Thought Leaders
 Forging Successful Strategic Alliances

The powerful alliance between Disney and Pixar produced light-hearted blockbusters such as Toy Story, Monsters, Inc., and Finding Nemo. But there was no storybook ending for one of Hollywood's most lucrative marriages, as the partners announced plans to go their separate ways earlier this year.

The moral of this tale: Alliances are difficult. Research suggests that 40 to 50 percent of alliances break down prematurely, inflicting financial damage on both parties. A study of 1,592 alliances in 200 companies by Wharton Professor Harbir Singh, with colleagues Jeff Dyer and Prashant Kale, found that 48 percent ended in failure in less than 24 months.

Despite these difficulties, alliances have become central to business strategy — and, after a brief retrenchment after 9/11, the pace of alliances is heating up again. "Managers are increasingly realizing that they need to manage assets beyond the legal boundaries of their organizations," said Singh, academic director of Wharton's Strategic Alliances: Creating Growth Opportunities executive education program and one of the leading researchers in the field. "It is not just low-priority activities anymore, but companies are using alliance for high-priority work such as R&D in critical areas or key customer relationships."

Why are alliances so important? Forces such as globalization and disruptive technologies mean that firms often don't have the internal capabilities to meet the shifting needs of their businesses. Demands for growth or rapid industry changes often make it too hard or too risky to achieve goals through organic means.

Alliance Strategies

What are some of the insights from research by Singh and colleagues on managing alliances more effectively? Among the keys to alliance success are:

  • Building a dedicated alliance capability: Establishing a dedicated capability for alliances is an overarching success factor. A dedicated alliance capability performs four key roles: it improves knowledge management, increases external visibility, provides internal coordination, and eliminates both accountability problems and intervention problems. Companies with a capability in alliances, such as Hewlett-Packard, Oracle, Eli Lilly, and Parke-Davis (which have a vice president or director of strategic alliances), have systematically generated more value from their alliances. Enterprises with a dedicated alliance function achieved a 25-percent-higher, long-term success rate with their alliances than firms without this function. This capability is also noticed by investors. Firms with this alliance function generated almost four times the market wealth when they announced a new alliance.

  • Strengthening interfirm relationships: The strengths of alliances depends on the quality of relationships between the two firms. Some of the ways these interfirm relationships can be strengthened are by identifying good complementary assets, creating customized assets that increase mutual dependence, establishing interfirm knowledge-sharing routines, and creating effective governance mechanisms for the alliance. "These interfirm relationships are both formal and informal," Singh said. "There is the formal contract and the extent that there is rigor in the contract, but there is also the informal creation of trust between transactors so that the alliance can succeed in the face of unexpected events."

  • Taking a broader view of acquisitions, alliances, and other options: Acquisition and alliance decisions are two ways to achieve the same end — accessing resources and capabilities outside of the firm. But managers often look at only one option when making a decision. When Dyer, Prashant, and Singh asked managers at 200 companies about their approach to acquisitions, only 24 percent said they considered the alternative of forming or sustaining an alliance instead of acquiring. Companies need to explicitly look at these alternatives. In a recent Harvard Business Review article, the three researchers offer insights on when to choose alliances or acquisitions, depending on the nature of the business challenge. "Overall, managers have to reconsider the value chain of the entire firm," Singh said. "Most companies have not effectively thought through what activities to own. It is largely an historical decision."

  • Assessing the success of alliances: Companies need to pay closer attention to formal alliance metrics. A 1999 survey by Anderson Consulting (now Accenture) found that only 51 percent of companies that form alliances had any kind of formal metrics for assessing their effectiveness. And only about 20 percent of those felt they had appropriate metrics. "Very few companies are rigorously monitoring alliances and learning from them," said Singh. This emphasis on consistent measurement is usually achieved through a dedicated alliance function.

  • Building capabilities in locating alliance partners: In addition to managing alliances, identifying potential partners can also be an important capability. With the need for a strong drug pipeline, one pharmaceuticals company built a capability in finding potential alliance partners for early-stage drug development. The company's "alliance partner identification program" helped it find potential research partners in India, China, and other parts of the world. The company also developed a systematic process for assessing these potential allies and drawing up relationships with them. This provided a significant advantage in a world in which drug companies need a steady stream of new drugs but also need to invest early enough to avoid paying too high a premium for this access.

Effective alliances can produce powerful advantages. For example, a few years ago, a manager came to the Wharton Strategic Alliances program from a pharmaceuticals company that was working on a critical agreement with a larger firm to market a new drug. The manager applied strategies from the Wharton program for strengthening compatibilities and collaboration between the two organizations, and the company also set up an in-house alliance institute based on these concepts. The alliance was a great success, producing a blockbuster drug and tremendous value for both firms (although the smaller firm was ultimately acquired by the larger one). "They did a good job of managing the joint venture, building cross-cultural and organizational compatibilities using concepts that are featured in this course," Singh said.

    

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