FRAMEWORK FOR DETERMINING THE NEED FOR A BUSINESS ALLIANCE
The definition of the word “alliance” varies from executive to executive, company to company, and industry to industry. Companies that have entered into alliance don’t necessarily agree on what is meant by “alliance”. The fact is that there are many different types of alliances. Another fact is that companies must approach them in vastly different ways. It is important to understand the common objective of an alliance before one seriously considers entering into an alliance agreement. The first step has to be the categorization of the types of alliances in order to connect the concept of an alliance with the successful creation and implementation of an alliance.
Types of Alliances
There are five basic categories or types of alliances
- Sales alliance
- Solution-specific alliance
- Geographic -Specific Alliance
- Investment alliance
- Joint venture alliance
A sales alliance occurs when two companies agree to go to market together to sell complementary products and services. Where the trust factor comes into play is the partnership agreements around specific clients or specific industries. The focus of sales alliance is to create sales. Usually this revolves around joint selling activities with specific clients. As such, the “rules of the road” are usually client – and sales – process-related.
A solution-specific alliance evolves when two companies agree to jointly develop and sell a specific marketplace solution. Exclusivity may or may not be “in play” with a solution-specific alliance. Many times, one alliance partner will own the solution developed, whereas the other alliance partner will have a “preferred partner” designation as a result of the joint solution development work. At times, the ultimate customer may like the solution and one of the partners but may not want to do business with the other partner.
A solution-specific alliance may provide for this scenario and the “sale” of a solution, despite another, non-joint development partner being selected by the customer. Again, the focus of the solution-specific alliance is joint selling of a jointly developed solution. Usually this type of alliance has specific parameters and incentives to maximize the return to both parties for their part of the joint development effort, regardless of other competitors potentially participating at clients; requests.
A geographic-Specific Alliance is developed when two companies agree to jointly market or co-brand their products and services in a specific geographic region. This type of alliance has existed for years in the beer industry. Sometimes a geographic alliance involves some sort of investment in plant and equipment if the specified products to be co-manufactured involve different manufacturing processes. In this case, these strategic geographic alliances would be investment alliance as well.
An investment alliance occurs when one company makes an investent in another company while at the same time developing an agreement to jointly market their products and services. An investment alliance includes an investment of capital and possibly of resources. It also involves some sort of joint effort to co-market and/or co-develop the products and services.
Joint Venture Alliance
In a joint venture alliance, two companies come together and form a third company to specifically market and/or develop specific products send services. It usually means setting up a separate organization and financial structure, with ownership interests and incentives specified as the joint venture is established. The positive aspect is that there is a financial and legal commitment between the two companies. The negative aspect is that in a joint venture, failure can be as painful as a divorce. With a sales alliance, either party can cancel the alliance in a specified period of time and just walk away. With a joint venture, there is the responsibility of a separate company and the financial implications that are tied to the performance of both companies.
In summary, there are many definitions for the word “alliance”. Each definition has its own costs and benefits to the executive. The road to a successful alliance is not necessarily a short one, and it requires significant amount of planning and negotiating. Sometimes, alliances are drawn together with nothing more than a couple of meetings and a press release. When done wrong, alliances can be worth no more than the paper that the press release is printed on.
Alliances done wrong can actually carry a negative marketplace perception for both companies, and can impact a company’s business beyond the specific market tied to the alliance. On the flip side of things, alliances that fail can actually produce a positive marketplace impression, if the failed alliance was focused on innovation or leading-edge solution.
Framework For Determining The Need For An Alliance
This framework consists of the following six steps.
Step 1: Business and Market Strategy
The first step in determining whether an alliance relationship is needed by an organization has to be the review of the company’s business and market strategy. The mission and vision of the corporation, as developed and adopted by the CEO, board of directors, the employees, the critical stakeholders, the suppliers, and the major customers, will serve as the foundation for the major objectives. The major objectives will then serve as a foundation for the company’s marketing strategy.
The company’s marketing strategy should include the product portfolio, its strategy and capital expenditure support, and the associated marketing programs to support it. All of these should be anchored around the customers; needs, desires, and behavior on what products they are willing to pay for.
Knowing the customers and their behavior is critical. What is also critical is to know how the company’s products are incorporated into a total “customer solution.” Specific knowledge of the customer, his or her buying behavior, and, most importantly, the total solution being sought by the customer, are all critical in satisfying actual customer demand – and whether an alliance will be beneficial from a customer-centric viewpoint.
Step 2: Marketplace Scan
The second step in assessing the need for an alliance relationship is to scan the marketplace for competitor activity. There are four stages to this step.
- The first stage is a review of existing competitors and their current market positioning. In this stage, current products and services as well as current market share should be identified. For example, in this stage a lawn mower company would identify all other lawn mower manufacturers, their products, and their market shares. A professional services firm that specializes in technology-enabled supply chain solutions would identify similar or like consulting firms.
- The second stage is a review of existing competitors against the identified total “customer solution.” This bundling of products and services into a total customer solution frequently resets the table as far as competition is concerned. In this stage, care must be taken to identify what companies have the customer touch points, the organization speed to change from selling products to bundled solutions, the technology, and the operating or execution efficiencies to meet the customers total solution needs. In this stage a lawn mower company would broaden its definition of competitors to all landscaping product manufacturers (e.g., trimmers, edgers, tillers). The professional services firm would identify all supply chain consulting firms that also perform system integration services as well as technology companies that perform supply chain consulting services and integrate their own systems applications.
- The third stage involves the identification of new competitors drawn into the market place by the bundling activity. For example, our lawn mower company should identify a total customer solution as a “garage solution”. In this case, if Company A sells lawn mowers, in the future they may be competing against not only their existing accessory companies, but perhaps all car dealers, parts and supply companies (oil, filters, grass refuse bags, etc.), and even perhaps all storage racking companies. The professional services firm may find competitors drawn into technology-enabled supply chain consulting from other “connected” solutions.
- The fourth stage involves the identification of non-total-customer solution providers that are intermediaries in the marketing process through technology. An executive can be overwhelmed in this stage with the possibilities. What matters here is that the companies with total solutions products other than what your company carries, the companies with the best technology, the companies with the strongest brands, and the companies with the best financial health – all be identified as future or new potential competitors.
Step 3: Product Portfolio Assessment vs. Marketplace Scan
Once Step 1, Business Market Strategy, and Step 2, Marketplace Scan are completed, it is critical to execute Step 3, Product Portfolio Assessment versus Marketplace Scan. In Step 1, the foundation is established in terms of where the board of directors, major stakeholders, and senior executives believe they want the company to be in a specified period of time. In Step 2, there is a determination as to where the competition is in terms of marketplace positioning. Step 3 identifies what the current products and services are in the company’s product portfolio, and compares them to the current and perceived future positioning of competitors and their products and services.
In a world moving at internet speed, many companies in this Step 2 find that a few key competitors are using technology and network supply chain methodologies to rapidly leapfrog their company and their existing products and services. Sometimes, companies discover that competitors have actually progressed beyond the company’s vision of their current state, creating a precarious scenario for the company’s senior executives.
Imagine being a CEO and having the embarrassment of informing your shareholders and your employees that achieving your vision in two years will position your company behind where your key competitor is today.
In Step 3, the gap between the Business and Market Strategy, the Marketplace Scan, and the current Product Portfolio of the company is identified. More times than not, it is imperative to have speed in closing or eliminating this gap for the company to regain its competitive positioning in the marketplace.
In addition, in today’s world, the creation and application of technology that transforms business processes in what seems to be an overnight time frame is frequently what creates this gap. Having access to the technology and its new products quickly can be one solution to close the gap in the marketplace with speed.
Step 4: “Build Internally” versus “Acquire Externally”
In Step 3, we discussed having access to technology and its products as one solution to help close the gap between the company’s current product portfolio and the competitive positioning surfaced in the marketplace scan. The executive is faced with three choices.
- Choice number one is to do nothing, and cede the specific market segment in question to the competitor. This is frequently not a very good choice, but sometimes a necessary and shrewd one. Nokia ceded the analog cellular telephone market to Motorola, to focus solely on the digital cellular telephone market. Due to the rapid pace of change in the technology, Nokia was able to leapfrog Motorola in the mobile communication device market when digital overtook analog.
- Choice number two is to create or build the needed technology or products internally. Some companies, especially ones in the technology or high-tech industries, have the capability to internally build capabilities at speed to match or lead the marketplace competition. For other companies, they either do not have the capability, the speed, or the “vision” match to accomplish this. For example, a professional services firm would not necessarily build a supply chain network suite of products internally because the marketplace starts to drive supply chain network innovations through collaborative planning and execution software. With the lifecycle of technology software products, their solutions would be outdated by the time the firm went to market with them. Besides, if the vision of the professional services firm is to be the leading supply chain network solutions provider, then why would they want to get themselves into the software development business?
- Choice number three is to “acquire externally” access to the technology products and services that drive the gap between the total customer solution and the company’s existing products and services. Above and beyond a total acquisition of a company with these products and services, a company gains access to these products and services through alliances.
One element that must be considered in all three choices is the cost/benefit analysis. Nokia could have built internally the best-in-class analog cellular telephone and competed head-on with Motorola, but where was the return? In another scenario, if it is cheaper to acquire externally, then why build internally? Or vice versa? If build internally is an option, then you must complete a cost/benefit analysis.
Step 5: organizational Readiness and Speed to Market Demand
Another area that needs to be explored quickly is the organizational readiness to build internally and create these needed products and services with Internet speed to meet the current and anticipated market demand. For the executive, this Step 5 is usually a quick, decision-tree process. For the products and services in question, the answer is usually a clear “yes” or “no” for the executives as they assess the organizational readiness of their organization. Ask yourself how fast your organization is in responding to or leading your competition in technology-enabled innovation solutions in the marketplace?
Speed to market may be more beneficial than a lower cost but a longer time- to-market connected to “build internally.” The capability to build internally and the organizational readiness to move at Internet speed to meet the market demand all play a role in the decision to build internally or acquire externally.
Step 6: Proceed to “Build Internally” or “Acquire Externally”
The answers gathered in Steps 4 and 5 will provide a clear choice for either building internally or acquiring externally. To acquire externally, a new process must be followed to ensure that the right products and services that complete the total customer solution are accessed in a manner that the market positioning of the two companies are simultaneously enhanced and the company’s operations are enriched and not degraded by the relationship.
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