Best Practices: Strategic Alliances

Strategic Alliances: An Overview

A strategic alliance is a unique relationship between two or more companies working together on a project designed to generate a profit neither partner could achieve on their own. Alliance partners keep ownership of their own businesses, while contributing capital, expertise and other "tradeables" to the mutual venture.

During the past decade, strategic partnering has become a more attractive option because of the wide range of benefits, without the risk and burden of paying for them. These benefits include:

• Expanded access to markets
  
  
• Advanced technology
  
  
• Quicker product development
  
  
• Broader geographic range

The goal is finding a partner in areas where one or the other company has limited expertise. In a successful alliance, partners gain access to specific strengths -- such as sales, technology, finance, distribution, etc. -- that they don't possess themselves. Another driving force behind alliance-building is the desire to control the quality and performance of the entire production process -- from raw materials to system design, from manufacturing to global distribution.

Sharing Benefits and Risks

The synergy generated by two cooperating organizations results in a sum greater than their parts. A successful alliance preserves each business' distinct competitive advantage and allows those advantages and core competencies to grow.

Benefits of partnering also include economies of scale, resulting in:

• Increased versatility
  
  
• Reduced costs through increased production
  
  
• Enhanced purchasing and financial arrangements
  
  
• Stronger negotiating position with suppliers, customers and/or regulatory agencies
  
  
• Greater access to critical resources
  
  
• Opportunities for large-scale marketing efforts

For the unprepared or uninitiated, a strategic alliance can be a minefield. Two of the most pervasive myths about partnering are:

1. "Alliances are easy to pull off."
   The process of alliance screening, assessment, negotiation, implementation and maintenance is anything but easy. To succeed, an alliance requires deep, organization-wide commitment from all involved.
   
   
2. "Alliances are for everyone."
   In fact, the opposite is true. A partnership between organizations with radically different goals or cultures will most likely fail.

CEOs and other alliance-builders should ask these questions of themselves and their potential partners:

• What do we expect the alliance to achieve over a long period of time?
  
  
• What effect will the alliance have on each partner's long-term competitiveness?
  
  
• How will the staff of each company react? What about other stakeholders, such as investors, suppliers, customers, etc.?
  
  
• Are we giving up too much proprietary information and too many processes?
  
  
• What level of trust is necessary for the alliance to succeed and how much can we reasonably expect from our partner?

The Path to Competitive Advantage

Like any other business venture, a strategic alliance is driven by enlightened self-interest. The best partnerships are pragmatic enterprises that provide the resources, expertise and positioning each partner can't achieve on its own.

When it comes to identifying a potential partner, a company's vision plays an integral role. Our experts agree that your company's vision should be inextricably linked to the selection process. What major competencies do you need in order to fulfill your goal of being the best in your industry? As you brainstorm your answers, you will identify specific areas and elements. This will help narrow the choices to two or three key partner candidates.

Of course, in the rush to forge a partnership, remember that potential partners need a reason to welcome you into the alliance. Before approaching another business, make sure you have all of your own ducks in a row:

• Articulate the competitive values you bring to the table (i.e., technical expertise, knowledge of and access to a niche market, etc.)
  
  
• Offer a solution to a highly visible business problem
  
  
• Bring a core competency to the partnership lacking in the other organization

Finding the Perfect Match

As part of the alliance-building process, answer these fundamental questions to better understand your current and projected strategic position:

• What industry factors (capital, technology, human resources, natural resources) have the greatest impact on your business today?
  
  
• What competitive conditions are influencing your suppliers? Your customers?
  
  
• Are industry newcomers and/or potential substitutes vying for your products and services?

Seek out a partner whose current and potential development resources fit well with your company's own resources. Look for:

• Production capacity
  
  
• Financial resources
  
  
• Technological expertise
  
  
• Distribution network
  
  
• Warehouse facilities
  
  
• Raw material supplies

Other good partner possibilities include suppliers of products, services or specialized technology -- particularly suppliers you're currently working with or those you've worked with in the past. Other helpful venues for the partner search include trade shows and conferences; chambers of commerce; trade associations; and industry research institutes that regularly explore the marketplace for new products, technologies and potential partners.

Closing the Deal

After the partner screening and selection process is complete, the real work of negotiation begins. But while the alliance must be endorsed and supported at both organizations' highest levels, neither company's CEO should be included in actual negotiations. This preserves the option by which the CEO can serve as a "court of appeals" in case of a serious snag in discussions. Also, it eliminates the possibility of loss of face by either side.

The TEC experts agree: lawyers should not be present during the first round of negotiations. The spirit and intent of the alliance guides the process. The legal nature of the relationship needs to be more of a safety net.

Getting each partner's expectations in written form is an important part of alliance negotiations. These expectations can grow out of in-depth discussion on the following:

• Mutual levels of commitment
  
  
• Organizational structures that fit alliance strategy
  
  
• Clearly defined alliance benchmarks
  
  
• Investment and compensation rewards tied to performance measures
  
  
• A formula for tracking assets and capabilities

A non-binding letter of intent is the minimum to expect from early rounds of negotiations. This helps isolate elements that potential partners find unacceptable. On the positive side, it helps seal a commitment on both sides to complete a mutually satisfactory agreement by a specified date.

From Competition to Collaboration

Broad-based best practices for alliance implementation and integration include:

• Designing a structure that meets the needs of the alliance, not the needs of the individual partners
  
  
• Appointing high-performing managers to implement the alliance and linking results to pay and investment incentives
  
  
• Connecting strategic objectives to budgets and resources, with a built-in review process
  
  
• Defining exit obligations, divorce procedures and penalties.

The alliance structure should be agreed upon beforehand, rather than when the time comes to implement. The principals must agree on a shared working vision. Identify key areas of cooperation, then assign respective team members to draft areas of agreement. As partners advance through alliance implementation, these practices can be used as guidelines:

• Appoint an "alliance manager" whose role and responsibilities are defined by specific alliance goals.
  
  
• Organize timetables, design measurement tools and conduct periodic reviews.
  
  
• Track how competitors respond to the alliance.
  
  
• Use open communication to resolve issues rather than turning only to the original alliance agreement for guidance.

Governance isn't easy, nor can it be standardized. When it comes to overseeing the alliance, companies must be flexible and innovative. Effective governance incorporates a custom-designed system and set of measurements that are consistent with the alliance's founding vision.

Partnering for Success

Well-positioned "alliance champions" are crucial to success. An alliance champion believes deeply in the enterprise and focuses on its acceptance and implementation. Champions -- who can be senior executives, members of the negotiating team, etc. -- are the ones who steer the alliance through the bureaucracies of the parent corporations. They have the credibility to defend its merits and actions.

By extension, teamwork is the backbone of an effective alliance. Whether through steering committees, operating teams or a group of task forces, partner teamwork depends on cross- functional "fertilization" generated by star performers from both organizations.

Creating an Alliance Culture

Prospering alliances encourage a high degree of cultural adaptability in their ranks. For the right "fit" to evolve, corporate cultures on both sides have to find common ground and nurture a spirit of collaborative activity.

Getting to know your partner involves learning about their internal workings and seeing how they respond to external events. Of course, the reverse also is true: during the "getting to know you" phase, your own internal and external operations will come under similar friendly scrutiny.

Most important, according to our TEC experts, is trust. Partners in an alliance remain separate entities guided by their own interests; but they must agree to coordinate their actions and willingly participate in joint decision making. They have to learn to not engage in traditionally opportunistic behavior, seeking short-term advantage for themselves alone. Instead, they should do everything possible to maintain an alliance relationship that yields long-term results.

To build trust between partners:

• Start with small, simple operations that enable each partner to experience the other's reliability.
  
  
• Be clear about what information can be disclosed and what cannot.
  
  
• Look at your own behavior from the other's point of view. Get your partner's feedback on your own strengths and weaknesses, and on how to improve the relationship.

Beware of "large company vs. small company" minefields. Frequently, the cultures of dissimilarly sized companies can generate conflicts and misunderstanding. To avoid this pitfall, our TEC experts advise the following:

• Share all relevant information and minimize conflicting objectives.
  
  
• Agree on a shared vision, common goals and partnering strategy.
  
  
• Agree on key performance indicators and jointly measure performance.
  
  
• Assign a partnering/alliance manager and clarify the role.
  
  
• Involve and inform those who have to make the alliance work at the operational level.
  
  
• Gain and maintain executive level support.

What Gets Measured, Gets Done

For the alliance to succeed, partner companies must design concrete measures of governance effectiveness. But because each alliance is a unique entity, this performance should be measured against specific, customized standards. Useful performance measures include:

• Revenue share
  
  
• Return on investment
  
  
• Contribution to fixed costs
  
  
• Return on sales
  
  
• Level of market penetration
  
  
• Speedy response to customer needs
  
  
• Cost savings
  
  
• Improved access to markets

Other "soft" indicators -- customer satisfaction and loyalty, continuous improvement and referred business -- are equally important. They are sometimes the most accurate gauge of alliance effectiveness.

Business Strategy for World-Class Organizations

Partnering is a logical response to the globalization of markets, increasingly intense competition, the need for faster innovation and the growing complexity of technology. It makes good business sense to connect people, departments, companies, customers and suppliers.

When negotiated, implemented and monitored correctly, a thriving strategic alliance meets each member's objectives by offering the scale, skills and positioning needed to succeed in a global marketplace.

Contributing Experts:

Randy Haas

Randy Haas is the founder and principal of California-based White Horse & Associates, a management consulting firm specializing in client collaboration for strategic solutions and cultural change. Haas and White Horse have partnered with organizations in a diverse group of industries, including manufacturing, retail marketing, healthcare, telecommunications and energy services. Among his other achievements, Haas has designed a strategic planning and thinking methodology named "global best practice" by Arthur Andersen Consulting for its application and implementation effectiveness.

Tony Lendrum

Tony Lendrum is director of Strategic Partnering Pty Ltd., a management consulting firm formed in 1994 to work with organizations interested in pursuing the benefits of strategic partnering. He worked for 14 years for the international chemical company ICI Australia in various roles, both in Australia and overseas. His positions included operations manager, sales manager and partnering manager for the ICI/Tetra Pak partnership, which became a benchmark for both organizations. His acclaimed book, "The Strategic Partnering Handbook," is published by McGraw-Hill Australia (1998, 2 nd edition).

Peter Palermo

Peter Palermo is president and CEO of Strategic Triangle Inc., a company he founded in 1994. STI is an international management consulting firm specializing in the formation of strategic alliances to facilitate technology, manufacturing and marketing growth opportunities in the global marketplace. He provides STI clients with assistance in the analysis, development and implementation of cross-cultural strategic alliances. Prior to founding STI, Palermo retired from the Eastman Kodak Co., where he served as a senior corporate vice president and general manager of the company's consumer imaging and diagnostic imaging global business units. Palermo's career assignments included general management positions in Kodak's Caribbean, Philippine and Mexican operating companies and as the company's chief marketing officer. Palermo also served as president and CEO of the Jason Foundation for Education.

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