Alliances ABC

A Strategic Alliance is a long term relationship between firms with complementary strengths that decide to cooperate in an equity or non-equity relationship to bring about an objective that neither could accomplish alone (for example to enter a given market more effectively and efficiently than either alliance partner could manage alone). Alliances can be formed along product or service lines, or along functional lines such as marketing, support, or distribution. Strategic alliances allow companies to minimize risks relating to their technological, market, or competitive environments. Alliances may be horizontal or vertical, may take a form of license agreements, teaming agreements, limited partnerships, general partnerships, corporate joint ventures, or may take less formal forms, such as referral networks.

Broadly speaking, a company enters into an alliance to reap one or more of five types of benefits:
1) Economies of scale by concentrating the activities of two firms into one entity.
2) Faster learning by concentrating the activities of two firms into one entity.
3) Access to know-how or the ability to use know-how.
4) Reduction of risk.
5) Improved competitive situation through shaping competition.

A firm entering an alliance faces several costs:
1) Ongoing coordination between the parents.
2) Losing its own competitive position by transferring knowledge to the other party.
3) Unequal share of rewards in a case of superior bargaining power of the other partner.

Strategic alliances are in essence marriages of unrelated parties. As with all marriages, if not managed carefully, they may unravel to the detriment of all parties involved. To survive, alliances need to have a proper strategy, aligned structure, clear governance rules, and effective monitoring by all parties involved.

Proper Strategy. Clear and Shared Objectives. The formation of alliances should not become an end in itself. The decision to form a strategic alliance should be the result of a strategy planning process. Alliances should be revisited periodically. A strategic alliance that makes sense today may not make sense tomorrow. Partners' goals should be aligned (for example to pool similar resources, to trade dissimilar resources, to reduce costs, to enhance revenues etc.).

Aligned Structure. Alliance structures should be tailored to their business strategy. Strategy should drive the choice of legal structure as well as the choice of alliance partners. Increased alliance size brings greater complexity and often more difficulty in coordinating efforts, but larger alliances tend to be more powerful. Most alliances encounter some degree of culture clash.

Governance Rules. Although strategic alliances are usually intended to be open-ended over time, markets, technologies, and overall strategies of all partners are likely to change. As a result, strategic alliances should be governed by a clear, fair, and flexible set of rules. Alliance operating agreements should be as clear and easy to understand as possible. Agreements should also be flexible. Rather than trying to anticipate every problem or dispute that could arise among the partners, the governing documents should place greater emphasis on the process for resolving business disputes among the partners. Typically, alliance agreements will address issues that fall into four main areas: partner contributions and distributions, control, allocation of risks and rewards, and alliance termination strategies.

Monitoring. Partners and the alliance itself must establish the appropriate performance measures that are linked to the alliance's strategic goals. Then, systems must be in place at the alliance level and at the partner level to collect information and evaluate those measures. Frequently, alliance agreements give each partner the right to audit or otherwise test the accounting records of the alliance. This is often key to each partner being confident that the alliance rewards are being allocated fairly and in accordance with the alliance agreement.

More strategic alliances fail than succeed. There are many reasons for that. It could be that one party tries to dominate the relationship, that rewards are not divided proportionally or that values are not shared and there is a clash of cultures. It could be also that an alliance was a wrong deal, with a wrong partner for wrong reasons.

"Alliances as a broad-based strategy will only ensure a company's mediocrity, not its international leadership. No company can rely on another outside, independent company for skills and assets that are central to its competitive advantage. Alliances are best used as a selective tool, employed on a temporary basis or involving non core activities"
Michael E. Porter - The Competitive Advantage of Nations

"If you do not seek out allies and helpers, then you will be isolated and weak."
Sun Tzu, "The Art of War"

"Without local guides, your enemy employs the land as a weapon against you."
Sun Tzu, The Art of War

"The forces of a powerful ally can be useful and good to those who have recourse to them... but are perilous to those who become dependent on them."
Niccolo Machiavelli, "The Prince"

"Those who establish adaptable formations will survive even if they are small. While those who establish unadaptable formations shall perish - even if they are large. So it has been since the beginning of time."
The Ancient Book of the Huainan Masters (a 2000 year old Chinese war text)

"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."
Charles Darwin

"There are routes not to be followed, armies not to be attacked, citadels not to be besieged, territory not to be fought over."
Sun Tzu, "The Art of War"

"It is easier to get into trouble than to get out of it."
Curtis E. Sahakian

Horizontal Alliances Horizontal alliances include firms of the same industry. They are created usually to achieve scale, to expand geographically or handle niche areas of expertise.

Vertical Alliances Vertical alliances are relationships among organizations in different industries. With little chance of competition between alliance members, firms can combine their skills to compete against firms who are not allied.

Referral Network A business network is a group of companies that cooperate and collaborate to seek new business opportunities. They group together in order to build critical mass to achieve the competitive advantages of scale and scope.

Teaming Agreement A teaming agreement is usually a project-oriented effort where the firms work together at different points in a project, but have no further commitment to each other.

License Agreement A license agreement is a contract that grants certain use or production rights relating to a technology or idea to specified parties for specific uses under agreed upon time frames. The licensor or inventor is usually awarded a combination of an up-front licensing fee and a monthly or quarterly royalty based on sales.

Joint Venture A joint venture is an equity-based initiative between two or more companies that is given a corporate entity of its own. They have been used as market entry strategies to protected markets since the 1930s. They are often used to enter global markets.