February 2011Strategy

The Key to Successful Alliances: Developing Firm-level Capability

Successful Alliances

Alliances help firms strengthen their competitive position by enhancing market power, increasing efficiencies, accessing new or critical resources or capabilities, and entering new markets. And in many instances, they are not only the preferred method, but the only feasible method for achieving growth. But with high alliance failure rates, the viability of such growth strategies is critically dependent on a firm's alliance capability.

"The answer to this 'alliance paradox,'" notes Harbir Singh, Wharton management professor and a leading researcher on strategic alliances, "isn't to stop forming alliances. They are and will continue to be a fast and flexible way to access complementary resources and skills that reside in other companies. Organizations need to get better at managing their alliances by developing firm-level capability. Not only will such a capability create greater and repeatable alliance success, but it will become in itself a source of competitive advantage."

Singh is academic director of Wharton's Strategic Alliances: Creating Growth Opportunities program, the longest running business school program of its kind. "The group always represents a wide range of industries and nations, so we're able to explore strategies on a number of levels, including cross-cultural. But no matter the business or the country of origin, a key measure of alliance success is how well they are supported at an organizational level. Current research shows that those companies that consistently generate greater levels of alliance value have one thing in common: a dedicated alliance function."

The Dedicated Alliance Function and Management Process

Organizations that coordinate their alliance activities through a dedicated strategic alliance function have a much higher success rate (about 70 percent) than firms without one (about 40 percent). These companies appoint a vice president or director of strategic alliances with his or her own staff and resources. The dedicated function coordinates all alliance-related activity within the organization and is charged with institutionalizing processes and systems to teach, share, and leverage prior alliance-management experience and know-how throughout the company.

"An alliance function works on a number of levels," explains Singh. "First, its managers, because of their repeated involvement in all of the firm's alliances, become repositories of alliance management know-how. They can leverage that knowledge throughout the organization and increase the visibility and awareness of their alliances among external stakeholders (investors, customers, government) to enlist their buy-in and support. Second, the dedicated alliance function provides legitimacy and support for the firm's alliances and helps garner internal resources necessary for alliance success.

"Finally, it monitors the performance of alliances, identifying potential trouble spots before they become an issue. It can then take quick, necessary action to escalate or resolve those conflicts. Dedicated alliance functions offer internal legitimacy to alliances, assist in setting strategic priorities, and draw on resources across the company. That is why the function cannot be buried within a particular division or be relegated to low-level support within business development."

For example, Hewlett-Packard developed 60 different tools and templates, included in a 300-page manual for guiding decision making in specific alliance situations. The manual includes such tools as a template for making the business case for an alliance, a partner-evaluation form, a negotiations template outlining the roles and responsibilities of different departments, a list of ways to measure alliance performance and an alliance-termination checklist. Another company, Philips, engaged in a multi-year project to improve its firm-wide capability to identify, negotiate, and manage alliances. This project, discussed in Strategic Alliances, substantially increased new product introduction in multiple businesses and also created corporation-wide economic value.

Singh notes, "Companies that build successful dedicated strategic alliance functions reap substantial rewards. They generate greater stock-market wealth through their alliances and better long-term strategic-alliance success rates. Over time, investment in an alliance-management capability enhances the reputation of a company as a preferred partner. Hence an alliance-management capability can be thought of as a competence in itself, one that can reap rich rewards for the organization that knows its worth."