Strategic Alliances for Success: Story of IFS Japan.

Abstract

Seventeen years after the dawn of new millennium, IFS and NEC celebrated 19th Anniversary of their very successful journey. IFS was an ERP company founded in Linkoping, Sweden in 1983.IFS Applications was single, integrated ERP suite developed by IFS that enabled global and demanding business to successfully handle four core process, namely service and assets management, manufacturing, projects and supply chain management. As of 2015 Gartner recognized IFS Applications as a leader in the Gartner Magic Quadrant for Single-Instance ERP for Product Centric Midmarket Companies. By year 2016, IFS’s revenue had reached 3.6 Billion SEK. IFS business model was to conduct the product development at R&D centres in Sweden and Sri Lanka and to develop global and local cooperation with partners to enable continued development of the company’s competence and market presence with lower risk and capital requirements. IFS’s partnership strategy was dating back to its roots even though it was found to be very challenging to be implemented. As of June 2017, some of IFS regional offices totally relied on direct sales and some employed mixed mode. The strategy of IFS Japan was to totally rely on the partners by becoming a “Partner Enabler” and “the communication link between partners and IFS global organization, in particular R&D”. IFS Japan was a very compact organization with a flat structure, open door management and with many other distinct characteristics and was very different to the other regional organizations in APAC region. With the acquisition of Avalon in 1996, a US based ERP vendor which had presence in Japan, IFS started its operations in Japan by formation of IFS Japan in January 1997. The partnership Avalon and NEC had before Avalon’s bankruptcy, paved the way to IFS Japan to approach NEC. With successful negotiations backed by deep insights, IFS and NEC became partners in May 1998.NEC was a huge well reputed Japanese multinational company with wide spread global presence, providing information system services and products. NEC was a very experienced player in system integration and was a resourceful company. Even though formation of strategic alliances were believed to be the divine formula to be successful in ERP industry in terms of implementation and selling and also the prime drive from the IFS Global from its inception, IFS as a company was far behind the competition, as the formation and continuation of successful alliances were quite challenging and difficult to execute. Whilst NEC and IFS Japan Partnership was believed to be the most successful channel partnership in IFS Global, many partnerships IFS formed, even within the APAC region had not delivered the intended results. This had been the case for partnerships, even with NEC, outside Japan. The first section of this full paper describes the background of IFS and its initial sales and partnership strategies. Then the ERP industry growth, IFS Focus Industries and IFS Architecture in Late 1990swould be discussed briefly. The next section would be focused on IFS entry to Asia Pacific Region,Japan Economy, Japanese Manufacturing Industry and IFS entry to Japan. This will shed light on to understand why Japan was an attractive market to IFS in the light of its strengths in manufacturing functionality. Final part of the paper would be focused on analysis of strategic alliance formation, structural preferences and alliance performance, in the light of the resource based theory for strategic alliances developed by T.K.Das and Bing Sheng Teng in year 2000 and also based on transaction cost economics. The resource based theory for strategic alliances propose and discuss four essential components of strategic alliances: rationale, formation, structural preferences, and performance. The resource based rationale highlight the value maximization of firms trough combination and utilization of valuable resources. The overall rationale for entering into a strategic alliance is to aggregate, share, or exchange valuable resources with other firms when these resources cannot be efficiently obtained through market exchanges or mergers/ acquisitions. The resource-based logic suggests that the competitive advantage of alliances is based on the effectiveintegration of the partner firms’ valuable resources. According to this theory, the performance of alliance can be measured by its endurance, profitability and objective attainment and the performance is a function of resource alignment. The resource alignment is referred to the pattern whereby resources of partner firms are matched and integrated in alliance. The strategic alliance arrangements must be mutually beneficial to all the parties in the alliance to make sure the sustainability of it. The performance of alliances are greatly dependant on the type and the value of the resources contributed by each partner and on the accuracy of resource alignment. As per the transaction cost economics firms ownership decision is based on minimizing the sum of transaction and production cost rather than maximizing the firm value. As of June 2017, IFS Japan had the highest EBIT percentage (Earnings before Interest and Tax over revenue) in Asia Pacific Region (APAC) and all the other IFS regional companies were far behind it. And also IFS Japan had been able to maintain this record in APAC region for many years while maintaining highest absolute EBIT. In addition to that, IFS Japan was one of the most compact regional organizations in IFS Global who had been able to maintain such a fascinating record throughout. The partnership between NEC and IFS was flourishing and relationship between them was being strengthen day after day even though they have had disagreements over priorities and resource allocations time to time in their journey. As of June 2017 IFS had about 100 customers in Japan and NEC was using IFS Applications companywide as their manufacturing ERP. Additionally, NEC was a shareholder of IFS parent company (5%) from 2004 to 2016. Even though strategic alliance between NEC and IFS Japan was proven to be very successful, it is quite risky for IFS Japan to restrict their partnership to NEC, as bad patches in NEC could directly affect IFS in a big way. Therefore IFS should be looking to form good strategic alliances with other companies in NEC nature. And also they need to reconsider the adequacy of staff if they decide to form strategic alliances with other organizations and also they may need to do slight adjustments to existing model based on the demand of new partners when dealing with them. All the modifications to existing model must be done without affecting the relationship with NEC. The prime purpose of this case study is to demonstrate the performance of successful alliances in comparison to the direct selling strategies and employing mix modes in ERP industry and to guide, on how to make decisions at the formation, deciding on a partnership mode, alignment of resource and execution of strategies to yield greater performances. And also this case study will discuss IFS Japan’s strategy, management style, shared values, systems, organizational structure, staff and their skills behind this successful relationship. The intended learning of this case study could also be relevant for other industries.