Strategic Alliance Partnering - Some Guidelines

• Strategic Alliance: A business relationship in which firms combine complementary strengths and share risk by pooling financial, physical, and personnel resources regarding a specific business venture; each firm remains a distinct entity, separate from its strategic alliance partner.

• Why Strategic Alliances are Undertaken:
  • Business Environment.
    • Globalization of demand, supply, and increased international competition.
      • Major markets have emerged in Europe, Japan, and in newly industrialized countries in Asia and Latin America.
      • Homogeneous demand for same products due to increasing equivalency of educational levels, higher mobility of people, and mass media communications.
      • Trends in realizing economies of scale by concentrating production of components or end products in the same location.
      • Trends in moving production facilities from one location to another to exploit differentials in wage rates and resource costs.
    • Accelerating pace of technological change.
      • Increasing technological parity among nations.
      • The range of technology required to compete often exceeds the financial or technical capabilities of the individual firm.
    • Resulting pressures on the individual firm.
      • Pressure to increase or protect market share by expanding into new domestic and foreign markets.
      • Pressure to build products beyond the existing technological capabilities of the firm.
      • Pressure to accelerate product development and bring technology to the marketplace faster.
      • Pressure to lower costs to customers and enhance product quality and usefulness to customers.
  • Private Sector's Response.
    • Concentrate on the firm's core competencies and outsource other functions.
      • A core competency is a key competitive advantage of the firm.
        • At each point in the value chain of developing, producing, and delivering a product or service, the firm is in competition with the best firms in that particular area.
        • Examples of value chain elements: technology development, product design, process engineering, manufacturing, assembly, marketing, sales, service.
    • Leverage core competencies by joining forces with a constellation of partner firms having complementary core strengths.
      • Gain access to complementary human, physical, and financial resources; gain access to innovative technology.
        • Gain access to technical expertise, other manpower, manufacturing capabilities, raw materials, and funds.
          • Mitigate capital investment requirements, financial exposure, and risk.
          • Strengthen technology underlying the product or service.
          • Speed production and delivery to customers; lower cost to customers.
      • Gain access to new domestic and foreign markets.
        • Access established distribution channels to preclude market entry barriers.
          • Enables the firm to overcome barriers of language, national culture, laws, regulations, and resistance to foreigners.
          • Enables the firm to do business with less risk in a country where political stability is uncertain.
      • Direct limited capital investment funds to the functions that the firm does best.

• Some Types of Strategic Alliances:
  • The type of strategic alliance and alliance parameters are limited only by the imagination of the partners. Some of the more common types of alliances include:
    • Pooled Purchasing - alliances between firms for purchasing similar or identical products by combining separate purchasing volumes to increase their leverage on suppliers.
    • Supplier Partnering - alliances between a firm and its suppliers to boost quality, reduce cost, and increase speed by establishing long term relationships; enables a supplier to develop the desired parts or services at a specified level of quality or cost.
    • Distributor Partnering - alliances between a firm and one or more distributors to provide access to new markets, domestic or foreign, or strengthen a position in existing markets.
    • Franchising and licensing agreements - alliances for providing long term business assistance or access to a new product or technology.
    • R&D partnerships and research consortia with other private entities.
      • Also includes alliances between the firm and government agencies or universities.
    • Joint Venture - an alliance in which a new legal entity is formed where both partner firms invest capital and share ownership.
      • The joint venture entity is staffed by a separate management team.
      • The joint venture may own its assets independently from its parent firms.
      • Partner firms take an active role in the joint venture's strategic decisions.
      • The joint venture is the vehicle of choice for international market entry in countries which do not permit wholly owned subsidiaries.

• Strategic Alliance Process:
  • Define Company Need.
    • Firm must develop a clear understanding of its own core competencies.
      • The firm must identify the elements in the value chain it does best; it must then determine which activities it might outsource to other firms without undue risk.
    • Firm should project business prospects with and without an appropriate alliance partner.
      • Identify the downside and compromises required to implement the partnership.
      • Assess the impact of the prospective alliance on the competition, to include the competition's possible responses.
    • Firm should consider alternative courses of action other than a strategic alliance.
  • Principles for Partner Selection.
    • Determine a reasonable criteria to identify prospective partners.
      • It is essential to consider more than one candidate partner.
    • Seek prospective partners with complementary technology, skills, and resources, to include time line considerations.
    • Seek prospective partners having compatible corporate cultures.
      • Corporate culture consists of a firm's values and behaviors.
    • A prospective partner should be able and willing to contribute something specific.
    • Finding an alliance partner is probably best managed by the business unit that will be directly involved rather than by corporate headquarters.
  • Due Diligence in Partner Selection.
    • It is imperative to assess a prospective partner's:
      • Past quality and delivery of performance; look for gaps in a prospective partner's capabilities and professionalism.
      • Financial and physical resource capacity and capabilities.
        • Includes a credit check and financial analysis of the prospective partner firm.
      • Top management strength and philosophy.
        • Includes an assessment of a prospective partner's board of directors.
      • Compatibility with the firm in terms of strategic goals.
      • Ability to protect intellectual property.
      • Ownership of patents and intellectual property rights that are key to the strategic alliance venture.
      • Prospective partner's likely trustworthiness:
        • Research the prospective partner's relationships with its suppliers and customers.
        • Research the prospective partner's history of litigation.
        • Research the prospective partner's strategic alliance history.
        • Consult with the prospective partner's former employees; research any current or past labor relations problems.
        • Look for any inconsistency, in public records or otherwise, between the prospective partner's words and deeds.
    • Learn as much about the prospective partner's organization as possible.
      • Personal visits to a prospective partner's corporate headquarters and plant sites are effective ways to assess: corporate culture, capabilities, adequacy of resources.
      • Seek a strategic alliance partner with goals that are consistent and compatible with one's own firm.
        • The goals of each firm must not conflict in any way.
        • It is critical that strategic alliance partners act in expected ways.
  • Negotiations.
    • Establish a win/win objective and relationship.
    • Partners must clearly communicate their expectations and requirements, to include timing; goals of the alliance must be mutually agreed upon.
      • It is critical to explore divergent values and expectations; it is important to clearly define "success" and base "success" on realistic expectations.
      • Firms must be open regarding what resources they seek and what resources they can commit.
        • Prospective partners should exchange lists of attributes they want and have to offer. For example,
          • Technical, production, and other know-how.
          • Sales and service expertise.
          • Production facilities.
          • Reputation and brand recognition.
          • Cash.
          • Market access.
    • Define roles and responsibilities, and specify committed resources.
    • Establish the terms under which the strategic alliance partnership will be dissolved both for reasons of failure or success.
      • Consider limiting the alliance to a period of time, such as five years, at which time renewal of the alliance is an option.
      • Provide for the liquidation/distribution of partnership assets.
    • Potential partner must demonstrate willingness to assume commensurate levels of risk.
    • Jointly agree upon a mission statement and an operational plan.
    • Jointly agree on project planning and monitoring processes.
      • Agree on a methodology and criteria for monitoring and measuring progress.
    • Specify rights to technology.
    • Be mindful that an inclination to avoid confrontation in negotiating an alliance will likely have perilous consequences.
    • Formalize the alliance agreement made.
  • Implementation.
    • Do:
      • Establish a single alliance manager for each partner.
      • Clearly define operational responsibilities to reduce potential for role ambiguities.
      • Establish a joint steering committee that meets regularly.
      • Provide opportunity for mutual input and feedback from both partner firms.
        • Alliances cannot be run over the telephone; ongoing face- to- face contact is critical.
        • Working level staff should meet regularly with management.
      • Recognize that top management involvement is essential not only in forging alliances but also in implementing the alliance.
      • Eliminate surprise; if the firm becomes aware of something that affects a partner's interests, it is imperative to bring it to the other party's attention immediately.
      • Attempt to learn as much as possible from strategic alliance partners.
      • Consider phasing in the strategic alliance relationship and thus gradually increasing the commitment of resources and reliance on the strategic alliance.
      • Periodically and systematically monitor a strategic partner's contribution.
        • It is imperative to monitor a partner's making the requisite contributions in human, material, and capital resources in a timely manner.
          • For example, the caliber of researchers assigned to the alliance is critical for technology oriented alliances.
        • Early action regarding identification of problems and implementation of corrective actions is critical.
          • In particular, the firm should look for signs of neglect or imbalance on either side.
    • Avoid:
      • Automatically placing the parochial interests of one's own firm ahead of the interests of the strategic alliance partnership.
      • Complacency and a feeling that little effort is required to maintain and build the relationship with a strategic alliance partner.
      • Frequently rotating individuals in and out of involvement in the strategic alliance.
        • Lack of continuity of alliance managers and other personnel is a great impediment to building trust.
      • Senior management leaving the task of selling the importance of an alliance to the firm's middle management.
      • Allowing the establishment of an alliance to force abandonment of business practices that have previously been critical to the firm's success.
    • Some Inherent Obstacles:
      • Successful people and successful firms tend to prefer relying on their own abilities rather than being dependent on outside partners.
      • Human nature resists investing the time required in building relationships that are critical to successful strategic alliances.
      • Many managers and other personnel see strategic alliances as threats to their jobs.
      • The firm's personnel is typically suspicious of the motives of the prospective strategic alliance partner firm.
        • Language differences often compound such problems in the case of foreign alliance partners.

• Additional General Guidance:
  • Form a strategic alliance only around a solid business opportunity.
    • The alliance must create economic value for the partner firms' customers and therefore for each of the partner firms; otherwise, the alliance will fail.
  • A firm's financial pressures should not increase as a consequence of its' involvement in a strategic alliance.
  • Avoid viewing a strategic alliance as a quick fix tactic to address some immediate problem; alliance goals should have relatively long term horizons.
  • Establish contingency plans for the firm regarding possible failure of the strategic alliance.
  • The firm should not be overly reliant on any particular strategic alliance.
  • Trust and mutual respect are critical.
    • For example, respect a partner firm's market boundaries.
  • Commitment to the strategic alliance must be organization wide and be particularly strong at the top executive level.
  • In addition to research personnel, each partner should contribute top quality people in all other areas; this signals whether a partner is serious about the venture.
  • Primary reasons for strategic alliance failure:
    • Poor leadership or unclear leadership.
    • Corporate culture incompatibility of partner firms.
    • Imbalance in terms of resources contributed, risk assumed, importance of the alliance to each partner, and control of the alliance.
  • Potential partner firms might consider informally working together on a small project to assess compatibility and mutual trust prior to entering into a strategic alliance.

• Risks
  • Inadvertent, gradual dependence on alliance partners to the extent of a firm's no longer being an autonomous, self-contained entity that can function without its partners.
    • In particular, the firm must be wary of relinquishing or otherwise permitting any technology, skill, or capability from migrating out of the firm if it is critical to one of the firm's core competencies.
  • The firm's core competitive advantages becoming vulnerable to moves by its' strategic alliance partners.
  • Failed alliances often result in leakage of proprietary technology to the alliance partner.
  • Inadvertent disclosure of critical non-alliance information to alliance partners.
    • An information gatekeeper might be useful in restricting partner access regarding the firm's other business interests.
  • When a strategic alliance does not work out it is rarely a secret; this can lead to loss of confidence in management's vision and judgment.