GLOBAL BUSINESS MANAGEMENT

UNIT III

WTO and LPG policies - Its Implications on India - Regional Trade Blocks - Integration between
countries - levels of integration and impact of integration - International strategic alliances - nature
- benefits - pitfalls - scope - how to make alliances work.

LPG STANDS FOR LIBERALIZATION, PRIVATIZATION, AND

GLOBALIZATION.
India under its New Economic Policy approached International Banks for development of the country.
These agencies asked Indian Government to open its restrictions on trade done by the private sector and
between India and other countries.
Liberalization
The basic aim of liberalization was to put an end to those restrictions which became hindrances in the
development and growth of the nation. The loosening of government control in a country and
when private sector companies‟ start working without or with fewer restrictions and government allow
private players to expand for the growth of the country depicts liberalization in a country.
Objectives of Liberalization Policy
 To increase competition amongst domestic industries.
 To encourage foreign trade with other countries with regulated imports and exports.
 Enhancement of foreign capital and technology.
 To expand global market frontiers of the country.
 To diminish the debt burden of the country.
IMPACT OF LIBERALIZATION
1. Privatization
2. Globalization
Privatization
This is the second of the three policies of LPG. It is the increment of the dominating role of private sector
companies and the reduced role of public sector companies. In other words, it is the reduction
of ownership of the management of a government-owned enterprise. Government companies can be
converted into private companies in two ways:
 By disinvestment
 By withdrawal of governmental ownership and management of public sector companies.
Forms of Privatization
1. Denationalization or Strategic Sale: When 100% government ownership of productive assets is
transferred to the private sector players, the act is called denationalization.
2. Partial Privatization or Partial Sale: When private sector owns more than 50% but less than
100% ownership in a previously construed public sector company by transfer of shares, it is called
partial privatization. Here the private sector owns the majority of shares. Consequently, the private
sector possesses substantial control in the functioning and autonomy of the company.
3. Deficit Privatization or Token Privatization: When the government disinvests its share capital to
an extent of 5-10% to meet the deficit in the budget is termed as deficit privatization.
4. Crisis of 1991 and Indian Economic Reforms
Objectives of Privatization
 Improve the financial situation of the government.
 Reduce the workload of public sector companies.
 Raise funds from disinvestment.
 Increase the efficiency of government organizations.
 Provide better and improved goods and services to the consumer.
 Create healthy competition in the society.
 Encouraging foreign direct investments (FDI) in India.
Globalization
Globalisation means to integrate the economy of one country with the global economy. During
Globalization the main focus is on foreign trade & private and institutional foreign investment. It is the
last policy of LPG to be implemented.
Globalization as a term has a very complex phenomenon. The main aim is to transform the world towards
independence and integration of the world as a whole by setting various strategic policies. Globalization is
attempting to create a borderless world, wherein the need of one country can be driven from across the
globe and turning into one large economy.
Outsourcing as an Outcome of Globalization
The most important outcome of the globalization process is Outsourcing. During the outsourcing model, a
company of a country hires a professional from some other country to get their work done, which was
earlier conducted by their internal resource of their own country.
The best part of outsourcing is that the work can be done at a lower rate and from the superior source
available anywhere in the world. Services like legal advice, marketing, technical support, etc.
As Information Technology has grown in the past few years, the outsourcing of contractual work from one
country to another has grown tremendously. As a mode of communication has widened their reach, all
economic activities have expanded globally.
Various Business Process Outsourcing companies or call centres, which have their model of a voice-based
business process have developed in India. Activities like accounting and book-keeping services, clinical
advice, banking services or even education are been outsourced from developed countries to India.
Benefits of Globalization
The most important advantage of outsourcing is that big multi-national corporate or even small enterprises
can avail good services at a cheaper rate as compared to their country‟s standards. The skill set in India is
considered most dynamic and effective across the world. Indian professionals are best at their work. The
low wage rate and specialized personnel with high skills have made India the most favourable destination
for global outsourcing in the later stage of reformation.
EVOLUTION OF WTO
GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

The General Agreement on Tariffs and Trade (GATT), the predecessor of WTO was

born in 1948 as a result of the international desire to liberalize trade.

Objectives of GATT
1. To raise standards of living
2. To ensure full employment and large and steadily growing volume of real income
3. Effective demand
4. To develop the full use of the resources of the world
5. To expand production and international trade
Principles of GATT

1. Non-Discrimination

2. Prohibition of quantitative restrictions – limit restrictions on trade to less rigid tariffs

3. Consultation to resolve disagreements

GATT AND THE BIRTH OF WTO

1947: The birth of GATT on 30th October 1947. The GATT was signed by 23 nations

1948: Entry into force on 1st January 1948, GATT entered into force

1949: Second round at Annecy, April to August, exchanged some 5000 Tariff concessions

1950: Third round at Torquay, September 1950 to April 1951, exchanged some 8700 Tariff
Concessions, Tariff reduction of about 25%
1956: Fourth round at Geneva completed in May. Produced same $25 billion worth of Tariff reduction
1960: The Dillion round – divided into 2 phase.

Phase 1: Concerned with negotiations with EEC member status Phase 2: General
round of Tariff negotiations
1961: The short term arrangement, covering cotton textiles, was agreed as an exception to the GATT
rules
1964: The Kennedy round meeting at ministerial level

1965: A new chapter – early 1960‟s marked the accession to the General Agreement of many newly
independent developing countries
1973: The Tokyo round – 99 countries participated, covering both Tariff and non-tariff matters

1974: The Agreement regarding international trade in textiles, known as MFA, Multi Fiber Agreements

entered on 1st January

1985: The Uruguay round September 20, envisaged to last for 4years and continued for some seven and
a half years

1993: Successful conclusion of the Uruguay round on 15th December 1993 in Geneva, Switzerland

1994: The final act of the Uruguay round signed by minister on 15th April 1994, in Marrakesh,
Morocco.The Uruguay round resulted in transformation of multilateral trading system under GATT
into the permanent world trade organisation for resolving trade
dispute multilateral

1995: World Trade Organisation enters into force on January 1 st 1995. On May 31st 1995, WTO
General Council approved the Head Quarters agreement, including the decision to locate the WTO in
Geneva
1996: Basic telecommunication negotiations in may 1996. Maritime transport services egotiation in

July 1996. First WTO ministerial conference held in Singapore 9 thto 13th December- Established 3
working groups 1) Trade and Investment 2) Transparency in government procurement 3) Trade and
competition policy, plus a mandate to conduct a study in trade facilitation
1997: Successful conclusion of negotiations on basic telecommunication services. Forty governments
agreed to cut customs duty on information technology products, successful conclusion of negotiation on

financial services on 12th December 1997

DIFFERENCE BETWEEN GATT AND WTO
GATT WTO
 It is a set of rules and multilateral It is a permanent institution
agreement It is established to serve its own purpose
 It was designed with an attempt to establish Its activities are full and permanent
International Trade Organization Its rules are applicable to trade in
 It was applied on a provisional basis merchandise and trade in service and trade
in related aspects of intellectual property
 Its rules are applicable to trade in Its agreements are almost multilateral

merchandising Its dispute settlement system was fast and

automatic
 GATT was originally a multilateral
instrument, but p lurilateral agreements
were added at a later stage
 Its disputes settlement systems was not

 faster and automatic

WORLD TRADE ORGANISATION

 The WTO was established on Jan 1, 1995

 The WTO is the embodiment of the Urguary Round results and the successor to GATT

 76 Government became members of the WTO on its first day

 As of September 1999, there are 134 members of the WTO and 34 countries have a

 bserver status

 There is a waiting list of 31 members

 They account for more than 90 percent of the world trade

 The WTO is based in Geneva, Switzerland

Functions of WTO
WTO administers 28 agreements contained in the final act and number of plurilateral agreements
and government procurement through various councils and committees

 WTO overseas the implementation of significant tariff cuts and also reduction of non-tariff
measures

 WTO examines regularly the trade regimes of individual member countries. It act as a watchdog
of international trade

 WTO provides dispute settlement courts

 WTO act as a management consultant for world trade

 Technical co-operations and training divisions are established in WTO‟s secretariat in order to
help developing countries

 Members countries can use WTO as a forum for continuous negotiation of exchange of trade
barriers

 WTO co-operates with other international institutions like IMF, IBRD, ILO

 WTO overseas the national trade policies of member government

WTO AND ANTI-DUMPING MEASURES

Dumping means selling the product at below the on going market price and or at the price below the
cost of production.
Haberter defines dumping as “the sale of goods abroad at a price which is lower than the selling price of
the same goods at the same time in the same circumstances at home, taking account of difference in
transport costs”
Types of Dumping

1. Intermittent Dumping – production is more than the demand for the product in the home
country. In such cases the producers sells the remaining stock in foreign countries at low prices
without reducing the prices in domestic countries

2. Persistent Dumping – The monopolistic sells the remaining production in foreign countries at a
low price continuously
3. Predatory Dumping – The monopolistic sells the product in foreign market at a low price
initially with a view to drive away the competitors and increase the price after the competitors
leave the market.
Objectives of Dumping

 To enter the foreign market by eliminating competitors

 To sell surplus production

 To develop WORLD TRADE ORGANISATION (WTO)
India and WTO
The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade and
Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation to
administer all multilateral trade agreements by providing equal opportunities to all countries in the
international market for trading purposes. WTO is expected to establish a rule-based trading regime in
which nations cannot place arbitrary restrictions on trade. In addition, its purpose is also to enlarge
production and trade of services, to ensure optimum utilisation of world resources and to protect the
environment. The WTO agreements cover trade in goods as well as services to facilitate international
trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers and providing
greater market access to all member countries.
As an important member of WTO, India has been in the forefront of framing fair global rules, regulations
and safeguards and advocating the interests of the developing world. India has kept its commitments
towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and
reducing tariff rates
Some scholars question the usefulness of India being a member of the WTO as a major volume of
international trade occurs among the developed nations. They also say that while developed countries file
complaints over agricultural subsidies given in their countries, developing countries feel cheated as they
are forced to open their markets for developed countries but are not allowed access to the markets of
developed countries.
As an important member of WTO, India has been in the forefront of framing fair global rules, regulations
and safeguards and advocating the interests of the developing world. India has kept its commitments
towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and
reducing tariff rates.
Growth of GDP and Major sectors (in %)
Sector 1980-91 1992-20012002-20072007-20122012-20132013-20142014-2015

Agriculture 3.6 3.3 2.3 3.2 1.5 4.2 -0.2*

Industry 7.1 6.5 9.4 7.4 3.6 5 7.0*
Services 6.7 8.2 7.8 10 8.1 7.8 9.8*
Total 5.6 6.4 7.8 8.2 5.6 6.6 7.4

Some scholars question the usefulness of India being a member of the WTO as a major volume of
international trade occurs among the developed nations. They also say that while developed countries file
complaints over agricultural subsidies given in their countries, developing countries feel cheated as they
are forced to open their markets for developed countries but are not allowed access to the markets of
developed countries.

REGIONAL TRADING BLOCS:

A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental
organization, where regional barriers to trade, (tariffs & non-tariff barriers) are reduced or
eliminated among the participating states.
A regional trading bloc is a group of countries within a geographical region that protect themselves from
imports from non-members. A trade bloc is basically a free-trade zone, or near-free-trade zone, formed by
one or more tax, tariff, & trade agreements between two or more countries. The Trading blocs are a form
of economic integration, & increasingly shape the pattern of the world trade. Regional trade blocks
promote the trade within the block & defend its members against global competition. Defense against the
global competition is obtained through established tariffs on goods produced by member states, import
quotas, government subsidies, onerous bureaucratic import processes, & technical & other non-tariff
barriers. Since trade is not an isolated activity, member states within regional blocks also cooperate
in economic, political, security, climatic, & other issues affecting the region. Members of successful
trade blocs usually share four common traits: similar levels of per capita GNP, geographic proximity,
similar or compatible trading regimes, & political commitment to the regional organization. Advocates of
the worldwide free trade are usually opposed to the trading blocs, which they argue & encourage regional
trade as opposed to the global free trade.
Types of Regional Trading Blocs
Trade blocs can be stand-alone agreements between several states (such as the North American Free Trade
Agreement (NAFTA) or part of a regional organization (such as the European Union). Depending on the
level of economic integration, the trade blocs can fall into the 6 different categories, such as preferential
trading areas, the free trade areas, the customs unions, the common markets, the economic union & the
monetary unions, & the political union.
Preferential Trade Area: Preferential Trade Areas (PTAs) exist when countries within a geographical
region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the
area. This is often the first small step towards the creation of a trading bloc.
Free trade area: Free Trade Areas (FTAs) are created when 2 or more countries in a region agree to
reduce or eliminate barriers to trade on all the goods coming from other members. This is the most basic
form of economic cooperation. Member countries remove all barriers to trade among themselves but are
free to independently determine trade policies with nonmember nations. An example is the North
American Free Trade Agreement (NAFTA).
Customs union: This type provides for economic cooperation as in a free-trade zone. Barriers to trade are
removed between member countries. The primary difference from the free trade area is that members
agree to treat trade with non-member countries in a similar manner. The customs union involves the
removal of the tariff barriers among the members, as well as the acceptance of the common (unified)
external tariff in contradiction to the non-members. This means that the members may negotiate as a
single bloc with third parties, such as with other trading blocs, or with the WTO. The Gulf Cooperation
Council (GCC)[1] Cooperation Council for the Arab States of the Gulf is an example.
Common market: A „common market‟ is the first significant step towards full economic integration, &
occurs when member countries trade freely in all economic resources – not just tangible goods. This
means that all barriers to trade in goods, services, capital, & labor are removed. In addition, as well as
removing tariffs, non-tariff barriers are also reduced & eliminated. For a common market to be successful
there must also be a significant level of harmonization of macroeconomic policies, & common rules
regarding monopoly power & other anti-competitive practices. There may also be common policies
affecting key industries, such as the Common Agricultural Policy[2] (CAP) & Common Fisheries Policy
(CFP) of the European Single Market (ESM). This type allows for the creation of economically integrated
markets between member countries. Trade barriers are removed, as are any restrictions on the movement
of labor & capital between member countries. Like customs unions, there is a common trade policy for
trade with nonmember nations. The primary advantage to the workers is that they no longer need the visa
or work permit to work in another member country of the common market. An example is the Common
Market for Eastern & Southern Africa (COMESA).
Economic & monetary union: This type is created when countries enter into an economic agreement to
remove barriers to trade & adopt common economic policies. An example is the European Union (EU).
Monetary union is a type of trade bloc which is composed of an economic union (common market &
customs union) with a monetary union. Monetary union is established through a currency-related trade
pact. An intermediate step between pure monetary union & a complete economic integration is the fiscal
union. Economic & Monetary Union of the European Union with the Euro for the Euro-zone members is
the example of monetary union.
Political union: In order to be successful the more advanced integration steps are typically accompanied
by the unification of economic policies (tax, social welfare benefits, etc.), reductions in the rest of the
trade barriers, introduction of the supranational bodies, & gradual moves towards the final stage, a
“political union”. Political union is a final stage in the economic integration with more formal political
links among the countries. A limited form of the political union may exist when two or more countries
share common decision-making bodies & have common policies. It is the unification of previously
separate nations. The unification of West & East Germany in 1990 is an example of the total political
union.
ADVANTAGES OF REGIONAL TRADING BLOCS
1. Free trade within the bloc: Knowing that they have free access to each other‟s markets, members are
encouraged to specialize. This means that, at a regional level, there is the wider application of the
principle of the comparative advantage.
2. Market access & trade creation: Easier access to each other‟s markets means that trade between
members is likely to increase. Trade creation exists when free trade enables high-cost domestic producers
to be replaced by lower-cost, & more efficient imports. Because low-cost imports lead to lower-priced
imports, there is a „consumption effect‟, with increased demand resulting from lower prices. These
agreements create more opportunities for countries to trade with one another by removing the barriers to
trade & investment. Due to a reduction or removal of tariffs, cooperation results in cheaper prices for
consumers in the bloc countries.
3. Economies of scale: Producers can benefit from the application of scale economies, which will lead to
lower costs & lower prices for consumers.
4. Jobs: Jobs may be created as the consequence of increased trade among the member economies. By
removing the restrictions on the labor movement, economic integration can help expand job opportunities.
5. Protection: Firms inside the bloc are protected from cheaper imports from outside, such as the
protection of the EU shoe industry from cheap imports from China & Vietnam.
6. Consensus & cooperation: Member nations may find it easier to agree with smaller numbers of
countries. Regional understanding & similarities may also facilitate closer political cooperation.
DISADVANTAGES OF REGIONAL TRADING BLOCS
1. Loss of benefits: The benefits of free trade among the countries in different blocs is lost.
2. Distortion of trade: Trading blocs are likely to distort world trade, & reduce the beneficial effects of
specialization & the exploitation of comparative advantage.
3. Inefficiencies & trade diversion: Inefficient producers within the bloc can be protected from more
efficient ones outside the bloc. For example, inefficient European farmers could be protected from low-
cost imports from developing countries.
4. Trade diversion arises when the trade is diverted away from efficient producers who are based outside
the trading area. The flip side to trade creation is trade diversion. The member countries may trade more
with each other than with nonmember nations. This might mean increased trade with less efficient or more
expensive producer because it is in a member country. In this sense, weaker companies can be protected
inadvertently with the bloc agreement acting as a trade barrier. In essence, the regional agreements have
formed new trade barriers with countries outside of the trading block.
5. Retaliation: The development of 1 regional trading bloc is likely to stimulate the development of
others. This can lead to the trade disputes, such as those between the EU & NAFTA, including the recent
Boeing (US)/ Airbus (EU) dispute. The EU & US have a long history of the trade disputes, together with
the dispute over US steel tariffs, which were declared illegal by the WTO in 2005.
6. Employment shifts & reductions: Countries may move production to cheaper labor markets in
member countries. Similarly, workers may move to gain access to better jobs & wages. Sudden shifts in
employment can tax the resources of the member countries.
TRADE INTEGRATION
Tradebetween a number of countries with the aim of securing the benefits of international specialization a
nd international trade.
There are four main forms of trade integration, ranging from a loose association of trade partners to a fully
integrated group of nation states:
1. A free trade area,
Where members eliminate trade barriers between themselves but each continues to operate its
own particular barriers against non members.
2. A customsunion, where members eliminate trade barriers between themselves and establish
uniform barriers against nonmembers, in particular a common external tariff.
3. A commonmarket, that is, a customs union that also provides for the free movement of labour
and capital across national boundaries.
4. An economic union, that is, a common market that also provides for the unification of members'
general objectives in respect of economic growth, etc, and the harmonization of monetary, fiscal and other
policies.
Examples of „free trade areas‟ are the
 EUROPEAN FREE TRADE ASSOCIATION (EFTA),
 THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA),
 THE ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN),
 ASIA PACIFIC ECONOMIC COOPERATION (APEC),
 LATIN AMERICAN FREE TRADE ASSOCIATION (LAFTA).
Examples
 A splinter-group from LAFTA, MERCOSUR, is an example of a „customs union‟;
 the ANDEAN PACT, another LAFTA splintergroup, is an example of a „common market‟;
 while the EUROPEAN
UNION is rapidly transforming itself from a common market into a full-
blown economic union' (see ECONOMIC AND MONETARY UNION).
 Partial trade integration as exemplified by the above arrangements are beneficial insofar as th
ey create additional trade between members, but they also involve discrimination against non
members, which may reduce trade with these countries.
 Thus, many economists view the promotion of free trade on a multilateral basis through the a
uspices of the World trade Organisation as generally preferable to limited regional alliances

INTERNATIONAL STRATEGIC ALLIANCES

A strategic alliance is a business arrangement whereby two or more firms choose to cooperate for
their mutual benefit.

 Strategic alliance is an important mode of doing international business. An alliance is an inter-firm

collaboration over a given economic space and time for the attainment of the participating
companies‟ goals.
 Strategic alliances are partnerships in which two or more companies work together to achieve
objectives that are mutually beneficial while parties remaining independent. Companies may share
resources, information, capabilities and risks to achieve this.

International Strategic Alliance is the combination of two or more firm’s agreed upon future
objective, which achieved by together practices of the MNCs.
Characteristics of international strategic alliances
According to the YOSHINO AND KANGAN there are three necessary and sufficient characteristics :-

 Two or more firms unit to pursue a set of agreed upon goals but remain independent subsequent to
the formation of the Alliance.
 The partner firm share the benefits of the Alliance and control over the performances and the one
that makes them so difficult to manage.
 The partner firms contribute on a continuing basis in one or more key strategic areas, for example ,
technology, product, and so forth.

Scope of international strategic alliances

The scope of cooperation among firms may vary significantly.

Comprehensive alliances arise when the participating firms agree to perform together multiple stages of
the process by which goods or services are brought to the market: R&D, design, production, marketing,
and distribution. Because of the broad scope of such alliances, the firms must establish procedures for
meshing such functional areas as finance, production, and marketing for the alliance to succeed. Yet
integrating the different operating procedures of the parents over a broad range of functional activities is
difficult in the absence of a formal organizational structure. As a result, most comprehensive alliances are
organized as joint ventures.
Functionally based alliances Strategic alliances may also be narrow in scope, involving only a single
functional area of the business. In such cases, integrating the needs of the parent firms is less complex.
Thus, functionally based alliances often do not take the form of a joint venture, although joint ventures
are still the morecommon form of organization. Types of functional alliances include production alliances,
marketing alliances, financial alliances, and R&D alliances

Examples of International strategic alliances

Apple
According to "An Overview of Strategic Alliances," Apple has partnered with Sony, Motorola, Phillips,
and AT&T in the past. Apple has also partnered more recently with Clearwell in order to jointly develop
Clearwell's E-Discovery platform for the Apple iPad. E-Discovery is used by enterprises and legal entities
to obtain documents and information in a "legally defensible" manner,..
Starbucks
According to Rebecca Larson, assistant Professor of Business at Liberty University, Starbucks partnered
with Barnes and Nobles bookstores in 1993 to provide inhouse coffee shops, benefiting both retailers. In
1996, Starbucks partnered with Pepsico to bottle, distribute and sell the popular coffee-based drink,
Frappacino. A Starbucks-United Airlines alliance has resulted in their coffee being offered on flights with
the Starbucks logo on the cups and a partnership with Kraft foods has resulted in Starbucks coffee being
marketed in grocery stores. In 2006, Starbucks formed an alliance with the NAACP, the sole purpose of
which was to advance the company's and the NAACP's goals of social and economic justice.

Types of strategic alliances

1. 1.Functional alliance:
A functional alliance integrates certain basic “functions”between the two parties by pooling efforts to
attain specific objectives.
There are four types of functional alliances. These are –
Production alliances: Firms each manufacturer products or provide services in shared facility.
Marketing alliances: Firms share marketing services or expertise.
Financial alliances: Partners of firms share equally in contributing financial resources to the project or
one partner may provides the majority financing while the other provides expertise.
R & D alliances: Partners agree to undertake joint research to develop new product or services

2. Joint Ventures

Joint Ventures are agreements between parties or firms for a particular purpose or venture. Their
formation may be very informal, such as a handshake and an agreement for two firms to share a
booth at a trade show. Other arrangements can be extremely complex, such as theconsortium of
major U.S. electronics firms to develop new microchips,”says Charles P. Lickson in A Legal Guide
for Small Business.

3. Outsourcing

Outsourcing and globalization of manufacturing allows companies to reduce costs, benefits

consumers with lower cost goods and services, causes economic expansion that reduces
unemployment, and increases productivity and job creation.
 4. Affiliate Marketing
Affiliate marketing has exploded over recent years, with the most successful online retailers using it to
great effect. The nature of the internet means that referrals can be accurately tracked right through the
order process.

5. Technology Licensing
This is a contractual arrangement whereby trade marks, intellectual property and trade secrets are
licensed to an external firm. It‟s used mainly as a low cost way to enter foreign markets.

Steps in the formation of a Strategic Alliance

Forming a Strategic Alliance is a process which usually implies some major steps that are mentioned
below:

1. Strategy Development: In this stage the possibility of a Strategic Alliance is examined with respect
to objectives, major issues, resource strategies for production, technology and people. It is
necessary that objectives of the company and of the alliance are compatible. Here, the international
rules and regulations of business should be kept in mind.
2. Partner Assessment: In this phase potential partners for the Strategic Alliance are analyzed, in
order to find an appropriate company to cooperate with. A company must know the weaknesses and
strengths and the motivation for joining an alliance of another company. Besides that appropriate
criteria for the partner selection are defined and strategies are developed how to accommodate the
partner´s management style. The legal and cultural environment of Potential partner‟s needs to be
assessed.
3. Contract Negotiations: After having selected the right partner for a Strategic Alliance the contract
negotiations start. At first all parties involved discuss if their goals and objectives are realistic and
feasible. Dedicated negotiation teams are formed which determine each partner´s role in the alliance
like contribution and reward, penalties and retaining companies´ interests.e
4. Operation :In this phase in the life of a Strategic Alliance, an internal structure occurs under
which its functions develop. While operating it, the alliance becomes an own new organization
itself with members from the origin companies with the aim of meeting all previously set
objectives and improving the overall performance of the alliance which requires effective
structures and processes and a good, strong and reliable leadership. Budges have to be linked, as
 well as resources which are strategically most important and the performance of the alliance has to
be measured and assessed.
4. End/ Development : In this stage the strategic alliances among partner organizations comes to an
end .There are several ways how a Strategic Alliance can come to an end:
5. Natural End: When the objectives, the Strategic Alliance was founded for have been achieved, and
no further cooperation is necessary or beneficial for the involved enterprises the alliance can come
to a natural end. An example for such a natural end is the alliance between Dassault and British
Aerospace which was founded to manufacture the Jaguar fighter aircraft. After the end of the
program no further jets were ordered so the involved companies ended their cooperation.
6. Extension: After the end of the actual reason for the alliance, the cooperating enterprises decide to
extend the cooperation for following generations of a respective product or expand the allianceto
new products or projects. Renault for example worked together with Matra on three successive
generations of their space minivan, whereas Airbus expanded its cooperation to include a complete
family of airplanes.
7. Premature Termination: In this case the Strategic Alliance is ended before the actual objectives of
its existence have been achieved. In1987 Matra-Harris and Intel broke up their Cimatel partnership
beforeone of the planned VLSI chips was manufactured.
8. Exclusive Continuation: If one partner decides to get out of the alliance before the common goals
have been achieved, the other partner can decide to continue the project on its own. This happened
when Saab decided to continue with the designing of a commuteraircraft (SF-340), after the partner
Fairchild had to cancel the alliancebecause of internal problems. After Fairchild left the project it
wasnamed Saab 340.
9. Takeover of Partner: Strong companies sometimes have the opportunity to take over smaller
partners. If one firm acquires another the strategic alliance comes to an end. After almost ten years
of cooperation in the field of mainframe computers a British computer manufacturer, named ICL,
was taken over by Fujitsu in 1990.

Key Issues in Implementation Of Strategic Alliances

1. Partner Selection: The success of any cooperative undertaking depends on choosing the
appropriate partner(s). Strategic alliances are more likely to be successful if the skills and resources
of the partners are complementary—each must bring to thealliance some organizational strength the
 other lacks. A firm contemplating a strategic alliance should consider at least four factors in
selecting a partner (or partners):
 compatibility,
 the nature of the potential partner's products or services,
 the relative safeness of the alliance, and
 the learning potential of the alliance..

2. Joint Management : A joint venture almost always takes the form of a corporation, usually
incorporated in the country in which it will be doing business. The corporate form enables the
partners to arrange a beneficial tax structure, implement novel ownership arrangements, and better
protect their other assets. It allows the joint venture to create its own identity apart from those of the
partners. Further issues and questions are associated with how a strategic alliance will be managed.
Three standard approaches are often used to jointly manage a strategic alliance : shared
management agreements, assigned arrangements, and delegated arrangements.
Approaches to Joint Management

 Shared Management Agreements:Under a shared management agreement, each partner fully

andactively participates in managing the alliance. The partners run the alliance, and their managers
regularly pass on instructions and details to the alliance's managers. The alliance managers have
limited authority of their own and must defer most decisions to managers from the parent firms.
This type of agreement requires a high level of coordination and near-perfect agreement between
the participating partners. Thus, it is the most difficult to maintain and the one most prone to
conflict among the partners.
 Assigned Arrangements :Under an assigned arrangement, one partner assumes
primaryresponsibility for the operations of the strategic alliance.
 Delegated Arrangements :Under a delegated arrangement, which is reserved for joint
ventures,the partners agree not to get involved in ongoing operations and so delegate management
control to the executives of the joint venture itself. These executives may be specifically hired to
run the new operation or may be transferred from the participating firms. They are responsible for
the day-to-day decision making and management of the venture and for implementing its strategy.
 Thus, they have real power and the autonomy to make significant decisions themselves and are
much less accountable to managers in the partner firms

 Other success factors

1. The success of any alliance very much depends on how effective the capabilities of the involved
enterprises are matched and weather the full commitment of each partner to the alliance is achieved.
Some key factors that have to be considered to be able to manage a successful alliance include:
2. Understanding: The cooperating companies need a clear understanding ofthe potential partner´s
resources and interests and this understanding should be the base of set the alliance goals.
3. No time pressure: During negotiations time pressure must not have an influence on the outcome of the
process. Managers need time to establish a working relationship with each other, develop a time plan,
set milestones, and design communication channels.
4. Limited alliances: Some incompatibilities between enterprises might not be avoidable, so the number of
alliances should be limited to a necessary amount, which enables the companies to achieve their goals.
5. Good connection: Negotiations need experienced managers. The managers from large firms need to be
connected very well so they have the possibility to integrate different departments and business areas
over internal borders, and they need legitimating and support from the top management.
6. Creation of trust and goodwill: The best basis for a profit-yielding cooperation between enterprises is
the creation of trust and goodwill, because it increases tolerance, intensity and openness of
communication and makes the common work easier. Further it leads to equal and satisfied partners.
7. Intense Relationship: Intensifying the partnership leads to the fact that partners get to know each other
better, each other's interests and operating styles and increases trust.

Risks Associated With International Alliances

1. Using and operating strategic alliances does not only bring chances and benefits. There are also risks
and limitations that have to be taken in consideration. Failures are often attributed to unrealistic
expectations, lack of commitment, cultural differences, strategic goal divergence and insufficient trust.
Some of the risks are listed below:[

 Partner experiences financial difficulties

 Hidden costs
  Inefficient management

 Activities outside scope of original agreement

 Information leakage

 Loss of competencies

 Loss of operational control

 Partner lock-in

 Partner product or service failure

 Partner unable or unwilling to supply key resources

 Partner's quality performance

 Partner takes advantage of its position

Advantages
1. Shared risk: The partnerships allow the involved companies to offset their market exposure. Strategic
Alliances probably work best if the companies´ portfolio complement each other, but do not directly
compete.
2. Shared knowledge: Sharing skills (distribution, marketing, management), brands, market knowledge,
technical know-how and assets leads to synergistic effects, which result in pool of resources which is
more valuable than the separated single resources in the particular company.
3. Opportunities for growth: Using the partner´s distribution networks in combination with taking
advantage of a good brand image can help a company to grow faster than it would on its own. The
organic growth of a company might often not be sufficient enough to satisfy the strategic requirements
of a company, that means that a firm often cannot grow and extend itself fast enough without expertise
and support from partners
4. Access to new technology, intellectual property rights,
5. Create critical mass, common standards, new businesses,
6. Diversification, Improve agility, R&D, material flow, speed to market,
7. Reduce administrative costs, R&D costs, cycle time
8. Allowing each partner to concentrate on their competitive advantage.
  Learning from partners and developing competencies that may be more widely exploited elsewhere.
 To reduce political risk while entering into a new Market

Disadvantages of strategic alliances include:

1. Sharing of profit: In a Strategic Alliance the partners must share resourcesand profits and often skills
and know-how. This can be critical if businesssecrets are included in this knowledge. Agreements can
protect these secretsbut the partner might not be willing to stick to such an agreement.
2. Creating a Competitor: The partner in a strategic alliance might become acompetitor one day, if it
profited enough from the alliance and grew enough toend the partnership and then is able to operate on
its own in the same marketsegment.
3. Opportunity Costs: Focusing and committing is necessary to run a StrategicAlliance successfully but
might discourage from taking other opportunities,which might be benefitial as well.
4. Uneven Alliances: When the decision powers are distributed very uneven, the weaker partner might be
forced to act according to the will of the more powerful partners even if it is actually not willing to do
so.
5. Foreign confiscation: If a company is engaged in a foreign country, there isthe risk that the government
of this country might try to seize this local business so that the domestic company can have all the
market on its own.
6. Risk of losing control over proprietary information, especially regardingcomplex transactions requiring
extensive coordination and intensiveinformation sharing.
7. Coordination difficulties due to informal cooperation settings and highly costly dispute resolution. Ex