Strategic Alliances - Part 2: Inter-Firm Cooperative Arrangements

Many firms are facing external pressures to become more innovative and efficient in order to remain competitive in domestic and foreign markets. These pressures include falling trade barriers; innovations which affect the types of products and services produced, the production process, or the organization of firms and institutions; and, consumer demands for better product and service quality, highly customized products and services, and greater product and service variety. These external pressures make up the forces of economic globalization and trade liberalization which are the dominant trends in commerce in the 1990s, especially in the North American, South-East Asian and European markets. The response of some firms to these pressures is to form strategic alliances.

The arrangements in which firms may become involved, in response to these pressures, may take numerous forms and have varying impacts in the market. In this section, there are descriptions of the more common forms of alliances and explanations of how their structure and behaviour may give rise to inquiry under the Act. This Bulletin does not offer a definition of strategic alliances, but instead relies upon several of the more common features of alliances. The lack of a definition does not affect the approach the Bureau will take in examining the competitive effects of a particular alliance.

Many strategic alliances are characterized by the continuing independence of the partners and, while generally established to jointly pursue medium to longer-term goals, they often have a set time frame and termination date. A common feature of some alliances is the acquisition of a minority, non-controlling investment by one of the parties in their alliance partner, together with some sort of undertaking to work on a cooperative basis in a particular area. In addition, these arrangements may provide for the exchange of property rights or technical assistance, but allow for the parties' independent pursuit of interests outside of the alliance. Typically, strategic alliances cover only a portion of the partners' total operations (e.g., research and develop ment, promotional activity, or foreign sales). On the other hand, even the most informal strategic alliances differ from "one-shot" contracts because the partners make some attempt to align their longer-term interests. Hence, information sharing on technologies, products, processes, and/or customer needs is generally greater compared to more traditional contractual arrangements.

Alliances may also act as a mechanism for transferring the skills and relationships of employees within participating firms. These resources may be hard to acquire through normal market transactions. Many alliances involve something new, innovative and forward-looking: a new research and development program, new products, technologies and processes, or a new marketing strategy to be conducted jointly by the parties. The adjective "strategic" has a definite meaning here. It implies a concern with the longer-term, with investment rather than day-to-day operations, and with developing new markets rather than servicing existing ones.

Another distinguishing feature of strategic alliances is that they generally involve swaps, trades, or the barter of goods or services, rather than the exchange of goods and/or services for money. As is generally the case with barter, there must be a close alignment of interests for this to be beneficial, illustrating the complementary and reciprocal nature of the alliance partners' goals. Each party has something the other wants, involving either tangible or intangible assets (e.g., skills, knowledge, re putation or contacts). Strategic alliances, particularly those involving international partners, can also be designed to facilitate transfers of technology, surmount non-tariff barriers to trade, and/or reduce the time needed to gain access to new markets where expertise on local market conditions is required.

In short, the major features of strategic alliances appear to be: the relative continuing independence of the parties in respect of those matters not covered by the alliance; a set (albeit longer-term) time frame; limited scope of the arrangement and greater flexibility of the parties compared to takeovers or acquisitions; and, reciprocity between the parties, as seen in the sharing of objectives, information and key assets. Whatever the form taken, the competition analysis of a particular strategic alliance will focus on its effects and likely effects, as well as the purpose for which the alliance is formed.

The Bureau will be particularly concerned with strategic alliances in cases where there is either a substantial or undue lessening or prevention of competition. In determining whether either of these thresholds is met, the Director seeks to determine whet her the strategic alliance is likely to maintain, create or enhance market power. Market power may exist at either a selling or buying level. Market power of a seller is the ability to increase price above competitive levels (or reduce output, quality, choice, service, promotional activity, innovation or other significant dimensions of rivalry, below competitive levels) for a sustained period of time. The Director will also examine the nature of the strategic alliance to determine if competition is diminished and, if so, whether the Act applies and which of its provisions are the most relevant.