysian companies and sixty seven (10.1%) by local companies. In other words, the great majority of Malaysia-Asia Pacific strategic alliances are contractual in nature. Since the 39 multi purpose joint venture alliances would most likely require equity contributions for their establishment, this means only four (43-39) of the remaining 622 (661-39) alliances have Malaysian equity injection. This may also reflect of the fact that the Malaysian industrial companies, being small in size, are unwilling or unable to commit capital investment in these cooperative alliances.



Table 2
Partners’ Contributions and Responsibilities
Malaysian Companies Partner Companies
In Asia Pacific
________________________________________________________________________

Local distribution/promotion 163 259
Employee training 135 60
Product/process research and development 95 44
Raw material and component part supplies 92 50
Local management 86 128
Production technology 72 24
Foreign distribution/promotion 58 29
Production equipment 47 33
Equity capital 43 67
Others 22 2
________________________________________________________________________________ Note: Total number of strategic alliances = 661


(iii) Objectives and Motives: In essence, strategic alliances allow partner companies to compensate for their competitive disadvantages and overcome their capability limitations. Individual alliance partners, however, may have different objectives and motives. These can be oriented toward resources (e.g., materials, components, capital, management skill), marketing (e.g., distribution networks, competitive uncertainty, government restrictions, cultural differences), or production (e.g., technology, synergy, flexibility, integration).

The Malaysian companies’ objectives and motives for entering into cooperative alliances in Asia Pacific are given in Table 3. In long term objectives, growth and increased profits are rated as significantly more important than income stability, risk reduction and survival which are more defensive in nature. This suggests that while entering into cooperative alliances may be pivotal for Malaysian industrial companies competing in Asia pacific markets, the companies are in Asia Pacific in the first place because of the region’s opportunities for growth and profits, and not because their viability is being threatened at home in Malaysia.

Among the motives, to gain access to foreign market is far ahead of all the others, and overcome trade barriers is also rated highly among the 17 motives listed. Again, this serves as evidence to a marketing orientation. Also, the globalization related motives (increase company’s credibility and image as a global company, facilitate the company’s initial international expansion, integrate/rationalize the company’s global operations) are all being rated as more important than those related to resource acquisition (make use of foreign labour, gain access to foreign capital, gain access/control to foreign material supplies, gain access to foreign management, gain access to foreign technology). However, it seems that even when some Malaysian companies have a globalization orientation, their cooperative alliances in Asia Pacific are not integrated with Malaysian operations to form an integral part of their international operations.


[Table 3] Objectives and Motives

(Discontinued)

Note: Please send me an e-mail for full paper at: subhanaceh@yahoo.com

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