Managing Inter-Firm Alliances

Companies may engage in inter-firm alliances in order to obtain something of value. The specific value may be financial, expertise or market position. Alliances can be formal or informal and can be short or long term. Some companies are looking for a long term partner and may engage in joint ventures in order to boost their qualifications for certain types of business. Meanwhile, others are looking for an informal partnership for the purpose of joint marketing. Some companies will acquire various entities to create a certain position in the market. The biggest management challenge in setting up an alliance with another firm is upfront planning. Advanced planning can be used to anticipate possible obstacles to effective alliances. Some of these obstacles can be in the sharing of information and staff, which entities will shoulder the financial burden, or how the financial burden will be distributed.

Keywords Acquisition; Alliance; Collaboration; Joint Ventures; Leveraged Buyout; Merger; Nondisclosure Agreement; Partnership

Management > Managing Inter-Firm Alliances

Overview

Companies may turn to inter-firm alliances for many reasons. These alliances may be formal or informal but in some way provide benefits for the parties involved. Some of the inter-alliances may be in the form of formal and legal partnerships and joint ventures. Companies may also align through merger and acquisition activity. Companies that are dependent on each other such as suppliers in an automobile manufacturer's supply chain may find value in alliances. Pietras and Stormer (2001, p.9) described strategic alliances as "a way for companies with complementary strengths to enter a given market more effectively and efficiently than either alliance partner could manage alone." Alliances can be a way for companies to avoid risk due to unforeseen factors, technology or market risk (Vaidya, 2011).

Dyer, Kale, and Singh (2001) called strategic alliances "a fast and flexible way to access complementary resources and skills that reside in other companies — an important tool for achieving sustainable competitive advantage." These benefits and others could explain why so many companies engage in alliances of all kinds. Dyer et al (2001, p.37) noted that "the top 500 global businesses have an average of 60 major strategic alliances each." However, about half of strategic alliances fail.

Reasons for Alliances

Best Practices

Alliances can take place because one company may have technology that another needs or may have demonstrated best practices in an area that can save a company money. For example, many online companies align themselves with specific shipping companies such as FedEx or UPS because these companies have demonstrated expertise in shipping. Online companies that sell merchandise that must be shipped may be experts in their business but may not be experts in the best and most efficient ways to ship. Similarly, online giant Amazon.com has become proficient in selling online and has built credibility online. The Amazon.com marketplace allows vendors to align themselves with Amazon.com using the online giant's proven system for getting customers, selling products and delivering those products quickly. Amazon.com has also proven that it knows how to protect customer personal information online. Many online shoppers are reluctant to shop with a company they have not done business with before. However, Amazon.com has set up a system for tracking orders and allows customers to access its customer service system if there are problems with an order sold through Amazon.com by a marketplace vendor.

Alliances can help companies get a product to market faster. One company may partner with another company with research and development expertise. Or, companies that are working in the same area of product development may pool their resources to complete a better product faster. Some products cross different fields making it important to find partners in the different industries needed. For example, a computer company might partner with a telecommunications company on a phone product with computer capabilities.

Mutual Benefit

Alliances usually take place because one firm has something that another wants and jointly they can create opportunities for all parties involved (Mitchell & Canel, 2013). For example, a small company may offer a service but may need help in getting the word out about that service. The small company may partner with a well-known company that offers a similar service or even a different one. This type of alliance may only be needed for a short period of time. A company may develop a self-improvement product or service and may need to generate leads. The company may be aware that companies like Stephen Covey's CoveyLink.com or Donald Trump's TrumpUniversity.com attract people interested in self-improvement. The smaller company may align themselves with these giants in self-improvement to be positioned to target a large audience without having to build that list on its own. The larger company may benefit by being able to offer another product that someone else created giving customers another reason to visit the company website.

Problem Solving

Sometimes alliances are formed to solve the joint problems that groups of companies share. For example, small manufacturers in the U.S. may form an alliance to address manufacturing competition from China. The companies in this type of alliance may work together to share ideas or even partner by trying to open up facilities overseas where appropriate. These companies could coalesce to identify joint purchasing opportunities or determine how they might lobby the government as a group to receive assistance. Similarly, technology vendors may form an alliance to ensure that technology is developed around open standards to ensure that products are compatible. If companies make a product that is far ahead of the competition but not compatible with the hardware, software and equipment that customers currently own, the advanced products are not very useful. The technology cemetery is loaded with very advanced but proprietary hardware and software that ended up failing because of the lack of interoperability and compliance with other products in use.

Alliance Organization

A non-profit organization called the Quoted Companies Alliance advocates for small companies listed in the United Kingdom (Binham, 2006). Companies might join an alliance like this to have a unified voice to represent their interests. Alliance groups like this one will only be successful as long as they stay in touch with the real needs of their membership. Pietras and Stormer (2001) give examples of strategic business alliances including "contracts, limited partnerships, general partnerships, or corporate joint ventures, or may take less formal forms, such as a referral network." Alliances are relationships between companies for mutual benefit.

Management of Alliances

The management of alliances starts at the very beginning of the relationship. Before the alliance is formalized, there is a need to do a great deal of planning and due diligence. Parties involved in the alliance will likely also exchange information, financial and otherwise, as part of the vetting process. There may be a need to sign nondisclosure agreements depending on the depth of the relationship and what internal information will be shared. Each party must manage and analyze information and manage the deployment of resources.

Alliances work when each side is able to get a result of value. Managing strategic alliances requires continual monitoring of the relationship to determine whether or not it is still effective. Collecting data on the cost of the alliance is also a factor in understanding if the alliance is useful. Evaluation at regular intervals will help the parties determine if the relationship should continue and if so, in what way. Keeping abreast of business activity in the industry and region can provide clues on which companies are engaging in strategic alliances and which companies may be ripe for that type of relationship.

Cisco Systems

Managing alliances can be tricky if the companies are in similar industries because a partner could also be partners with the competitor of their alliance partner. Careful thought must be given to this possibility up front and swift action will be needed as these situations arise. Cisco Systems is well known for products in the networking sector of the technology industry. Although Cisco has been successful, it still has ideas for expanding to other parts of the industry (Capron, 2013).

Cisco has entered the AON (Application-Oriented Networking) market by introducing products and by targeted merger and acquisition activity of at least ten companies per year in 2006 and 2007 (Manufacturing Business Technology, 2007). Cisco has a partnership with SAP to network enable enterprise applications. The partnership helps Cisco do what they do best (networking) while taking advantage of the reach that SAP has with enterprise customers. Companies like Cisco may also acquire companies to eliminate competition. The benefit to the acquired company is investment in the products and services offered and a means to take those products to market quickly to the automatically built Cisco customer base. It might take much longer for a smaller company to attract top tier clients which tend to be conservative in deploying technology due to cost, implementation, roll-out and compatibility issues. Similarly, advances in research and development can be supported and taken farther by partnering with a company that has the financial and human resources to push development forward.

A similar alliance between Cisco and SAP ended that allowed for co-branding and marketing of risk and compliance products. Cisco and SAP regularly enter into various types of partnerships likely because they have felt a level of trust and reaped benefits from their ongoing alliances. However, Cisco is engaged in a business partnership with IBM which owns a company that competes in the same area of a company that Cisco recently acquired. Within the technology industry, this is called co-opetition or a scenario in which these technology vendors realize that they will always have some overlap or competition with other technology vendors. But, as all try to expand their reach and embrace new technology, these competitors may have to work together as partners to ensure their mutual survival.

Companies seeking alliances should set specific goals and objectives for the alliance and always consider the impact of time. Putting together an alliance could mean a partnership on a short project or it could mean a multi-year agreement. In the case of a merger, the partnership might exist forever. As a result, companies must protect themselves by getting as much information as possible up front and to engage in careful planning. In addition, company employees have to be prepared for the upheaval that might result from certain kinds of alliances. Dyer (2001) suggested companies put a due diligence team in place to assess the suitability of potential alliance partners.

Viewpoint

The Value of Alliances

Time can cost companies money. The time it takes to develop products and services, the time it takes to train employees and the time it takes to acquire and convince customers to buy are all expensive. The value of an alliance can be the cost savings associated with time and catapulting a company into the next phase of development.

Strategic Alliance Processes

Dyer et al (2001) studied 200 businesses and found them engaged in 1572 alliances. A 1% rise in stock price was noted with the announcement of each alliance "which translated into an increase in market value of $54 million per alliance" (Dyer, 2001, p.37). Dyer et al also identified certain companies that were much more efficient at creating value than others such as HP, Oracle and Parke-Davis. These companies were extraordinarily successful because within their organizational structure was a dedicated strategic alliance function. The dedicated function can provide training to company employees to improve the internal capabilities of the firm to judge strategic alliances. Some companies provide intensive training for employees on alliances.

Successful alliance companies with units dedicated to identifying and analyzing strategic alliance opportunities can be more successful because of an institutional strategy. Dyer (2001, p.38) reported that "Enterprises with a dedicated function achieved a 25% higher long-term success rate" than companies engaging in alliances without an institutional approach. A dedicated strategic alliance function also helps companies become more familiar with the process and increases the knowledge available internally to the firm about strategic alliances. Dedicated resources can also spend the time needed to evaluate the progress and results of alliances. The increased knowledge helps companies devise strategies and tactics for every part of the strategic alliance process.

The University of Pittsburgh Medical Center has partnered with Alliance Imaging to deliver advanced technology for the treatment of cancer. The Medical Center reaps several benefits from the alliance. First, the center gets the opportunity to commercialize proven technology and resell the technology to hospitals that don't have advanced cancer technology. Second, the company only made a 20% financial investment but will receive 50% of the control (Becker, 2006). In addition, the medical center has 16 hospitals and 42 cancer centers so if has an opportunity to use and develop cancer treatments regularly. The partnership gives the hospital a distribution network for their technology. The market for radiation therapy is said to be $20 billion and not all hospitals can afford the equipment.

Alliance Evaluation

Alliances have to be reevaluated periodically to determine their relative value based on a company's objectives. Hershey Candy ended a long term relationship with advertising and public relations giant Ogilvy & Mather. Instead, Hershey established a new relationship and chose to expand other relationships as a solution to new advertising problems. The purpose of the change was to take a new direction and make changes that consumers might notice (Beirne, 2005). The distinctions are needed based on the large number of new products Hershey produced. Some retailers have suggested that the constant influx of new products is confusing to customers. Hershey must keep a critical eye on its market given that it spent a projected $580 million in advertising in 2013 alone (Schultz, 2013).

Sometimes alliances help companies penetrate a market quickly. HSBC North America partnered with Debitman Card, Inc. to serve a common customer base (Breitkopf, 2006). HSBC brings merchants to the table like Best Buy and HP while Debitman brings a payment network to process debit payments. The value of this alliance is it allows all of the players including HSBC who provides the credit card system for merchants, the retailers and Debitman to all concentrate on their core business area. Concentrating on a core business area is essential to success and efficiency. Partnering with those who are also experts in their lines of business can give companies access to expertise that would take a long time, money and effort to build. In addition, the largest retailer (Wal-Mart) only issues credit cards, not debit cards meaning that Debitman would have been shut out of Wal-Mart's business (Breitkopf, 2006). Together, HSBC and Debitman are working to convince retailers about the additional revenue opportunities in the debit business. The alliance can also help these strategic partners to work jointly on common problems.

There are times when alliances of particular companies affect entire industries. Examples can be seen in the automotive, telecommunications and retail sector. Becker (2005) reported on an merger between Alliance Medical Corporation and Vanguard Medical Concepts to consolidate two of the top three companies involved in the reprocessing of used medical equipment for reuse. Hospitals used to perform this task themselves and soon outsourced to contract re-manufacturers. This action makes the two medical device re-manufacturers together the largest company performing these tasks. Since both companies had different customers and specialized in servicing different devices, they can now sell to each other's customers and increase the revenues and demand associated with their products.

Alliance Need

Alliances should not be entered into simply because a company wants to be bigger or wants to prevent competition. To find the real value means the companies involved must actually have a need. Geographic interests are an example of a specific need for an alliance. Magnum Semiconductor is a semiconductor manufacturer based in California with a need to expand worldwide (Electronic News, 2006). Strategic alliances in foreign companies might involve finding local people to manage the company or setting up subsidiaries in the foreign country that would do business for the company. Other strategies if a company wants a presence in another country could be to align with distributers that are already set up allowing a company to capitalize on local country knowledge.

One of the greatest benefits of alliances is the ability to get more customers. More customers can come from taking a new view of your business and industry and to focus on the needs of these potential customers. A financial services company chose to partner with a pharmaceutical company to get more customers (Ramachandran, 2006). By partnering with a pharmaceutical company, a financial services firm has access to the names of physicians and others who might have financial service needs.

How to Make Strategic Alliances Work

There are as many ideas about making strategic alliances work as there are ways to construct them. However, any company interested in a strategic alliance will have to process a lot of information. Information can include data about the company, company interests and needs, industry players and dependent industries. Knowledge about other industries affected by a company's industry or that in some way has impact on an industry can offer unique ideas for possible alliances. Customers can also be a source of key information and possible referrals to strategic alliance opportunities.

Harper (2001) suggested that companies should avoid jumping into strategic alliances too quickly in order to solve problems. Avoid strategic alliance failure requires being realistic from the beginning. Painting too rosy a picture could lead to great disappointment. Disappointment can occur even if companies are industry leaders and spend a great deal of time vetting each other. Different styles in management, structure and methods may make it hard for different cultures to work together (Rooks, Snijders & Duysters, 2013). Harper (2001) outlined several important steps to help make strategic alliances work and provide win-win results for the parties involved. Using these steps makes it possible for companies to truly reap the benefits of lower costs, better market penetration, access to expertise or any other benefits they are looking to achieve.

To make strategic alliances work:

• Companies can make a careful assessment of the company goals for strategic alliances. This can mean looking internally at the needs and objectives in order to create a picture of the right kind of strategic partner candidate. A company should also look at alliances from the perspective of all stakeholders such as customers, employees and stockholders. A thorough look from these perspectives will also help companies identify what factors of an alliance are most important and which, if not in place, will sabotage an alliance. Companies should also evaluate whether or not another action other than an alliance might make more sense or provide some value such as cost savings.
• Formulate an alliance strategy with the candidate before signing formal agreements. In this way, both can try out ideas and see how working together feels. A true alliance that is not a merger provides what Harper (2001, p.26) calls "equal power"; allowing each company to be independent. Identification of the benefits for both must be compelling enough to balance out the effort and cost of working together. Both companies will have to share information about the strengths and weaknesses they bring to the table.
• Both sides of an alliance will have to contribute to making it work and have the ability to participate in making the alliance work from business development to process improvement.
• Similarly, both companies have to be honest about the effect and performance of the alliance when evaluating success.

"Frequent milestones" are a tactic suggested to ensure that risk is low and that problems are easily identified and handled early (Harper, 2001, p.27). The continuous feedback and continuous learning approach will make certain that the relationship between the alliance members is constantly improving.

Terms & Concepts

Acquisition: The takeover of a company through purchasing the company's assets or outstanding shares of stock.

Alliance: A contractual grouping together of people or entities based on some common interest in which all parties will invest. A strategic alliance is a business collaboration that satisfies some strategic goal of the business entities such as increased sales, greater efficiencies, reduced cost, etc.

Collaboration: A relationship in which people or organizations work together for a common goal or collaborate on a project.

Joint Venture: A business agreement where companies may work together on a specific project.

Leveraged Buyout: One company buys out another to take it over using limited funds of its own and borrowing the rest.

Merger: A situation where two companies come together and they no longer exist as separate entities.

Nondisclosure Agreement: A legal agreement to prevent individuals or entities from taking a company's internal secrets and using them for profit.

Partnership: A business entity in which the partners share in the profits of the business.

Bibliography

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Beirne, M. (2005). Hershey candy is dandy, but shelf space is thicker. Brandweek, 46, 6. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=18590624&site=ehost-live

Binham, C. (2006). QCA wins lobbying battle as Govt drops increased AIM regulation. Lawyer, 20, 5. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=23291918&site=ehost-live

Breitkopf, D. (2006). HSBC to issue for merchants using Debitman. American Banker, 171, 12. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=20908302&site=ehost-live

Capron, L. (2013). Cisco's corporate development portfolio: A blend of building, borrowing and buying. Strategy & Leadership, 41, 27-30. Retrieved on November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87116218&site=ehost-live

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Harper, P. (2001). Four steps to making strategic alliances work for your firm. Journal for Quality & Participation, 24, 24-27. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=5982707&site=ehost-live

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Mitchell, S., & Canel, C. (2013). Evaluating strategic alliances in small and medium-sized enterprises. Advances in Management, 6, 2-9. Retrieved on November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=86941105&site=ehost-live

Pietras, T. & Stormer, C. (2001). Making strategic alliances work. Business & Economic Review, 47, 9. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=5426867&site=ehost-live

Ramachandran, A. (2006). Alliances the formula for adviser business. Money Management, 20, 1. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=22161207&site=ehost-live

Rooks, G., Snijders, C., & Duysters, G. (2013). Ties that tear apart: The social embeddedness of strategic alliance termination. Social Science Journal, 50, 359-366. Retrieved on November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89488685&site=ehost-live

Schultz, E.J. (2013, September 2). Hershey's ad-budget rethink pays off with sweet rewards. Advertising Age. Retrieved from http://adage.com/article/special-report-marketer-alist-2013/hershey-s-ad-budget-rethink-pays-sweet-rewards/243761/

Vaidya, S. (2011). Understanding strategic alliances: An integrated framework. Journal of Management Policy & Practice, 12, 90-100. Retrieved on November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=78858339&site=ehost-live

Suggested Reading

Forest Laboratories and Schering-Plough case studies. (2005). Pharmaceutical Licensing Strategies, 1-17. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=21120550&site=ehost-live

Hirings. (2005). Pensions & Investments, 33, 35-37. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=18673053&site=ehost-live

Solheim, S. (2006). Virtualization vendors take aim at desktop. Network World, 23, 23. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=20634474&site=ehost-live

Theodore, S. (2005). New age 'Infuzion.' Beverage Industry, 96, 32-34. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=19443540&site=ehost-live

Westera, W., Herik, J. & Vrie. (2004). Strategic alliances in education: The knowledge engineering web. Innovations in Education & Teaching International, 41, 317-328. Retrieved November 21, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=14910724&site=ehost-live