Forming Corporate Alliances That Get Results
Four principles that
describe how well-chosen and well-managed alliances boost financial
performance.
A well-managed
portfolio of corporate alliances can create unique
pathways to competitive advantage. However, failure rates remain high –
in a recent
study, around 80 percent of companies
reported that the vast majority of strategic partnerships fail. The advice you
usually hear regarding alliances is often quite general, if not painfully
obvious: Have a clear process in place, know what you want to achieve, etc.
By contrast, recent
years have seen a proliferation of academic studies yielding highly relevant
insights about how to exploit the performance-enhancing opportunities afforded
by alliances. We compile some highlights from this impressive
body of knowledge in a recent virtual
special issue of Strategic Management Journal.
Four principles emerged from our survey of the latest research.
A strategy for
start-ups
1.
When a firm lacks any experience, i.e. a start-up, it needs to
build a vast and diverse alliance portfolio, but the weight of the evidence
disfavours partnering with potential rivals.
A
2000 article in the Strategic
Management Journal analysed the alliance portfolios
of 142 Canadian biotech start-ups alongside the firms’ early performance data
(revenue, R&D spending growth, number of patents issued, etc.).
Start-ups with a larger number of upstream and downstream partnerships
generally performed better, with nearly all types of partnerships presenting at
least potential benefit. However, relationships with industry associations,
presumably formed to compensate for underdeveloped personal networks, were a
significant drag on performance. As you might expect, the highest performers
had worked out efficient ways of managing their sizeable networks, minimizing
redundancy, conflict and complexity.
Start-ups that forged
collaborations with potential rivals at launch were on thin ice, the
researchers found. On the whole, their performance suffered; the authors
theorise that the putative allies in these cases were actually working against
one another to the detriment of both. However, when the two partners differed
greatly in the scope of their market activities, the firm with more diverse
activities was able to profit from the more focused firm’s specialised
knowledge.
Established firms
2.
More experienced firms, research suggests, should also think twice
about working with their own direct competitors. But partnering with multiple
firms that compete among one another, rather than with your firm,
can improve performance.
A
2007 article in the Strategic
Management Journal tracked the evolution of alliance
portfolios for 367 U.S. software companies from 1990 to 2001 against the companies’
performance during the same years. The results point out a disparity between
joint value creation and value appropriation within corporate alliances. In
other words, a power imbalance between two allied firms may result in the more
influential of the pair walking away with most of the benefits generated by the
alliance. The article describes how a company can “reduce its dependence on any
given partner by forming alliances with that partner’s competitors”. It cites
the hypothetical example of video game developers who, in order to weaken the
bargaining position of a platform provider with whom they do business, also ink
deals with said provider’s rivals.
Matching portfolio to
strategy
3.
Whether your optimal partner pool would be diverse (i.e. largely
disconnected from one another) or homogenous (i.e. playing mostly in the same
space) may depend on your firm’s strategy.
A 2006 study in The Academy of Management
Journal found that established investment banks improved performance
when they matched their alliance portfolio to their corporate strategy. That
is, diversified investment banks benefited from collaborating with a diverse
set of partners.
Based on an analysis
of syndicates formed by Canadian investment banks for the purpose of
underwriting public offerings, the article concludes that both highly
diversified and highly specialized banks performed well, while those in the
middle lagged behind – and that this pattern would also hold true in other
business sectors where valuable information is shared among discrete, largely
non-communicating groups. In these networks, specialists, those with insider
knowledge, and generalists, those enjoying the widest variety of business
opportunities, are in the best position to cement mutually beneficial alliances
(in the case of Canadian investment banks, alliances take the form of
syndicated deals). Everyone in between is left out in the cold.
Exploration vs.
exploitation
4.
In order to extract the maximum possible value, firms should view
corporate alliances in light of all the other strategic vehicles at their
disposal.
A 2014 article in
the Strategic Management Journal examined how
U.S. software firms balanced exploration (developing or discovering new
knowledge) and exploitation (refining and implementing acquired knowledge).
This balancing act is called “ambidexterity” in management research. It
is nearly impossible to employ both mind-sets simultaneously and at equal
strength. Any such balance can be achieved only through trade-off, which can be
difficult to accomplish and costly if not done well. To make it easier, most
researchers recommend separating the two somehow – the gap could be temporal,
organisational, or accomplished by using specific alliances to either exploit
or explore.
Researchers found
that ambidexterity worked best when firms explored via externally oriented
modes such as acquisitions and alliances, while exploiting via internal
organisation modes. Exploration is best pursued, they argue, under the
conditions of flexibility and openness that alliances force on firms.
Conversely, exploitation is more likely to be effective when firms can fully
apply their past experience and core competencies to given tasks. Therefore,
companies should minimise resistance between strategic mode and mind-set,
rather than pursuing ambidexterity in ad hoc combinations.
The alliance
portfolio
The above principles
point to the value to be derived from considering individual alliances in terms
of where they fit in the overall “alliance portfolio” as well as the grand
strategic scheme. They reinforce one of the core ideas from the
book Network
Advantage: How to Unlock Value From Your Alliances and Partnerships: “Success
comes to firms that actively manage their alliance portfolios.” Companies can
indeed achieve competitive advantage from collaboration when they proactively
take the learning and resources acquired from one alliance and find value
creation opportunities with the resulting ideas or resource combinations in
another alliance.
Andrew Shipilov, INSEAD Professor of Strategy,
and Ithai Stern,
INSEAD Associate Professor of Strategy
Read more at http://knowledge.insead.edu/strategy/forming-corporate-alliances-that-get-results-5183?utm_source=INSEAD+Knowledge&utm_campaign=392160fa8c-EMAIL_CAMPAIGN_2017_02_09&utm_medium=email&utm_term=0_e079141ebb-392160fa8c-249840429#6sjDRZbsQ0pE6DyK.99
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