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Alliances: Beyond Organic Growth

on Wednesday, 02.05.2016

On the one hand, companies attempt to focus on becoming leaner, more efficient and concentrate on their core business. On the other hand, growth opportunities may demand that companies go well out of their core business comfort zones to reach distant markets, employ new technologies and adopt a wider range of skills.

Growth involves some risk, such as adding staff and investing in marketing, systems and capital/non-capital expenses. To alleviate some of that inherent risk associated with organic growth, companies might consider forming alliances with other companies that already have some of what is required for growth. Forming an alliance could provide many advantages of growth, but would not demand as great of a direct investment in time, resources and skill as it would to organically grow the business from within.

An alliance is an agreement between companies to collaborate by leveraging each other’s resources. The table below illustrates two dimensions against which all alliances can be described: ownership and commitment. To best understand the table, trace rows and columns from left to right and then from bottom to top. For example, along the bottom row from left to right, the relationship of one company to another goes from a simple purchase order, to joint marketing and advertising, to a purchase order with up-front funding. The row above that demonstrates a greater commitment than the lower row, and a higher level of engagement as you move from left (Multi-year purchase agreement) to right (R&D program partnerships). There is also a large variety of strategic alliances, which encompass many types of teaming too extensive to discuss here.

In looking at the table, a company may realize that it already has an asset or experience to share in an alliance. Or, it might notice a deficiency needing to be ameliorated, possibly through an alliance. Of course, specific circumstances might suggest particular arrangements. In my experience, companies often are guilty of not looking objectively at themselves. This tends to lead to two opposite issues: Companies overestimate the value of something that they possess, and thereby try to drive too hard a bargain in an alliance; or companies fail to even notice something which they possess but take for granted, which could have tremendous value to another company.

Reasons to form an alliance might include:

  • Distant-market access: The Company does not have access to geographic markets.
  • Market-segment access: The company does not have a presence in a desired market segment and cannot build access fast enough to leverage its strengths.
  • Changing distribution channels: Destabilizing conditions are forcing a new look at delivery options.
  • Management skills: The Company’s core competency is under pressure by formidable competitors.
  • Value-added barriers to competition: The Company wants to strengthen its value-added skills and raise the level of competitive intensity within the industry.
  • Risk sharing: The Company does not want to take on all of the risk in developing products or markets.
  • Funding constraints: The investment burden is straining scarce resources.
  • Technology base: Industry is requiring rapidly developing technology.
  • Barriers to acquisition: Opportunities are limited because of size, geography, or ownership’s reluctance to cede control.

Except for joint ventures and acquisitions, two allied companies generally remain independent, while agreeing on increased commitments and dependencies. To be sure, alliances present significant challenges: boundaries need to be defined, people with unfamiliar skills need to be combined functionally, and communication across the alliance needs to be established.  This is all within the context of clearly communicating the value creation of the alliance.

Many companies are unfamiliar with the skills and approaches needed to form alliances, but an alliance may hold the key to growth that would be unachievable alone – and this holds true for both companies involved. I have worked to engineer a wide range of alliances of the types described in the table, but two absolute, inviolable requirements for success are: 1) clear communication about expectations and responsibilities, and 2) trust, because it is never possible to anticipate everything. This may be an unfamiliar, uncomfortable path to growth for some companies – but it might be the best and sustainable path to growth.

(Information for this article was derived from Smart Alliances by Harbison and Pekar, 1998 and Alliance Advantage by Doz and Hamel, 1998)