2. Literature review
This chapter critically reviews the literature on horizontal and vertical alliances. Horizontal
alliances are collaborations between competitors and vertical alliances are collaborations with
suppliers or customers. This chapter also focuses on sustainability as well as sustainability issues
within the supply chain in the apparel industry.
An alliance is a lasting relationship among companies that have complementary power and
decide to work together in a mutual or non-mutual relationship to achieve with a goal that none of
them could realize on its own (Gomes-Casseres, 1996). These alliances are formed based on
functional lines like support, marketing, or distribution. Alliances enable firms to reduce the risks
associated with their market, technology, or competitive environments. There are two types of
alliances: horizontal and vertical. These may be in the form of teaming agreements, general and
limited partnerships, license agreements, or joint ventures(Gomes-Casseres, 1996).
2.1.
Vertical and horizontal alliances
Present day alliances allow companies to remain independent from their alliance
partners(Yoshino, 1995). In setting up an alliance, there are common objectives, but additionally
each firm comes up with its own objectives. Performance control and benefits from the given
processes have to be shared among all alliance stakeholders. Trade collaboration in vital strategic
processes is common among stakeholders in firms. The stakeholders’ firms are teaming up with each
other based on the central abilities of each organization and what each organization can in turn
offers the other(Cohen et al., 2002). Arrangements of this kind are usually enacted between
competing firms, an idea that was thought unrealizable some years back, as well as between
industries from different fields (Agrawal and Henderson, 2002). Such alliances are creating two-sided
partnershipthat involves collaboration across institutionsand collaborative links through joint
training managements, consultant and researchon both domestic and global levels. This makes it
complex to control the flow of information to and from a firm’s boundaries (Reuer, 2004).
Business entities can engage in different collaborative relationships or alliances. Strategic
alliances enable buying and supplying firms to combine their individual strengths and work together
to reduce non-value-adding activities and facilitate improved performance (Whipple, 2000).
Manufacturers, customers, and competitors can form these collaborations, which can be vertical or
horizontal alliances. Vertical alliances are a coalition between a company and its distributors or
suppliers (Cavusgil et al., 2015). These alliances strengthen the relationship between a company and its
suppliers via the exchange of technical expertise as well as commercial knowledge. They expand a
company’s network as well as benefit its clients by providing cheap prices (Ratchford, 2010).
Horizontal alliances are enacted between firms operating within a similar industry (Hill, 1998,
p.286). The company cooperates with competitor firms to better its position against its other
competitors. Horizontal alliances seem to discourage competition, and thus anti-trust
regulationscould be consideredby the competing firms in order to have a principle on which they can
build their collaboration (Hill, 2014). It is a policy to sell products or services in several markets freely
and prevents unlawful restraints, price – fixing and monopolies. As its main goal is to protect the
publics welfare (Blair,1993). A horizontal alliance takes place when competitors collaborate and
share private information or resources to create new product innovations or to solve issues that are
outside their control, e.g., changes in legislation (Simatupang, 2002; Tether, 2002).
As noted above, the horizontal and vertical alliances show important differences in the
reasons for collaboration.However, the majority of the existing literature has focused on examining
vertical alliances rather than examining their differences from the horizontal alliances (Rindfleisch,
2000). This tendency is due to most scholars not havingconsidered that firms can benefit from
competing and cooperating at the same time as these factors are completely different and
contradictory from one another(Bengtsson, 2000).
The little research on horizontal alliances with competitors is primarily centered on hightech industries (Stuart T. E., 2000; Lerner, 1998; Oum, 2004) and this suggests that other industries,
such as the apparel industry, have not been studied yet. Furthermore, research on supply-chain
collaboration is highlighted as the joint effort of two firms that try to deliver value for their end
customers. This can be either through horizontal or vertical alliances; however, the implications of
horizontal alliances with regard to supply-chains have not been studied (Simatupang, 2002).
2.2.
Benefits and risks of horizontal alliances
Firms engage in strategic alliances because they want to attain the benefits that they could
not get on their own. The literature has put forward that firms can get various benefits from
collaborating with each other (e.g. sharing knowledge and commercial resources) (Handfield &
Nichols, 2002).). One of the main reasons why firms cooperate is because they can create value by
decreasing transaction costs, as in the case of reduction of search and information costs.
Furthermore, entering a strategic alliance creates the opportunity to gain access to information and
resources regardingcommon needs, which help them to gain a sustainable competitive
advantage(Alvarado, 1999). Firms can, for example, share particular tacit knowledge or give access
to superior technology and high levels of R&D. In addition, collaborating strengthens the position of
the firms by increasing their competitive advantage (Zineldin, 2004). Collaborative relationships also
contribute to a better social status by enhancing firms’ reputation and legitimacy, as firms are
expected to receive more social support from other firms that notice the collaboration Stuart T. H.,
1999; Human, 2000; Podolny, 2001).
Although collaboration has many advantages, there are burdens and conflicts in
collaborative relationships. These consist of the following:
1. Increase of dissemination risk (Agarwal, 1992). Dissemination risk refers to the threat
that arises when a firm shares its key information with other collaborating firms and
then the shared information gets used for other purposes than initially intended (Hill,
1988).
2. Power and dependency, i.e., one partner can force the other to act in a way that is in its
best interest, due to its political, financial, technical, or emotional power. In addition, if
firms are too dependent on other firms, it can increase their vulnerability. For instance,
by letting the other firm decide upon a strategy that might not fit well within its own
company. (Zineldin, 2004).
3. The uncertainty that arises due to various potential risks in, e.g., working with foreign
suppliers, agents, or firms, which make it more difficult to anticipate incidents and
assess the partners’ commitment. These risks can contribute significantly to the failure
of an alliance. Theycan have a negative effect on mutual dependence that helps the
firms to rely in each other in sharing equipment, finances information and more, which
can lead to negative outcome of an alliance (Heizer, 2014).Furthermore, firms may tend
to behave more opportunistically, which also increases the uncertainty (Williamson,
1985).
In order for firms to have a good and stable relationship, trusting each other is essential.
“Trust forms an important basis upon which to expect the relationship to continue well
into the future” (Ganesan, 1994). Whereas, high mutual dependence does not only
create incentives for the collaborators, it also offers a significant opportunity for
negotiations (Casciaro, 2005).
Furthermore, dependency is related to trust. If firms trust each other, they will be more
likely have a greater interdependence (Ganesan, 1994).
4. Apart from trust and mutual dependency, clashing cultures is another factor that might
cause the failure of a strategic alliance. This can cause friction in the collaboration as a
firms’ decision-making is affected by, e.g., language barriers, work ethics, personality
traits, or other values (Hofstede, 2010).
5. Another additional reason that is associated with the underperformance and failure of
alliances is the relational risk. It is concerned with the probability that partner firms may
lack commitment to the alliance and that their possible opportunistic behavior could
undermine the prospects of an alliance, as well as the risk of creating a future local or
even global competitor. For example, one partner might be using the alliance to test a
market and prepare the launch of a solely owned subsidiary by, e.g., product copying
(Elmuti, 2001).
2.3.
Key success factors for effective collaboration
Several types of research have highlightedthe elements of successful collaborations. As
mentioned earlier, the collaboration will most likely fail if there is no mutual dependency and trust.
Another important influence in collaboration is power. Power refers to the ability of one individual
or group to control or influence the behavior of another (Hunt and Nevin, 1974). Power in a
collaborative relationship helps to reduce the uncertainty related to the future behavior of social
and economic indicators (Smith & Cockburn, 2013).). The collaborating firms can harness their
individual powers to attract customers and to seek inspirations. Power and trust are also similar
because they complement each other. The trust stands for the willingness of one firm to have
confidence in another, and the power supports that confidence by influencing the other in a positive
way. However, at the same time, they can be opposites, in the sense that trust is based on
teamwork and reciprocity, whereas power tends to be more connectedwith self-serving and
opportunistic behavior (Ganesan, 1994).
There are many factors that can lead to horizontal alliance effectiveness. The basic features
are alliance-planning processes, partner commitment, the extent of collaboration, and finally
dependence relationships and power (Cravens, 1993).
Dependence and powerof alliance partners
Within horizontal alliances, it is critical that the dependence and powerof alliance partners
be evenly divided. Most alliances in which financial contributions and benefits are one-sided do not
seem to be successful. The deficiency of complementary profits seems to be the main factor that
leads to failures in horizontal alliances. The chances of an alliance success are limited in a situation
where only some of the partners’ central businesses are involved. Therefore, in order to realize
success,it is criticalthat all partners in the alliance make contributions using their main businesses
(Anderson, 1990).
Partners’ commitment
Partners’ commitment to an alliance has a huge impact with regards to its success. Lack of
interest in long-term allegiance by any member of the alliance brings about some degree of
ineffectiveness. The moment partners use the right resources and personnel and provide priorities
to the alliance at hand, they exhibit their allegiance to the entire alliance(Child, 2005). Commitment
indications include exclusive agreements, alliance firms’ investments, and the absence of conflict
between firms.
Alliance planning processes
Nevin(Nevin, 2012) stresses the importance of proper planning of all the activities that occur
early on within the alliance. He further states that this is a major aspect of the success of horizontal
alliances. Many researchers concur that the crucial components in planning an alliance are deciding
on the conduct of the relationship management and creating specific objectives. When an alliance
ventures into a market in which one stakeholder is already active, it is easier and cheaperfor it to
outline its goals as the active stakeholder have already performed some market research.
Nevin(Nevin, 2012) adds that the more particular and realistic the goals of the alliance, the
higher the probability of success. When enough planning exists prior to establishing an alliance,
hiccups and problems can be detected earlier and resolved. Resolving conflicts in horizontal alliances
formed between competitors appears more complex than in vertical alliances. A failure toagree on
clear decision-making responsibilities is a possible cause of ineffectiveness.
Extent of collaboration
Collaboration is possibly the most crucial aspect in horizontal alliances. It is a willingness to
come together and realize objectives. Alliances proceed far beyond the basics and guidelines
provided by transaction cost economics. Motivations like equitable results as well as trust and
character are neglected in establishing governance structures through transaction cost economics
(Buffington, 1991). Horizontal alliances are quite sophisticated, as opposed to transactional
relationships between firms that are guided by the search for the cheapest way to realize efficiency
in the transaction. Collaboration could be perceived as a vital and feasible alliance (Gomes-Casseres,
1996). Understanding the vitality of collaboration can assist alliance partners in overcoming
uncertainty, solving major conflicts, and realizing positive and profitable results within a longer
period. Collaboration between firms also helps to reduce inter-industrial rivalry and improves the
synergistic benefits (Farag, 2009), (Ireland, Hoskisson, & Hitt, 2012). Characteristics and horizontal
alliances
According to Birley (1985), Stuart (Stuart T. H., 1999), and Jack (Jack, 2002), who are
accredited for a research on networks, alliances, and entrepreneurship, states that firms’
characteristics are key for successful collaborative relationships. These characteristics can be divided
into three factors, which are scope, organizational, and social. These factors are equally dependent
on one another. At the same time, each factor is significantly different in terms of organizational
structure, market focus, strategy, and resource gains between small, medium and large firma
(Mintzberg, 1979). In this research, small firms have less than 100 employees, medium firms have
less than 400 employee but more than 100, and large ones have more than 400 employees) .
Scope factors can include the size of the firm, volume of activity, age of the firm, location of
the firm, and the industry the firm operates in. Scope factors determine the degree to which firms
can form business relationships, and how dependent they are on these collaborations.
Organizational factors include the extent to which a firm’s internal structure is formalized,
what system it uses for control, reporting, etc.
Social factors comprise the elements that are related to the firm’s reputation, status,
legitimacy, performance, and social influence.
Firm size
Large firms have high visibility compared to small firms. As such, in an alliance between large
firms and small firms the large firms can penetrate the markets enabling the flexible and quick to act
small firms to execute the documented plans of action. Further still, the wide pool of resources of
the large companies make it easy for the small firms to exercise their untapped skills and potential.
Small firms have a lot of unused talent due to the limitation of resources(Gattorna, 1998). On the
other hand, the large firms are at their peak and stagnate at optimum levels of performance.
Therefore, the horizontal collaboration of different size companies leads to improved levels of
performance. The adaptability of the small firms helps them take advantage of their quick and easy
organizational techniques to reach maximum utilization of technological, financial, and even
scientific resources for excellence (Brown, 2004).
The number of employees increases when companies come together, creating a larger pool
of ideas(Gattorna, 1998). As such, the continued interaction of the employees sparks the exchange
of ideas. Internal competition becomes prevalent. All this triggers improvement of performance, and
brilliant ideas are hatched that foster growth of not only the companies but also the employees.
Firm location
The locations of firms are a crucial characteristic in forward development. The different
collaborating companies might be located near markets of interest where demand is outweighing
supply. As such, collaboration makes it easier to meet the demand in the market through improved
production that in turn accelerates supply. Road networks, nearness to raw materials, and favorable
economic environments are also elements affiliated with the location of firms (In Ishikawa, 2015).
Since it is sometimes difficult for a single company to have access in its location to all these
advantages, companies with different strongholds can work together and emerge stronger. Such a
case can be witnessed through the collaboration of a company in a location covered by a good road
network with one that is near raw materials (In Ishikawa, 2015). This means the two can swiftly
access raw materials and transport finished products.
2.4.
Apparel firms and horizontal alliances
Apparel firms refers to a group comprising manufacturers, brands, government, nongovernmental organizations, retailers, and professionals that represent a huge part of the world’s
footwear and apparel market. Their vision is to reduce the risks of social and environmental issues
concerning global products.
The apparel firms ensure that they capture the best sources of subsidized raw materials.
Governments and NGO’swill always try to encourage business to use resources effectively as well as
to manage the environment impacts(Savitz& Weber, 2006). Following this, they may fund
programmes that help business achieve its goals,and use their purchasing power to support apparel
firms produce more sustainable products(Savitz& Weber, 2006). Therefore, the apparel firms get
incentives through the governments and NGO’sthat cut down their operation costs as well as
improving sustainability.Sustainability features social, environmental, and economic aspects. Using
the three aspects helps formulate a plan of action that will propagate the forward development of
collaboration. The first element of the plan of action is of the social aspect, which relates to the life
values and beliefs of the specific target groups (Dagnino, 2012). The organizations are collectively
able to understand new life values and beliefs of a certain population. This can be achieved through
collaborationbetween a new company and a dominant company in the region of interest.
The environmental aspect aims to ensure that the operations of the companies are not
tampering with the natural ecosystem, such asthe rivers and vegetation. Traditionally, companies
were known to drain their waste into rivers, which would kill aquatic life as well as
contaminatenearby communities’ water sources. It is important to be aware and observant of how a
company coexists with the natural environment.
Finally, yet no less important to sustainability, is the economic aspect. The markets should
be receptive of the products given to them, which should also be reasonably priced. The intended
meaning of “reasonably” is to formulate competitive prices that will also keep the company’s
business afloat. The economic strength and classes of the population are paramount in
consideringthe best pricing and the quality of the products (Gratton, 2007).
Figure 1: The Triple Bottom Line (Dagnino, 2012)
The sources of information in this literature review are insightful and credible. Figure 1shows
that there is much that can be achieved through horizontal alliances. These alliances can
demonstrate their impact in three levels along with the triple bottom line (Savitz, 2006). The first
one that the collaboration can have is internal impact like the creation of new jobs that never
existed in individual firms. This can bring more expertise to the alliance (Savitz, 2006).Secondly; the
firms can combine powers to influence their operation model. The firms get the ability to design
their operational model to fulfill deliberate and specific kinds of impacts. This is common when firms
harness collaborative models in order to ensure that their facilities serve a broader range customer’s
need more closely and to use their assets more efficiently.They can thus produce more appealing
product to their customer, which enhance their reputation and ultimately more customers(Savitz,
2006). Finally, the horizontal alliance can also have certain benefits to people, economies, and
environment that are even outside their core business. More employment means better economy
andbetter production methods implies less emission to the environment and a better; both resulting
to happy society (Savitz, 2006).
Therefore, the firmscan help each other to meet their needs easily. The collaboration is rewarding
and with sound leadership, the best results can be achieved.
Figure 2: The conceptual model for characteristics of firms (Madlberger, 2009)
The conceptual model above illustrates the chosen characteristics of firms based on the
literature and are all derived from the dataset. The theory on characteristics and horizontal alliances
has indicated that the characteristics of firms are highly relevant to achieving for durable
collaborations. Based on the scope factors a selection has been made of important potential
characteristics. These include firm size, HQ location, the number of employees, the firms’ production
countries, and the firms’ industry. These characteristics determine the degree to which firms can
form business relationships and how dependent they are on these collaborations(Madlberger,
2009). This sustainability ranking is a benchmarking score that rates firms on how well they have
implemented the ‘Code of Labor Practices’ (Appendix 2). The FWF member firms are ranked
according to the following three categories:leader, good, and needsimprovement(Appendix 3).
1. Leaders are firms that are doing exceptionally well and are operating at an advanced
level.
2. Firms that are categorized‘good’ are making serious effort to implement the Code of
Labor Practices; firms that operate above average.
3. A Firm that ‘needs improvement’ is one that has encountered unexpected problems or
is unwilling to seriously implement the Code of Labor Practices
Added References
Ireland, R. D., Hoskisson, R. E., & Hitt, M. A. (2012). Understanding business strategy: Concepts plus. Mason,
OH: South-Western Cengage Learning.
Hill, C. W. L., & Jones, G. R. (1998). Strategic management theory: An integrated approach. Boston, MA:
Houghton Mifflin.
Handfield, R. B., & Nichols, E. L. (2002). Supply chain redesign: Transforming supply chains into
integrated value systems. Upper Saddle River, NJ: Financial Times Prentice Hall.
Smith, P. A. C., & Cockburn, T. (2013). Dynamic leadership models for global business: Enhancing
digitally connected environments. Hershey, PA: Business Science Reference.
Gattorna, J. (1998). Strategic supply chain alignment: Best practice in supply chain management.
Aldershot, Hampshire, England: Gower.
In Ishikawa, T. (2015). Firms' location selections and regional policy in the global economy.