Is a strategic alliance right for your company’s growth?

Short answer: it depends on your purpose and the degree of control that you need. Strategic alliances are “strategic” because they solve significant strategic challenges where M&A and traditional strategies are less effective – all the more reason they are also attractive and why they have risen worldwide. This article examines their purpose, advantage, and the control you get by type of alliance – for you to judge.

 

PURPOSE AND ADVANTAGE

Strategic alliances are powerful vehicles for business growth, used primarily for three purposes:

• access to market opportunities
• M&A testing and preparation
• corporate portfolio enhancement

These endeavors are different in their ambition and the advantage they offer.

Access to Market Opportunities. Companies enter into strategic alliances to leverage the capabilities of a partner company to take advantage of an attractive business opportunity that the individual firm would otherwise not be able to access on its own. Alliances become appropriate for business opportunities when three conditions exist:

• The opportunity is large
• There is a high level of uncertainty and associated risk, and
• Speed to market is critical

In this case, the advantage is to do more with less, i.e., employ resources you don’t have (and don’t have to pay for) to capture new opportunities quickly.

M&A Testing and Preparation. Companies enter into a strategic alliance to test whether a partner is a good fit for a merger and the firms’ combined synergies – before doing an M&A deal. According to the Harvard Business Review, the rate of failure of M&A deals measures 70% to 90%.¹ A strategic partnership improves the odds of success of the deal by working through the joint value proposition upfront. The advantage of a strategic alliance is to lower M&A risk significantly, including

• avoid committing significant funds upfront under uncertainty
• work through collaboration issues before the acquisition, with time on your side
• start achieving synergies
• once ready, speed up the M&A transaction process for a smoother transition

Corporate Portfolio Enhancement. The objective of the strategic alliance is to improve the attractiveness of a portfolio of businesses. To this end, strategic alliances are instrumental in helping a single SBU in several ways, including

• transition to a new form of competition
• manage to exit the portfolio, or
• serve to develop a new business altogether.

The advantage of a strategic alliance is to grow financial value for the SBU and the corporation.

 

CONTROL

Strategic alliances imply partial loss of control as each company must cede some form of control over how the business is managed. That said, the amount of control depends on the type of alliance relationship: non-equity strategic collaborative agreements, equity strategic alliances, and joint ventures (Exhibit 1).

 

Exhibit 1. Range of Alliance Relationships

 

• Non-Equity Strategic Alliances:  share control over the performance of joint projects. Examples:  joint R&D, joint marketing, shared distribution, joint sales, long-term sourcing agreements

• Equity Strategic Alliance:  establish minority control over an existing company.  Examples: Beijing Automotive Group Co., Ltd. owns 10% of Mercedes Benz.²

• Joint Ventures: control over a new company with a minority, equal, or majority stake. Example: United Launch Alliance (ULA) ownership by Boeing 50% and Lockheed Martin (50%).³

As a result, considering the type of alliance and the control that goes with it is essential in making an informed decision.

 

WHAT IS YOUR BACKUP PLAN?

While the business case for an alliance stands on its merit, it’s always helpful to compare it to alternative options, i.e., your Plan B. Important considerations when comparing an alliance to other options include the following:

• Business value proposition
• Investment
• Operating cost
• Benefit
• Expected cost / value ratio
• Financial risk – overpaying for value
• Strategic risk – failure to achieve synergies
• Operational risk – failure to integrate
• Degree of shared control
• Fit with strategic business path
• Urgency
• Speed to execution
• Distance from revenue

All these parameters are at play for each option – though the degree to which they matter depends on the company’s context, the business sector, and the ultimate objective.

 

CONCLUSIONS

Whether a strategic alliance is right for your company depends on your purpose, the advantage gained, and the degree of control you need – relative to alternative options.

Strategic alliances are powerful vehicles for business growth. They offer companies an alternative between acquisition and organic growth to secure transitory opportunities or pave the way for a more permanent entity in the future.

Alliances have surged worldwide and continue to rise year over year. The primary drivers include global competition, innovation, and the need for corporations and fast-growth startups to deploy new capabilities quickly.

However, strategic alliances are not a panacea for business growth; they can enhance or stall development, depending on how well they are conceived and managed. Successful partnerships rely on transparent processes, activities, and the team’s attitudes, behaviors, and management styles.

Companies must take a disciplined approach by investing in the appropriate alliance model in the context of specific collaboration, new processes and standards, and adopting new managerial skills and behaviors.

Finally, the global rise of strategic alliances speaks directly to the unique value and the powerful competitive weapon they provide. Companies that get strategic partnerships right enjoy extraordinary returns and growth because the essence of the alliance is simple yet valuable – draw on resources you don’t have (and don’t have to pay for) to achieve exponential benefit.