UK: Strategic Alliances

Last Updated: 14 December 2012

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

An attractive option

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 to find a partner in areas where one or other of the companies has limited expertise. In a successful alliance, partners gain access to specific strengths – for example, in sales, technology, finance or distribution – 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 co-operating organisations results in a sum greater than its parts. A successful alliance preserves the distinct competitive advantage of each business and allows those advantages and core competencies to grow.

The benefits of partnering also include economies of scale, resulting in:

  • increased versatility
  • reduced costs through increased production
  • enhanced purchasing and financial arrangements
  • a 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. Below are two of the most pervasive myths about partnering.

  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, organisation-wide commitment from all involved.
  2. "Alliances are for everyone."
    In fact, the opposite is true. A partnership between organisations 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 and customers?
  • 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 that each partner can't achieve on its own.

When it comes to identifying a potential partner, a company's vision plays an integral role. We believe that your company's vision should be inextricably linked to the selection process. What major competencies do you need in order to fulfil your goal of being the best in your industry?

As you brainstorm your answers, you will identify specific areas and elements. This will help to 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 (e.g. technical expertise, knowledge of and access to a niche market).
  • Offer a solution to a highly visible business problem.
  • Bring to the partnership a core competency that is lacking in the other organisation.

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 and 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 specialised 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 organisations' 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.

We believe that 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:

  • mutual levels of commitment
  • organisational 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 to isolate elements that potential partners find unacceptable. On the positive side, it helps to 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 co-operation, and then assign respective team members to draft areas of agreement. As partners advance through alliance implementation, the following practices can be used as guidelines.

  • Appoint an "alliance manager" whose role and responsibilities are defined by specific alliance goals.
  • Organise 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 standardised. 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 "fertilisation" generated by star performers from both organisations.

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 is also true: during the "getting to know you" phase, your own internal and external operations will come under similar friendly scrutiny.

Most important is trust. Partners in an alliance remain separate entities guided by their own interests; but they must agree to co-ordinate their actions and willingly participate in joint decision making. They have to learn to not engage in traditionally opportunistic behaviour, 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 behaviour 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 versus small company" pitfalls. Frequently, the cultures of dissimilarly sized companies can generate conflict and misunderstanding. To avoid this pitfall we recommend the following.

  • Share all relevant information and minimise 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, customised 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 organisations

Partnering is a logical response to the globalisation 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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