Environmental characteristics

Firm characteristics

Strategic Alliance Formation

Alliance relationship Attributes

Alliance Success
Competitive positional advantage Organizational performance

Measure the Effect on Share Price. Because it is so difficult to pin down, one performance measure that few companies use is the effect of an alliance on company share price. And yet, linking alliances to share price is the ultimate measure because changes in market capitalization are the most universal measure of corporate performance. We believe that all public companies should include the direct effect of the announcement of an alliance on shareholder value in the set of performance measures developed for each alliance. As a step in this direction, we, along with professors from Harvard and Yale, have developed the Partnership Value Assessment, a statistical tool that isolates the effect of alliance announcements on company share price (See "Linking Performance to Share Price"). 2. Elevate a Few Measures. No matter which measures are used for a balanced scorecard, it is important for companies to elevate two or three of them to the status of red flags that quickly indicate when there are critical problems. The selected measures become the poster children for the alliance, focal points for all those who have a stake in alliance performance, including the alliance staff, parent company boards and the media. The power of the simple message conveyed by just a few selected measures can be seen in the results achieved by one best practitioner, SEMATECH, a semiconductor research alliance. For the last five years, it has focused its member firms on two performance measures: member firm return on investment and individual project performance. By providing the discipline of focusing on a few measures (and the internal infrastructure to measure them), the alliance has increased its cohesiveness, flexibility and ability to respond to market conditions. Proof lies in

The Partnership Value Assessment measurement method strips out all external factors that affect share price to focus solely on the effect of an alliance's debut. This motivates the managers to strive for excellence on the full set of performance measures. it is simply not possible to have consistent success in alliances without overcoming these issues. . helps align their individual incentives and increases teamwork. the alliance is an endorsement of the small company. recalling that alliances are ultimately about self-interest. a biotechnology company or an emerging market airline) receives from an alliance with a large multinational. This will show that much of the potential value of the alliance will be captured separately by the parents. Surplus Value Parent companies need to address the issue of surplus value—that is. A Dollar Defense Successful alliances create a "dollar defense"—an indisputable. A dollar defense also sends a strong message to the financial markets that the alliance continues to create significant value. Such sources of value can include relatively impervious cost or revenue enhancers like new sales. since value derived from using know-how against a partner may destroy the foundation of cooperation. How can companies incorporate this kind of surplus value into the performancemeasurement process? A few simple steps can help. however. work in short time frames and deal with nonfinancial benefits and surplus value. Devising appropriate rewards for alliance performance generally is a straightforward exercise once the measures are selected. stable source of financial value that allows the alliance to pursue strategic benefits without living under the constant threat of venture dissolution. Meanwhile. Performance measures do not get much attention without a direct link to reward systems. the value generated by alliances that often goes unrecognized because it goes unnoticed or because only one partner sees it. On occasion. One common example is the halo effect a small partner (say. business contacts and overall market opportunities. purchasing discounts and reduced overhead costs that likely will survive competitive onslaughts as long as the alliance exists. the name of the game is enlightened selfinterest: This value should come at no expense to the partner. often raising investor enthusiasm. But remember. For optimal effectiveness. alliances present real challenges in measuring performance—firms must account for different corporate interests. used this money to reward the alliance managers (managers from each parent who are focused full-time on the alliance). companies should draw up at least three sets of performance measures—one for the alliance and one for each parent. It measures the activity of the parent companies' shares in the days immediately before and after the alliance is announced. During the alliance negotiations. Clearly.SEMATECH's ability to have survived the withdrawal of government funding and to have attracted a series of new international member firms. One interesting practice has emerged in the pharmaceutical industry. in turn. companies should try to maximize their own surplus value. At a minimum. companies should ensure that at least a few executives are evaluated on the basis of the full balanced scorecard of between 10 and 15 performance measures. In effect. which. Linking Performance to Share Price Linking alliances to share price is the ultimate measure of their performance (see story). the corporate parents have allocated a small pool of funds to the alliance steering committee. Link to Individual Incentives. Difficult as it may be. 3. this will broaden the discussion about the appropriate performance measures and division of the profits.

. The ordinary returns are then subtracted from the abnormal returns to arrive at the firm's "excess returns" from the alliance. especially industry incumbents. this will require new skills. These excess returns are then used in conjunction with the firm's total market value of equity to calculate the total shareholder value (in dollars). To form and maintain successful alliances these days. The research demonstrated systematically what some executives know intuitively: that an individual firm's alliance portfolio can have tremendous implications for shareholder value. companies will need to discard the myths we have questioned here and embrace the new realities. using prior-year historical stock price growth (proxied by using S&P 500 returns and the stock's beta and alpha). entirely new participants—many with deep alliance experience and unhindered by old myths—certainly will.106 licensing arrangements and 870 joint ventures) over a four-year span. As with any rapidly evolving situation in the marketplace.000 alliances (1. structures and perspectives that most companies. All the participating firms' profiles and excess returns are then aggregated and disaggregated along a number of dimensions to analyze the value-creating effect of various industry factors and alliance features. In many cases. someone will seize these new opportunities. do not yet possess.This tool was developed by Accenture and is based on an analysis of work done by professors Tarun Khanna of Harvard Business School and Bharat Anand of Yale School of Management. Stock price changes surrounding the announcement date of the alliance are measured to determine the firm's "abnormal returns" that could be attributed to the announcement. If traditional companies do not. It included analysis of the historical data covering nearly 2. both positive and negative. The PVA methodology comprises five basic steps: Alliance participants' "ordinary returns" are estimated.

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