The Strategic Alliance Boom

In the new global environment, with greater competition from more and more products and choices, alliances are not just a planning option but a strategic necessity. Strategic alliances are booming across the entire spectrum of industries and services and for a wide variety of purposes. According to Booz, Allen & Hamilton, the number of U.S. firms with partners in Europe, Asia, and Latin America is growing at a rate of 25 percent annually.

Why the boom? Here are several strategic reasons companies enter into alliances:

§  Fill gaps in current market and technology

§  Turn excess manufacturing capacity into profits

§  Reduce risk and entry costs into new markets

§  Accelerate product introductions

§  Achieve economies of scale

§  Overcome legal and trade barriers

§  Extend the scope of existing operations

§  Cut exit costs when divesting operations

Despite the many good reasons for pursuing alliances, a high percentage end in failure. A study by McKinsey & Company revealed that roughly one-third of 49 alliances failed to live up to the partners’ expectations. Yet such painful lessons are teaching companies how to craft a winning alliance. Three keys seem to be:

1.    Strategic fit: Before even considering an alliance, companies need assess their own competencies. Then they need to find a partner that will complement them in business lines, geographic positions, or competencies. A good example of strategic fit is AT&T and Sovintel, a Russian telephone company. The two joined forces to offer high-speed ISDN service for digitized voice, data, and video communication between the two countries. By joining together, the two telecommunications companies can offer new services for more business customers than either could do alone.

2.    A focus on the long term: Rather than joining forces to save a few dollars, strategic partners should focus more on gains that can be harvested for years to come. Corning, the $5-bilion-a-year glass and ceramics maker, is renowned for making partnerships. It has derived half of its products from joint ventures and even defines itself as a “network of organizations.” That network includes German and Korean electronics giants, and Mexico’s biggest glassmaker.

3.    Flexibility: Alliances can last only if they’re flexible. On example of a flexible partnership is Merck’s alliance with AB Astra of Sweden. Merck started out simply with U.S. rights to its partner’s new drugs. For the next phase, Merck set up a new corporation to handle the partnership’s $500-million-a-year business and sold half the equity to Astra.