Idea 41 - Strategic alliances (50 Management ideas you really need to know)

Idea 41 -  Strategic alliances

'It's partner or perish', declared Xerox CEO Anne Mulcahy. She was announcing yet another in the chain of strategic alliances that her company has built, to powerful effect, over many years, starting with Fuji of Japan in 1960. It may have sounded like roll-of-the-drums hyperbole, but in today's fast-moving markets - and particularly in the high-tech arena where Xerox competes - it was no more than a reasonable observation.

Managers and shareholders want their businesses to grow, though not always for the same reasons. Growth comes from building share in existing markets or expanding into new ones, and there is more than one way of doing either. The conventional options have always been either to build growth, or to buy it. Companies can grow organically, the hard, backbreaking way. The (deceptively) easy alternative is go out and acquire a competitor or a business in the chosen new market. The trouble with acquisition is that it is expensive, risky and, when it comes to post merger integration, exhausting.

Buying without paying 'Strategic alliances' can provide many of the benefits of acquisition without too many of the problems, more quickly and at a fraction of the cost. Some companies prefer to call it 'partnering'. Whatever you call it, a strategic alliance is an agreement between two or more organizations to pool resources to achieve common goals. They can be established between complementary firms, with customers or suppliers, with competitors (on a carefully defined basis), academic and research establishments or even government agencies. Alliances are generally motivated by something more specific than brute growth, though that will usually be the ultimate aim. It may be the need for access to a particular technology or intellectual property. It may be a way of establishing a presence in a particular territory or acquiring a new distribution channel. Broadening the product range for existing customers, cutting research and development costs or reducing time-to-market are other reasons.

In nearly all of the above, a carefully structured alliance should reduce risk. Rather appealingly, alliances also provide access to a partner's capital. Indeed, some business advisers refer to them as 'virtual funding' because they bring all the benefits associated with a cash injection, relatively quickly and without having to borrow money or sell more shares. With all that going for them, strategic alliances have been multiplying in recent years, to the point where they now outnumber mergers and acquisitions in terms of how many take place each year. In simple marketing alliances, firms exchange customer data and sell to each other's client base - you might earn royalties on their sales to your customers.

In a product alliance, you offer another company's goods to your own customers, expanding your range without costly investment. These and more complex know-how exchanges are especially prevalent in technology and IT industries, where rapid access to new products and research is vital in order to remain competitive. This acceleration in partnering is partly driven by a cooling of enthusiasm for the good old-fashioned merger (for which, read 'takeover'). It is becoming common currency that more mergers fail than succeed, and that any positive shareholder value is more likely to accrue to sellers rather than buyers. In competitive auctions, the winner is inclined to overpay, invoking what they call 'the winner's curse'. Any management with its eye on the stock price will see attractions in the alliance alternative.

Alliance mania is also a product of the growing complexity and speed of today's business environment. Companies are bombarded with threats and opportunities, but their capacity tq respond is limited by finite capital and human resources. On the one hand, they are beckoned by crumbling geographical and technological barriers. On the other, many have retreated into their core competencies and need partners if they are going to venture out again.

A range of options the strategic alliance is one of a range of corporate alliance options that demand different degrees of partner commitment and integration. At one end is licensing, an alliance of a kind, but usually a contractual arrangement involving little actual collaboration. Next comes the non-equity alliance, which shares resources but stops short of exchanging equity. Commitment must be more intense in equity alliances, of which there are two types. The first involves partial acquisition, where one party acquires shares in the other or cross-equity arrangements where they take minority stakes in each other.

The second, most integrated form of equity alliance is the joint venture, where the partners set up a new company in which they each have an interest. These take longer to set up, can be complicated to manage and may take up quite a lot of senior management time.

Some of the most successful alliances have come together to accomplish very specific goals. US telecoms group BellSouth partnered with Dutch telco KPN to drive into the German mobile phone market, while Nestle and Haagen Dazs joined up to compete with Unilever in the US ice cream market.
Ending in tears in business, as in life, intimate relationships don't always run smoothly. In the early 1990s, Apple and IBM formed a strategic alliance to develop a next-generation microcomputer operating system. Called Taligent, it faded away quietly. An automobile industry alliance between Honda and Rover ended in tears. Organizations have learnt from others' mistakes and the odds on success have improved, as long as basic rules are followed. Know exactly what you want from the partnership and why you are entering it. Find the right partner through diligent research - if alliance is a recovery strategy, a partner in as much trouble as you is unlikely to solve your problem. Be crystal clear on what each partner expects of the other, and get a good lawyer to write it down.

Some alliances find that an exchange of people helps to build necessary trust and understanding between the partners. Specialize, letting each partner do what it does best. And remember, it doesn't have to go on forever. Alliances should last only while they are useful to both partners, once the goal is achieved, they should be allowed to lapse without rancor. That's why some say many strategic alliances would be better labelled 'tactical alliances'. But it doesn't sound quite as grand.

Reference: 50 Management Ideas You Really Need to Know

Book by Edward Russell-Walling

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