Wharton@Work

November 2020 | Strategy

Successful Alliances: Building Firm-Level Capability

High levels of uncertainty often lead businesses into predictable directions. Today, one of those directions is the forming of alliances. Partnering with other firms can help strengthen a competitive position by enhancing market power, increasing efficiencies, accessing new or critical resources or capabilities, and entering new markets.

“In many instances, alliances are not only the preferred method for growth, but also the only feasible one,” says Wharton management professor Harbir Singh. Consider the race for a COVID vaccine. Multinational pharma giants Pfizer and Astra Zeneca, for example, respectively joined forces with BioNTech — a boutique German firm— and scientists at Oxford University. Singh, academic director of Wharton's Managing Strategic Partnerships and Ecosystems, says these partnerships are not altruistic, but instead based on self-preservation. “Improving your competitive position alone is often no longer an option. COVID has gotten companies to reexamine their footprint — they must consider how much they want to do in house versus outsourcing through partnerships.”

Alliances are invaluable not only in challenging and uncertain times, but also otherwise as a means to drive competitive advantage and growth. As the business world explores opportunities that materialized with the growth of the digital economy or efforts to address environmental sustainability, alliances and partnerships play a critical role. For example, to help clients with digital transformation, consulting companies like McKinsey or Accenture are partnering with design firms to build capabilities in design thinking to complement their in-house strategy or technology consulting skills. Walmart has partnered with Microsoft to strengthen its position in the “phygital” (physical and digital) retailing landscape. Digital platforms like Apple iOS and Google Android create competing ecosystems with a wide range of partners to generate their respective growth and advantage. In the environmental sustainability space, Tesla has carved a leadership position in the EV space on the back of many partnerships, including initial alliances with Daimler and Toyota and a long-standing alliance with Panasonic for batteries.

But alliances are fraught with high failure rates, and the viability of an alliance-based strategy is critically dependent on a firm’s alliance capability. “The answer to this ‘alliance paradox,’” notes Singh, “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, a leading researcher on strategic alliances, says he expects the new online version of Managing Strategic Partnerships and Ecosystems to continue to draw participants from a wide range of industries and geographies. The longest-running business school program of its kind, it is taught by the same faculty as the on-campus program. “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. 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

To be successful with alliances, organizations have to get it right at each stage of the alliance life cycle, including creating a sound business case for having an alliance, selecting appropriate partners, designing the alliance to elicit the required cooperation and co-ordination to get the job done, building relationship capital with partners, and more. Organizations that coordinate their alliance activities through dedicated alliance management efforts have a much higher success rate (about 70 percent) than firms without one (about 40 percent). These initiatives are charged with coordinating all alliance-related activity within the organization and institutionalizing processes and systems to teach, share, and leverage prior alliance-management experience and know-how throughout the company.

For example, Pfizer has an alliance infrastructure that includes internal alliance managers and groups such as External Research Solutions. The infrastructure helps improve consistencies and economies of scale, and its measuring tools clarify goals and monitor their progress. Another company, Philips, engaged in a multi-year project to improve its firm-wide capability to identify, negotiate, and manage alliances. This project substantially increased new product introduction in multiple businesses and also created corporation-wide economic value.

Singh notes, “Companies that engage in proactive efforts to build alliance capability reap substantial rewards. They generate greater stock-market wealth through their alliances and enhance 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.”