Is your strategic alliance really a sale?

Joel Bleeke and David Ernst
Group 3 Pavan Kumar P V S - 37 Rohan Gopalakrishnan - 107

Context  Strategic vehicle of choice for product. geographic and customer base expansion – Alliance 25% annual growth in past 5 years Median life span 7 years    80% end in sale by one partner!!! .

Context  Result of such unplanned sale ◦ Failed partnerships ◦ Erosion of shareholder value post sale or acquisition  Advantages of a planned evolution and sale: ◦ Avoids disastrous partnerships ◦ Selection of appropriate partners – advancement in long term strategic plan ◦ Help reveal opportunities to assess alliance as a low cost. low risk future acquisition .

Crux   How to analyze an alliance ◦ Predict probability of sale Appropriate strategy development post analysis ◦ Assess bargaining positions and risks for unplanned outcomes ◦ Plan evolution of partnership ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ Collisions between competitors Alliances of the weak Disguised sales Bootstrap alliances Evolutions to a sale Alliances of complementary equals Experience with more than 200 alliances Study on a broad range of industry and service sectors 49 strategic partnerships in US. Europe and Asia since 1989 Focus on JV  Six types of alliances  Results based on: .

Avoid self deception  Alliances between competitors ◦ One in three chance of success ◦ High tension and conflicts often  Alliances between weak companies ◦ Weaknesses persist after sale ◦ Strengths of each is pulled down by weakness of the other  Alliances between weak and strong company ◦ Not enough contribution from the weak company .

Avoid self deception  Alliance between an established company and a new low cost competitor ◦ Company may replace critical core products ◦ New company fails to match the established in new technology development long term  Alliance to raise capital without change in management ◦ Works only if the partner is a passive investor ◦ Usually weaker partner loses control .

Risk assessment  Key : Project relative bargaining power evolution of partners Depends on: ◦ Initial strengths and weaknesses ◦ How strengths and weaknesses change over time  ◦ Potential for competitive conflict .

functional   Identify important factors for long term success Identify relative position in the JV ◦ Who controls customers? ◦ Who dominates management? ◦ More willing partner   Ideal situation : Power is balanced at start Usually tilted balance – stronger acquires the weaker over time E. market access.g. Meiji – Borden alliance in Japan for dairy product distribution of Borden by Meiji  .Risk assessment Strengths and weaknesses  Change over time Potential for conflict Specific business strengths to be analyzed ◦ Product. technology.

Risk assessment Strengths and weaknesses       Change over time Potential for conflict   Change in power comes over time Initial stages of industry development – provider or product and technology more powerful Later stages of industry development. US chemical company alliance with Japanese company who controlled distribution .g.power with party controlling distribution channel and customers Scale driven company – power to party with process design capabilities More members in senior management – high growth in strength Power to invest more – greater power Higher ability to learn and teach – higher power E.

Risk assessment Strengths and weaknesses  Change over time Potential for conflict Competitor alliance scenario – conflicts over markets to target. customers and products– leads to merger or acquisition Different qualities – minimal conflicts – higher strength E.g. Lipton – Pepsico for iced tea ◦ Lipton – expertise in tea business ◦ Franchise and brand awareness built to maintain bargaining power ◦ Pepsico brings access to beverage distribution channels   .

to be avoided Alliance between a strong Risky. to be preoperly and a weak company planned Complementary equals have higher chance of success equals Alliance between strong companies .Risk management  Risk assessment gives six types of alliances Type Players Strategy ◦Collisions between competitors ◦Alliances of the weak ◦Disguised sales ◦Bootstrap alliances ◦Evolutions to a sale ◦Alliances of complementary Alliance between equals Usually fail.

Risk management Collision between competitors Bootstrap alliances  Alliances of the weak Evolution to a sale Disguised sales Complementary equals alliance Advantages ◦ Short term synergy – consolidation of overlapping projects and market positions ◦ Shared control. power retained and synergy captured and split  Disadvantages ◦ Expansion plans of each leads to conflict  Example ◦ US and Asian alliance to sell point of sale terminals – 3 years of loss post which Asian partner bought stakes to get control in decision making ◦ General Electric – Rolls Royce alliance for jet engines – Rolls Royce came up with a directly competitive model  Strategy ◦ Acquisition of such competitors ◦ Alliance with different business or geography companies .

Risk management Collision between competitors Bootstrap alliances      Alliances of the weak Evolution to a sale Disguised sales Complementary equals alliance   Two weak companies band together Usually happens in scale-intensive business Initial years – neither partner has capital or resources More focus on fixing their own core issues rather than the alliance Bottom line ◦ Weak gets weaker ◦ 3rd party acquire the pieces ◦ Alliance hence should not be based on weaknesses and rather should be based on strengths ◦ Such alliances lead to less sale value in case of acquisition later – due to difficulties in dissolution of alliance ◦ Erosion of skills. customers. products in interim Example ◦ Airline industry – unprofitable US airlines – led to significant write offs Strategy ◦ Divest outright or refocus and then go for alliance .

the better . rarely lasting more than 5 years  Divesture thinking vs.Risk management Collision between competitors Bootstrap alliances  Alliances of the weak Evolution to a sale Disguised sales Complementary equals alliance Weak company joins a strong company  Short-lived. Example:  Siemens-Allis Chalmers venture in Power equipment Strategy:  Importance of Exit Clauses  Alliance should be structured so that business to sold is easily separated  Sellers should recognize that their bargaining power will decline over time  The fewer remaining entanglements (transfer pricing). Alliance thinking  Potential sellers should seek partners that would be the best buyers later on.

Attempts to use the alliance to improve its capabilities  Often tried. develops into an alliance of equals  Requires systematic learning program and the ability to learn Example:  Alliance of Honda and Rover – successful Strategy:  Weak partners should structure the deal so that they retain control over one or more business elements like customer relationships  Alliance should be around a series of skill building activities  Government protection can increase the chances of protection for weaker partners . but rarely works – if it does.Risk management Collision between competitors Bootstrap alliances  Alliances of the weak Evolution to a sale Disguised sales Complementary equals alliance Weaker company partners with a stronger company.

one gets sells out to the other  Delivers value to both the parties  Contributions from each are significant in determining the shift  Devising a formula to share the future value of the venture is important  Importance of Flexibility Example:  Pfizer and Taito Strategy:  Partners in evolution need to be clear about their individual strategic intent .Risk management Collision between competitors Bootstrap alliances  Alliances of the weak Evolution to a sale Disguised sales Complementary equals alliance Alliance between two strong and compatible partners  Bargaining power shifts due to competitive tensions .

Fuji Xerox. Importance of governance. Siemens-Corning Strategy:  Keep the strengths and contributions in balance . clarity of leadership Examples:  Dow-Corning.Risk management Collision between competitors Bootstrap alliances  Alliances of the weak Evolution to a sale Disguised sales Complementary equals alliance Only partnership that can lead lo marriage for life!  Alliance between two strong parties that remain strong throughout the duration  Based on true collaboration – both partners build on each other’s qualities rather than trying to fill gaps  Balance of power.

Thank you! .