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Strategic Alliances That Work:
Should You Build a Strategic Alliance?
Micheal Kelly and Jean-Louis Schaan prepared this note solely to provide material for class discussion. The authors do not intend
to provide legal tax, accounting or other professional advice. Such advice should be obtained from a qualified professional.
Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of
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Copyright © 2005, Ivey Management Services Version: (A) 2009-10-01
This paper is the first of a four-part series on building strategic alliances that work. Whether you are a business
leader considering an alliance or you are already in the middle of one, the series is intended to help you understand
the cornerstones of success to building a strategic alliance.
Each part concentrates on the central activities and issues surrounding a unique phase of the alliance process.
These phases include creating the strategic rationale for an alliance, selecting a partner, negotiating the deal and,
implementing the relationship. You may prefer to read the parts out of order to correspond with the context of your
own alliance development.
At the conclusion of each section you will be provided a helpful set of diagnostic questions to aid you in determining
your own company’s strength and suitability of achieving success through alliances.
If your alliance is already underway, these tools can be a healthy way of reviewing the quality of the alliance,
indicating where intervention may be required.
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Should You Build a Strategic Alliance?
Today's business environment has changed. Amidst rapid and dramatic change heavily driven by
IN BRIEF
globalization, increased business complexity, diversified customer needs – and simply speed –
companies need to respond and adapt accordingly if they are going to survive and grow. Alliances
serve as an important business strategy to respond to the business environment and they increasingly
define the structure of entire industries as is the case in the multimedia, telecommunications,
automobile, and biotechnology industries.
And they work. Companies that successfully embrace alliance strategies consistently perform better
than those that do not. These companies benefit from alliances in a variety of ways including sharing
cost and risk, pooling their respective strengths and leveraging complementarities. How much
importance and stake you place in forming an alliance should be directly proportionate to the degree to
which the alliance supports your overriding business strategy. Simply stated, if it is going to be
instrumental in achieving your long term business objectives you will want to put into it suitable time and
resource commitment to ensure its success. In contrast, if it is not as strategically important, exercise
prudence in making a commitment.
Deciding to commit is only part of the readiness question. You would be well served to take a close look
at the internal structure, policy, and culture of your organization to make sure the internal machinery is
indeed setting you up for success. You may discover you must first get your house in order before you
should entertain forming an alliance with another organization because those alliances that are not
managed well can prove to be very costly!
Should You Build a Strategic Alliance? is the first of a four-part series on building strategic alliances that
work. Whether you are a business leader considering an alliance or you are already in the middle of
one, this series is intended to help you navigate the process of identifying, negotiating, and
implementing an alliance in order to increase your chances of success.
Firms of all sizes are looking to create and maintain a competitive edge
in a business climate where the abilities to adapt and respond are
critical to survival. Traditional organizational boundaries and business
models have been redefined with more emphasis being placed on
alliances. Among large companies, alliances have become the norm,
with companies engaging in anywhere from 30 to 100 alliances each.1
Why? The belief is that alliance models are highly flexible, are
generally lower risk, and enable companies to respond to rapid and
sometimes radical changes in the marketplace and technology.
What are Strategic Alliances?
A strategic alliance is a formal and mutually agreed to commercial
collaboration between companies. The partners pool, exchange or
integrate specific business resources for mutual gain. Yet partners
remain separate businesses.2 Alliances can be either equity or non-
equity-based and typically start with one cooperative agreement that
evolves into a portfolio of arrangements built over time.
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Alliances are not risk free, however, and many studies cite 40-50%
success rates.3 Other research points out these rates are not dissimilar
to alternative strategies including wholly-owned subsidiaries4 but the
bottom line is there is much opportunity for improvement. You would be
well-served to invest effort in managing your alliance well. If poorly
managed, they can be very costly distractions wasting resources,
destroying morale and resulting in a loss of competitiveness. Even
ventures that ultimately succeed are seldom problem-free and at least
half can expect to see serious operational challenges within the first two
years.
In spite of this sobering rate, enthusiasm for alliances continues to
grow. A 2004 PriceWaterhouseCoopers study of 201 senior finance
executives, finds nearly two-thirds of respondents were more willing
now to strike alliances than they were three years ago.5 Another study
of Fortune 500 companies shows that the top 25 that successfully
embrace alliance strategies consistently performed better than those
that do not.6
Why alliances? Alliances are viewed as an excellent vehicle to obtain
market growth amidst market conditions that are rapidly and
Partnering for Growth dramatically changing world-wide. Globalization, the growing complexity
Ask Jeeves is a highly popular of the business environment, increasingly diverse customer needs, the
Internet site that allows visitors to
need for speed and momentum are the underlying factors. In this
type questions in ordinary language
and receive relevant answers. The climate, alliances are an excellent way for organizations to share risks,
core strength of the website is the pool strengths and integrate business operations for their mutual
company’s natural language search benefit.
technology. In 2000, the company
enjoyed a strong brand within a
competitive search engine space.
Management wanted to capitalize
on their leadership position and
swiftly expand into the lucrative
enterprise market. Using alliances
as a vehicle to achieve market
growth, Ask Jeeves announced
partnerships with several customer
support outsourcing companies
already serving Fortune 1000
companies. While alliance partners
gained access to leading edge
search technology to improve their
outsourcing solutions, Ask Jeeves
gained accelerated entry forecasting
a 20% increase in their customer
base over the next 12 months as a
result of the alliances.
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Competition is While growth and profitability are typically the common end-goal,
becoming as much a alliances satisfy a variety of needs for individual companies and can be
battle between a valuable tool across a company’s entire business system as indicated
competing and often below. Moreover, alliances have been increasingly used to construct
overlapping coalitions broader business systems by linking a company’s internal core
as it is between competencies with the ‘best of breed’ capabilities of allies.
individual firms.
Source: Sabine Urban and Serge Vendemini (1992) European Strategic Alliances:
Coopreative Strategies in the New Europe: Oxford: Blackwell; 131
The growth of alliance-based businesses has led some experts to
conclude that competition is becoming as much a battle between
competing and often overlapping coalitions as it is between individual
Competing Industry Alliances firms. Alliance networks, or business webs, increasingly define the very
structure of an industry as is the case with industries including
Juniper Networks develops high multimedia, telecommunications, networking, automobile, and
performance networking products biotechnology. Cisco, Dell, and more recently Nortel are examples of
for the growing Internet market. The
Mountain View California firm has
virtual integration where non-core competencies in the value chain are
directed its technology at the heart distributed across alliance partnerships. For smaller companies, this
of Cisco in the Internet core. In means understanding - and targeting – the ideal ecosystem within
1998, it raised venture financing and which you want to participate and understanding what the resulting
partnered with a number of Cisco implications of membership are.
competitors including Ericcson,
Nortel, the Siemens/Newbridge
alliance, 3Com, Lucent, UUNET Outsourcing is another form of alliance that has evolved particularly in
Technologies Inc, and ATT the area of Information Systems. What is remarkable is that industries,
Ventures. For Juniper this such as banking, are choosing to outsource IS while they consider it to
represented a partnership with
companies that collectively
be a core competency that, intuitively, one expects would not be
represented more that $75 billion in outsourced.7 In these instances, the strategic drivers include changing
annual sales to virtually every major organizational boundaries, organizational restructuring, and risk
networking customer. These mitigation supersede the traditional view.
alliances provided a foundation for
the delivery of Juniper’s technology
around the world. Its partners had
the opportunity to integrate Juniper’s The Benefits and Challenges of Strategic Alliances
leading edge technology with their
existing product lines and services
worldwide.
When successfully built and managed, alliances can provide both
strategic and financial benefits to participating firms:
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Although there are • reduced costs and risks
cautionary statistics on • access to needed technology and distribution
alliance failures, there • access to new markets and customers
is also evidence of • faster acceptance of new technology
significant potential. • enhanced credibility
• increased investment
• boost in stock market value
• opportunities to learn
• opportunity to build new skills
From a financial perspective, the evidence of the impacts on the bottom
line due to alliances is impressive pointing to substantial impacts on
ROI and ROE. Among large alliances there was a substantial share
price change in 52% of the alliances and 70% of these were share price
increases. It is interesting to note this figure represents substantially
higher effects than from acquisitions.8
It is clear that, when managed well, alliances can create tremendous
value. In terms of revenue in, a 2002 International Data Corporation
study, 90% of survey respondents reported their alliances contributed
between 5-50% of corporate revenue.9
So although there are cautionary statistics on alliance failures, there is
also evidence of significant potential. Alliances will remain a strategic
business model. The fundamental question therefore becomes: what
drives successful alliances for both large and small companies?
Problematic alliances can be the result of many factors including
industry dynamics (e.g. regulatory changes), new technologies, new
entrants or economic cycles. The ability to weather external forces as
well as maximize internal alliance potential is heavily driven by
establishing a solid alliance foundation that includes experience, mutual
trust, strong relationships, and sound business rationale.
First establish your Understand What You Really Need from an Alliance
company’s strategic
objectives and then The rationale for your strategic alliance needs to be firmly grounded in a
evaluate your resources clear strategic understanding of your company’s current capabilities and
and capabilities to see if those it will need to be successful in the future. First establish your
you are capable of company’s strategic objectives and then evaluate your resources and
executing on your own. capabilities to see if you are capable of executing on your own. The
clearer the significance of the alliance for the success of your future
strategy, the more committed you will be to work at its success.
Start by developing a realistic appraisal of what resources are required
to meet your company’s long-term strategic goals; that is, what
capabilities will give you a competitive advantage in three to five years?
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These capabilities might include credibility, geographical presence,
distribution, technology, or money. Then objectively state what your
current capabilities really are.
An understanding of the gap between what you might be able to
accomplish internally and what you need, helps to develop the profile of
the best partner for you (if any). With this undertaking you begin to
establish your criteria for rating partnership opportunities if this is an
option you choose.
Alliance or Acquisition?
You also need to assess your company’s readiness to embark on an
alliance. The process should involve an evaluation of your various
alternatives and the pros and cons of each. In many cases a strategic
alliance may not be the most appropriate vehicle for meeting your
strategic needs. Studies show that alliances work best for companies
entering new geographic markets or related industries. Acquisitions,
which should be viewed as an alternative to alliances, are more likely to
be effective in core business areas or existing, highly competitive
markets.10 Make note, however, that a study by McKinsey & Company
found that using an alliance to hide a weakness — as opposed to
leveraging strength — was rarely a successful strategy.11
Identify the Real Costs
Before you decide an alliance is the way to go, understand the potential
costs involved. For example, you should consider technology transfer,
coordination, and management costs, which can be particularly high in
international alliances. Potential costs can also include reduced control,
reduced flexibility in optimizing global production and marketing efforts,
lost opportunity costs, or even creating or strengthening a competitor.
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If this is your first Moreover, if differing operational and financial structures exist, an
alliance, you should alliance may strain your ability to deal with more pressing internal,
look carefully at your competitive, or operational issues that need your attention. Ask
internal policies and yourself: what am I not going to be able to do if I pursue an alliance?
practices and evaluate
to what degree they will
help or hinder an Is Your Organization Alliance Friendly?
alliance.
One of the greatest determinants of alliance success is the experience
one or both companies have in managing them. Experienced
organizations know what it will take and will likely have gotten their own
house in order to support additional alliances. If this is your first
alliance, you should look carefully at your internal policies and practices
and evaluate to what degree they will help or hinder an alliance. For
instance, an organization with shaky internal communications practices
or with incentive programs focused on individual performance can place
significant strain on an alliance relationship. It is best to modify
internal practices as necessary before introducing a third party.
Even if your review shows you are not capable of managing an alliance
right now, it should clarify what capabilities you need to develop, what
capabilities your firm brings to the table, and the timeframe that you
need to achieve a specific partnering goal.
In the end, it is important to recognize that alliances are only one
strategic approach. They make most sense when other internal options
are not viable or when it would be foolish to go it alone. In today’s
environment, however, it is frequently the case that going it alone is less
and less a viable option.
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Bibliographical Notes
1 Jim Bamford and David Ernst. Measuring Alliance Performance. 2002
2 Jordan Lewis. Partnerships for Profit, Structuring Alliances. New York Free
Press, 1990.
3 Marloes Borker, Ard-Pieter de Man and Paul Weeda. Chapter 8 Embedding
Alliance Competence: Alliance Offices. 2004.
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4 Andrew Delios and Paul W. Beamish. Joint Venture Performance Revisited:
Japanese Foreign Subsidiaries Worldwide. Management International Review.
2004.
5 “PricewaterhouseCoopers Research Findings: CFOs Embrace Strategic
Alliances as Major Growth Tool and Alternative to Higher-Risk M&A “
Business Wire, May 7, 2004,
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6 Gabor Garai. Strategic Alliances: The Path to Success or Disaster.
Corporate Board Member Magazine. 2001
7 Kerry McLellan, Barbara L. Marcolin, and Paul W. Beamish. Financial and
Strategic Motivations Behind IS Outsourcing. Journal of Information
Technology. 1995.
8 David Ernst and Tammy Halevy. When to think Alliance. 2000.
9 Nicole Gallant, Marilyn Carr, Stephen Graham. Measuring the Financial
Impact of Strategic Alliances:An Evaluation Framework. December 2002
10 Jeffrey H. Dyer, Prashant Kale, and Harbir Singh. When to Ally & When to
Acquire. Harvard Business Review July-August 2004. p. 109
11 Bleeke, J. and Ernst, David (1993) The Way to Win in Cross Border
Alliances in Bleeke, J and Ernst, D Collaborating to Compete, New York: John
Wiley and Sons: 21-22. …
Professor Jean-Louis Schaan is the J. Armand Bombardier Chair in Global Management. Micheal Kelly is Dean,
School of Management at the University of Ottawa.
The authors would like to thank Ms. Andrie Nel for her help in editing this material.
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