Strategic Alliances

A strategic alliance is a formal or semi-formal agreement between two or more firms who unite to pursue a set of agreed upon goals, and remain independent subsequent to the formation of the alliance. In essence[1]:

  • The partner firms share the benefits of the alliance, and the control over the performance of assigned tasks. This is perhaps the most distinctive characteristic of alliances, and the one that makes them so difficult to manage.
  • The partner firms make contributions to each other on a continuing basis, in one or more key strategic areas, e.g. technology, throughput, assets, and so forth.

A joint venture (JV) is a more formalised arrangement of an alliance. Conversely mergers, takeovers and acquisitions where one partner assumes control are not alliances.

Likewise overseas subsidiaries of multinationals (even if they are joint ventures), are not considered alliances, as strategic control is retained by the parent multinational. The ‘joint interests’ of many of these ventures are often tactical responses to host nation anti foreign ownership measures, which more often than not revert to the parent as soon as these markets are deregulated.

The strategic logic that drive firms to cooperate are many, and depend on the strategic goals that each firm wishes to pursue.

Creating and managing a strategic alliance – The 5Cs

The criteria for ‘creating the alliance’ at the strategic level, and for ‘managing the alliance’ at the operational level are often not the same. The alliance logic for choosing a partner is a complex process that must be undergone with some analytical vigour. A few pointers are provided below:

At the strategic level, alliances are most successful when the strategic logic of the need for an alliance meets the requirements of the 5C test namely:

  • C1 – Complementary skills (and/or assets or strengths) are offered by the partners. Alliances based on the size of the financial contribution are never enough. They work best when the partner firms make a real contribution by providing experience, core competencies, access to key markets or customers, core capabilities and key assets.
  • C2 – A cooperative culture exists between the partners. This is easier said than done. Poor chemistry, abrasive interactions between the players based on relative size can be avoided and even managed. Incompatibility however cannot be overcome. Partner firms should concentrate on why they make compatible bed fellows instead. This is the challenge that each party must address.
  • C3 – Compatible goals. The partner firm’s goals must be compatible. This is perhaps the most important attribute that is often missed in the hurly burly of trying to cooperate for one reason or another.
  • C4 – Commensurate level of risks must be borne by each of the partners based on the size of the reward (or share) they negotiate. Each partner needs to make a contribution which often involves both capital and the sharing of operating risks. These must be shared for the alliance to work. If not, there is a tendency for one key partner to delay, or avoid making critical investments at the right time.
  • C5 – Comparative size. Whilst alliances have been undertaken by partners of different sizes, it is well known that the most successful alliances are those where the partners are of ‘comparative size’. This is often misunderstood to mean that both partners should be of the same size. In fact the ‘size’ of an alliance member is actually in the context of the specialist service or markets they operate in. A large player and a relatively smaller player cooperate well, if each of them has a sizeable presence in their own industry sector or area of expertise; even if the actually relative difference in size between the two alliance partners may be fairly large.

Equity and non-equity partnerships

Alliances can be either ‘equity based joint ventures’ or non-equity based ventures, depending on how the investments made by each partner are structured. A broad descriptor between the one and the other is placed below:

  • Equity based JVs work when the partners create (or bring to bear) tangible assets and other resources into a JV, and consequently receive payments from the profits generated based on their contributions.
  • Non-equity based JVs describe a wide array of agreements that stipulate how the partners need to cooperate with each other to pursue a common goal. Non-equity based JVs are essentially management contracts between cooperating members of an alliance.

Managing the alliance (at the operational level)

Managing the alliance at the non-strategic level of its operations, requires a complementary set of skills as well. These are captured below in no particular order:

  • Parallel or complementary interests remain between the partners. Each partner continues to bring complementary skills that are valued by the other(s).
  • Trust continues to exist.
  • Managing cultural differences is critical. Whilst managing cultural differences between ethnic cultures are important between international partners, they rarely cause as much trouble as managing the cultural differences in the ownership, management styles and decision making processes between partners, which are seen as the key to succeeding in modern alliances.
  • Control issues over the key drivers of value in the alliance are managed well. Often control is based on the strategic significance of the parent to the alliance relationship. Where the control is based on the ownership of costs and risks by both parties, the alliance will remain healthy. Where control is based on the bargaining power of the larger (or dominant partner) who does not share in the costs or the risks, the alliance will be short lived. A ‘prenup’ or exit agreement between the partners is a prerequisite for such conditions.
  • Conflict management is critical. Where conflict management remains informal, the alliance does well. This usually happens when the goals remain compatible between partners. When the goals begin to diverge, conflict management becomes a fractious affair.
  • A key issue that usually arises between alliance partners is on ‘who owns the end customer’ or the key value drivers (key residual revenues) of the alliance, once the costs have been covered. It is this ownership conflict that eventually results in the destruction of most alliances.
  • On average 70% of (even highly successful) alliances fail in the first 5 years and almost 85% of alliances fail in 7 years. A good prenup and exit policy is therefore critical in any alliance partnership.

Formula for applying the logic of alliance advantage

The abiding logic that drives value in any alliance is based on the argument that the sum of the cooperation between two (or more) partners, is greater than the value created by each partner going it alone. This is captured in a simple formula below:

Strategic alliance formula

For this to happen there must be a rationalisation of costs by both parties.

Allan Rodrigues has considerable experience in crafting strategic alliances and is currently working in alliances between supply chain entities. You can contact him at allan@theBusinessBinnacle.co.nz [no spam]

 


 

References

  1. Brandenburger, A. M. and W. S. J. Hawthorne (1996). “Value based strategy.” Journal of Economics & Management Strategy 5(1, Spring 1996): 5-24.
  2. Brouthers, K. D., L. E. Brouthers, et al. (1995). “Strategic Alliances: choose your partners ” Long range planning 28(3): 18-25.
  3. Das, S. S. (2011). “To partner or to acquire? A longitudinal study of alliances in the shipping industry ” Maritime Policy Management 38(2): 111-128.
  4. Doz, Y and Hamel, G. (1997). Alliance advantage: the art of creating value through partnering. Boston, Massachusetts. Harvard Business Press.
  5. Heaver, T. (2000). “Do mergers and alliances influence European shipping and port competition” Maritime Policy Management 27(4): 363-373.
  6. Reuer, J.J. (2004). “Strategic Alliances”. Oxford University Press Inc. New York.
  7. Slowinski, G and Sagal, M.W. (2003). “The strongest link: Forging a profitable and enduring alliance”. American Management Association. New York.
  8. Slack, B., C. Comtois, et al. (2002). “Strategic alliances in the container shipping industry: a global perspective ” Maritime Policy Management 29(1): 65-76.
  9. Steinhilber, S. (2008). “Strategic alliances. Three ways to make them work”. Cisco System

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