MAXIMIZING A STRATEGIC ALLIANCE

The ability to create and manage strategic alliances is an important skill for most management teams.  If you cannot make effective use of alliances in today’s world, you will be at a serious competitive disadvantage. One of the reasons for the low success rate of alliances is that there are many different aspects of the design and management of alliances that you need to get right, from clearly understanding your objectives to managing the alliance after it is formed.  They can be grouped into three sequential steps:

1. Clarify objectives: What do we need and how long? Is an alliance the best way to get what we need?
2. Design the alliance: What type of alliance should we create? What should our role be?
3. Manage after the deal is done: How do we effectively manage the alliance? Can we build trust?

Clarify Objectives and the Need for the Alliance

The first challenge is to be clear about what your company needs to fulfill its strategy, which may be different from what others in your industry need. The second challenge is to decide whether the alliance is the best way to get what you need. Three common reasons for forming alliances are:

1. To enter new markets: One of the classic purposes of joint ventures is to enter foreign markets. Typically the foreign company finds the local market attractive, but does not feel confident enough to enter without local knowledge, and so takes a local partner. In some countries the government insist on such a relationship. In China, for example, joint ventures between foreigners and local companies are prevalent. Often, as foreign companies gain confidence in their ability to operate locally, they end the joint venture by buying out their local partner and creating a wholly owned subsidiary. In this case, the alliance is a step to something else. 
2. To create new technology and set industry standards: In technology-intensive industries like computing and telecommunications, companies often use alliances to attempt to create a new technology that will become the industry standard. 
3. To shape consolidation: In consolidating industries such as airlines, telecoms, and automotive industry, alliances are often formed between companies that fear they are too small to continue independently (and that do not want to be taken over) and those that intend to play a dominant role in the consolidation. The immediate motives behind alliances are to gain economies of scale and global reach, to eliminate excess capacity, and to keep the smaller companies out of the hands of predators. 

Why Use an Alliance?

Alliances are often the least-preferred choice of the companies that enter them. Most companies would rather enter a new market themselves, or make an acquisition. Alliances are often seen as difficult to manage, ambiguous in terms of control and decision making (and as a result slow moving), and requiring an extraordinary amount management time and attention.

The usual motives, positive and negative, for proceeding with an alliance are: 

Positive

1. To harness the partner’s energy and knowledge;
2. To set an industry standard by involving partners;
3. To learn something;
4. To gain economies of scale or global reach;
5. To reduce risk;
6. To gain speed.

Negative

1. Government insists on alliance;
2. Acquisitions are too expensive or not available;
3. It’s the only financial affordable alternative;
4. The company fears being acquired;
5. An alliance will prevent a competitor’s acquisition of, or alliance with, the partner. 
6. Closing the business is too expensive, an alliance provides a more graceful exit.

You should be clear on your own motives as well as your partner’s. There are no data on this issue, but alliances formed for positive motives may have a high success rate.

Design the Alliance

There are many types of alliance. The simplest are straightforward license agreements and shared marketing deals; the most complex are multipart arrangements such as cross-ownership positions, joint ventures, and cooperative projects between partners.  Faced with an abundance of choice, managers entering an alliance need to make a key decision, whether they want a shallow alliance or a deep alliance.

Shallow- Alliances – Travelling Light

A shallow alliance might be thought of as a flirtation – a low- commitment alliance that doesn’t have a lot of resources devoted to it and that can be broken on short notice. The shallow alliance solution is to buy 10 per cent of a company’s stock in a friendly transaction and get a seat on the board and an option to buy the remainder of the equity. The assigned board member can then assess the company’s management, its market prospects, and its technology. If it looks good, they buy the rest of the company. If not, they leave. Shallow alliances thus create options for companies in fast-changing industries in which the way ahead is not clear. The alliances are not usually intended to be permanent.

Deep Alliances – Commitment

At the other end of the spectrum are deep alliances involving high levels of financial and managerial commitment by the partners. Deep alliances feature many links between the partners, usually including one or more seats on the board of directors, cross-ownership positions, at least two or three joint ventures, and many less formal but important cooperative projects.  Deep alliances are generally slower-moving than shallow alliances, more difficult to manage and more difficult to end. The benefits of success can be high, but so can the costs of failure. Deep alliances are not for the timid.

Manage After the Deal Is Done

Once you’ve formed an alliance, you’ll sooner or later discover that you have brought together partners with different ways of doing things and somewhat different objectives, priorities, and performance standards.  These differences make the management of alliances a difficult task.  The single most important thing you can do to maximize the probability of success is to assign some of your very best people to work on it. “Best” means managers with excellent people skills, cross-cultural sensitivity, and a tolerance for ambiguity and frustration. Alliance managers need to be patient, yet persistent.

Six months into the life of your alliance you should look closely into the relationship between the partners.  Is trust starting to develop? If not, why not? Where are the trouble spots? Many texts advise that when choosing a partner you should choose someone you trust. This is difficult to do unless you have worked together before. The real question is whether or not you can develop trust over time. The best predictor of the future performance of any alliance is the current level of trust between the partners.

Finally, don’t assume that the alliance is done when the deal is signed.  This is just the beginning.  Be flexible and open to change and learning. There will be plenty of opportunity for both.

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