Strategy and Design

Outlook Special Edition, October 1999

Think of the great corporate matches of this century. They have been either long-standing joint ventures, such as Caltex and Siecor (an alliance between Siemens and Corning), or special corporate relationships in which partners such as Dow Chemical and DuPont, or Swissair and Austrian Airlines, regularly work with one another on various projects over decades.

These alliances also share several common attributes that make it tempting to see them as similar to marriages. Like marriages, corporate alliances traditionally have been exclusive, bilateral relationships. Like marriages, these relationships are built on trust and patience and depend on strong and ongoing communication. Also like marriages, alliances tend to succeed when the partners have underlying similarities in culture and values as well as complementary differences in skill sets.

The marriage myth has been further advanced by frequent public remarks and allusions by alliance partners themselves. A comment by American Airlines Chairman Donald Carty is typical: "We and BA see ourselves as nicely married. American Airlines and British Airways are long-term partners."

The marriage parallels are not altogether incorrect. But they do not emphasize the true nature of the most successful alliances. Diplomacy serves as a better model.

Alliances, whether between corporations or nation-states, are driven by enlightened self-interest. In diplomacy and commerce, alliances are neither inherently altruistic nor based on an emotional attachment to the concept of union. Instead, alliances are pragmatic pairings that help fulfill their members' interests by providing the scale, skills or positioning to better defend territory, turn back competitors or advance into the unknown.

It is the dynamics of self-interest that give alliances a number of important attributes—including multiple partners, collaboration with competitors and short life spans—that are distinctly unmatrimonial and more akin to diplomacy.

Multiple Partners
Just as nations join forces to fight a common enemy, corporations now depend on multiple partners to pursue their goals. According to Alliance Analyst, a monthly trade publication, multi-partner alliances, or networks, increased by an average of 54 percent per year between 1990 and 1996 and have accounted for roughly 20 percent of annual alliance activity during the past decade. Certain industries, such as airlines, automotive and telecommunications, now compete almost entirely on a group-versus-group basis. Other industries have seen multi-partner alliances challenge dominant incumbents—for example, Airbus Industrie in aerospace and Excite@Home, a global electronic-media company, in multimedia.

Collaborative networks create value in a variety of ways that individual alliances may be hard-pressed to match. A data base of almost 5,000 networks and interviews with more than 100 executives involved in designing, governing or managing networks reveals that one of the most common motivations is to access skills from different but converging industries. The multimedia and computer industries are full of examples, including the Network Computer consortia launched by Oracle and others to challenge the dominance of the personal computer.

Another common network motive is global coverage. In the airline, real estate and telecommunications industries, for instance, national companies have formed alliances with groups of similar companies in other geographic markets to create seamless customer service. The Star Alliance in airlines and WorldPartners in telecommunications are well-known cases.

Multilateral alliances demand new strategic assumptions and managerial practices. Three deserve special attention:

1. Choose a Structure that Facilitates Decision Making. Forced to reconcile an array of owner interests, networks are prone to making decisions slowly. There are two solutions: venture independence and tiered membership.

The independent model turns the network into a freestanding corporation, where management consults the corporate parents only on a few major issues. A tiered-membership model places major decisions in the trust of a few large owners and creates concentric rings of participating members. Major decisions are made at the small and nimble center, while the large number of remaining members provide additional scale and scope. MasterCard and Inmarsat, the satellite consortium with scores of members, have each used the tiered model.

2. Identify Internal Value Points. Network members compete against one another for advantaged positions within the network. Our work shows that the companies that capture the most value tend to be early network entrants or those with system choke holds.

A historical example comes from Coca-Cola, which, at the turn of the century, struck a deal granting independent partners the exclusive and perpetual rights to bottle the drink in the United States. These network pioneers promised to build bottling plants and to pay Coca-Cola a modest fee for the syrup. Once this initial alliance was formed, the bottlers branched out and started to form alliances of their own. To create national coverage, they recruited others as franchisees. Indeed, the initial bottlers became parent bottlers—overseeing a network that grew to some 400 local bottlers within a decade.

3. Manage Member Churn. Multi-partner alliances usually confront constant membership additions and defections. WorldPartners has seen this repeatedly: Telefónica of Spain defected from the global alliance, and AT&T withdrew to form a competing alliance with British Telecom. In such a shifting environment, companies should enter networks whose survival will not depend on the contributions of any individual company.

Collaboration With Competitors
World diplomacy is replete with examples of alliances formed between competitors. One particularly vivid example from modern history is the collaboration of Churchill, Roosevelt and Stalin during World War II. Corporations increasingly are forming such dangerous liaisons. For example, close to 50 percent of alliances in the financial services industry are formed between competitors, according to our research. Other industries have similar profiles. General Electric and Pratt & Whitney have an alliance to manufacture aircraft engines. Dow Jones and Reuters have formed a global online news joint venture.

Alliances with competitors—so-called co-opetition—introduce new risks (See "Dangerous Liaisons"). In the late 1980s, for instance, Schwinn, America's largest bicycle maker, turned to Giant Bicycles, a small Taiwanese manufacturer. Because its plant was outmoded, Schwinn was unable to meet soaring demand; soon Giant was producing four out of five Schwinn bikes. More over, the Schwinns from Taipei were chaper and better than the US-made versions.

By 1992, Schwinn was bankrupt—and Giant had become the world's largest bicycle maker. To mitigate against the risk of know-how leakage, companies should consider a series of defensive managerial practices. Most involve closer assessments of information and personnel contributions to the alliances. Companies need to determine the value of this information, its transferability and the steps necessary to manage and contain its flow.

Co-opetition does not have to be a purely defensive game, of course. The Japanese have been exceptional learners from alliances, using collaboration to dramatically increase their skills. Short life spans unlike the dissolution of a marriage, the quick termination of an alliance does not necessarily mean failure. Indeed, many corporate alliances these days are purposely short-term in their ambitions.

Some alliances seek to fill a gap quickly in the product or service offering. For example, Delta Air Lines accomplished its immediate goal of gaining access to London through a code-sharing alliance with Virgin Atlantic. When Delta gained landing rights for itself three years later, the alliance ended. Other alliances endure only long enough to try to establish a standard. Rockwell, U.S. Robotics, Motorola, Hayes and others came together to set the standard for 28.8 kilobits-per-second modems; once that goal had been accomplished, the alliance members dispersed to compete against one another.

Dangerous Liaisons Alliances with competitors are increasingly common–and carry new risks. Below you will find listed the Risk and the corresponding Sample Response. Leakage of technology Partner uses alliance to acquire certain know-how, which is then used against you later.

Draft clear definition of ownership. Bundle technologies, making it hard to disaggregate. Blackbox technology. Avoid areas where staff is more loyal to profession than to employer. Leakage of Strategy Partner gains insight into your broader corporate strategy through close working relations. Create independent joint venture structure. Limit personnel exchanges. Enforce employee guidelines of engagement. Loss of Customers Partner uses alliance to gain access to–and, ultimately, control over–your customers. Demand reciprocal access to partner customers. Insist on joint contract with customer. Fire Sale on Assets Partner forces buyout, and with few third parties interested in buying into a joint venture, your stake is sold at well below market value. Create independent joint venture structure. Define exit provisions. Lock in sale price during negotiation. Wasted Energy Partner, due to the inherent challenge of working with a competitor, stalls alliance, wasting your time and energy. Spend extra time up front mapping expectations and roadblocks. Focus on non-core business areas.
SOURCE: Accenture ANALYSIS.

Some alliances are struck as part of a strategy for coping with uncertain environments. Tele-Communications, Inc., took a minority stake in the Microsoft Network, a proprietary online service launched prior to the Internet explosion. The alliance never proved a great commercial success for TCI, but it allowed the company to hedge its bets in an emerging technology area. A useful tool, short-term alliances introduce new demands to traditional alliance strategy and management. These alliances:

1. Create Strong Links to the Surrounding Value Chain. Since short-term alliances almost never cover a full value chain, corporate parents must ensure strong links to adjacent value chain positions. There are a number of ways to do this. One is to create a senior executive sponsor position or, at least, regular reviews by a senior-level alliance policy committee. Another is to rotate staff constantly through the alliance to maintain good information flows to and from the surrounding business areas. Some companies, especially in the pharmaceutical and computer industries, have created an alliance coordinator position to "plant" the work of an isolated alliance into the next value chain position.
    
2. Redefine Performance Measures. Short-term alliances need a different approach to performance assessment. Our work shows that two tasks are especially important. First is the need to measure the decline in uncertainty. In fast-changing and knowledge-intensive industries such as consumer electronics and new media, short-term alliances are often a response to uncertainties in market direction or company capabilities. It is only reasonable, therefore, to include the decline in uncertainty as a key performance indicator. In other words, an alliance that drains resources and provides no revenue or true innovation could still be a great success if, despite its apparent failure, the company is able to predict the future faster or more accurately than its rivals. Second is a need to expand performance measures to encompass more than one alliance. When alliances are part of an options strategy, true performance must reflect the overall success of the portfolio of related bets. As one executive explained, "We have a 20 percent success rate with alliances, but the few that have worked are driving the growth of the entire company."
    
3. Nurture Special Relationships. In an environment of short-term alliances, companies will gravitate toward partners who are known. The reason: When alliances do not last long, the most valuable allies are ones that introduce the fewest surprises into cooperation. As a result, the corporate landscape contains a growing number of special relationships—close corporate bonds that spawn many short-lived alliances across time. Netscape Communications and Sun Microsystems seem to have such a relationship, as do Swissair and Austrian Airlines. And, of course, there is the Coca-Cola–McDonald's–Disney promotional relationship. 
    
4. Become the Partner of Choice. There is even greater value in building a wide reputation as a good partner. Companies that are seen as the "partner of choice" will find themselves in the middle of a rich deal flow. Our interviews indicate that partners of choice already exist in certain industries: Hewlett-Packard in computer hardware, for example, and both British Petroleum and Royal Dutch/Shell in energy. These companies have built reputations investing in constant alliance innovation, standardized processes and a reserve of well-trained staff. Hewlett-Packard, for instance, was one of the first to create a database of internal alliance experiences and procedures, including contact names and detailed case histories of its most important alliances.

 
Such tools created consistency and accountability across the alliance portfolio and gave large numbers of managers access to the company's best alliance thinking.

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