Strategic alliances

Strategic alliances are agreements between companies to work together. Alliances can be created in many forms, through referral networks, CONTRACTs, limited PARTNERSHIPs, general partnerships, or corporate JOINT VENTURES. The basis for strategic alliances is the complementary strengths of the companies agreeing to work together. Alliances are designed to take advantage of the capabilities each company brings to the effort and to reduce RISK by reducing the unknowns and diversifying. The benefit of strategic alliances depends on the flexibility and commitment of each partner to the alliance, although this is also a potential weakness. As one author states, “Strategic alliances are, in essence, marriages of unrelated parties.” Business analysts stress four factors important to the success of strategic alliances: proper strategy, aligned structure, clear governance rules, and effective monitoring. Proper strategy addresses the question of why is the company entering a strategic alliance. Like consumers, business managers are affected by trends, and throughout the 1990s, strategic alliances were a very popular trend. Numerous U.S. businesses, particularly in banking and telecommunications, entered strategic alliances as their way of responding to the NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA). The prevailing logic was “we know our industry and our Mexican partner knows how to do business in Mexico.” But like all consumer fads, strategic alliances were not necessarily the right thing for all businesses. Many alliances soured due to unclear communication, governance rules, and definition of objectives. Proper strategy incorporates proposed alliances into overall corporate strategic plans. The term aligned structure in strategic alliances refers to the relationship between the alliance’s structure and its objectives. Joint ventures are usually significantly structural relationships. Strategic alliances should be consistent with the goals of each participant, neither overstating nor understating the nature of the agreed relationship. Writer John Graham satirically but poignantly suggests, “Never do business with anyone who talks freely about ‘partnering’ because it will cost you. It’s worth noting that there are also strategic partners. This term is reserved for those who do not capitulate so easily or egomaniacal CEOs who want to believe they’re actually important. . . . Strategic alliances is pure puff and simply a gimmick to make someone feel important enough so that they are lured into a costly proposition.” Clear governance rules in strategic alliances attempt to allow for flexibility as the nature of the business venture evolves, creating a process for resolving business disputes among partners. Regardless of the type of strategic alliance reached, the agreement should clearly address four issues: partner contributions and distributions, control, allocation of RISKs and rewards, and termination strategies. When strategic alliances are made between firms of similar size and RESOURCES, partner contributions and distributions are usually easily defined. Often, especially in international business, alliances are made between unequals, and defining CAPITAL contributions, control of INTELLECTUAL PROPERTY, RESEARCH AND DEVELOPMENT efforts and control, market-access efforts, and distributions are more difficult. Control should also be addressed in the alliance governance documents, including issues such as
• admission of new partners or the sale of additional securities by the alliance
• appointment of board members, managers, and officers
• compensation of the alliance’s MANAGEMENT
• terms of transactions with partners and/or their affiliates
• circumstances under which the terms of the alliance may be modified
• allocation of risks and rewards among partners
• when and how the alliance terminates
Like a prenuptial agreement, a strategic alliance should anticipate a time when the relationship might end and set up a process for termination. For example, two smallbusiness partners, recognizing the potential for disagreement, included in their partnership agreement a requirement that if they reached an impasse, they would agree to meet on three occasions to resolve the conflict. If after three meetings they could not resolve the conflict, they would sell the partnership ASSETS and distribute returns based on the agreement. Monitoring is the fourth aspect of a strategic alliance. Alliance members should establish in advance clear understandings regarding
• annual budgets
• BUSINESS PLANs with detailed marketing, financial, and operating plans
• capital requirements and timing of capital needs
• methods used to establish overhead costs
• period summaries of financial and marketing results
While many strategic alliances are entered into like a Las Vegas wedding, clearly stated understandings and expectations among alliance members improve the success rate in business relationships.