Insights on alliance management, accountability, Sarbanes-Oxley, marketing theory and leadership competencies

European Business Forum, Spring, 2005 by Angela Andal-Ancion, George Yip, Ben Kedia, Somnath Lahiri, Al Lovvorn, Dermot Williamson

EDITOR'S NOTE

The in-depth section of EBF--which you will find in the next 26 pages--represents a change of style and pace for the reader. While the preceding EBF debate dealt with a specific theme, here we broaden the focus to look at a variety of topics that affect businesses across Europe and around the world. Leadership, the impacts of culture on accountability, the evolution of marketing thought and the impact of financial regulations are among the subjects discussed.

Smarter ways to do business with the competition

Culture and managing expectations are the key to developing successful business alliances

Every company needs to co-operate with rivals at some point during its business lifetime. Increased levels of local and international competition, coupled with smarter and more discerning customers, require more sophisticated and efficient ways of doing business. In addition, many regulated or protected industries have restrictions on cross-border activities or mergers.

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Alliances and partnerships with peers and competitors offer a credible alternative to flying solo. The idea seems easy and straightforward: pooling ideas, resources and capabilities gives managers and companies added strength and power. Yet with strength comes complexity, balancing power, decision-making and group dynamics. Alliances among peers and competitors pose many issues, including:

* Alliance structure (organisation, governance and ownership)

* Managing members' expectations

* Creating the alliance content

* Fostering a healthy alliance culture

* Managing external networks

* Measuring performance

Companies that enter into strategic alliances thus encounter many dilemmas. We have summarised the key issues into six categories of 10 dilemmas:

Structure

Dilemma 1: what sort of entity should be created to manage the alliance?

Dilemma 2: how should power be distributed among the members?

Expectations

Dilemma 3: how do you resolve differing visions of the alliance's evolution?

Dilemma 4: how do you build trust among actual and potential competitors?

Content

Dilemma 5: how do you create a separate identity for the alliance while maintaining the individual identities of members?

Dilemma 6: what should each member give up doing?

Dilemma 7: should members be involved with each other outside alliance business?

Culture

Dilemma 8: how should the alliance deal with cultural differences, whether national or business-related?

External networks

Dilemma 9: how should alliance members deal with their external networks?

Performance

Dilemma 10: how do you quantify the gains from alliance involvement?

This paper discusses how Star Alliance, the world's largest airline alliance, has dealt with these 10 dilemmas.

Star Alliance constitutes one of the most complex alliances in the world, with 15 air-line members from 16 countries: Air Canada, Air New Zealand, ANA (Japan), Asiana Airlines (South Korea), Austrian, bmi (United Kingdom), LOT Polish Airlines, Lufthansa (Germany), SAS Scandinavian Airlines (Denmark, Norway and Sweden), Spanair (Spain), Singapore Airlines, Thai, United (US), US Airways, and Varig (Brazil).

Structure

Dilemma 1: what sort of entity should be created to manage the alliance?

An alliance can be formed as an independent entity or as dependent on its parent companies. When only a few partners are involved, dependence can be the simplest solution, reducing the need for separate systems. BP and Mobil adopted this approach for their European oil business joint ventures, essentially operating the refining venture as a BP entity, and the lubricants venture as a Mobil entity (Bamford et al. 2004).

The road to finding the right entity for Star Alliance took many turns. Its founders began with a series of bilateral agreements involving key functions such as marketing and operations (for example, code-sharing of flights). Various other bilateral agreements followed until five airlines--Air Canada, Lufthansa, SAS, Thai and United--sought a closer engagement by launching the Star Alliance network in May 1997.

Although its founding members chose an independent identity, Star Alliance did not become a separate legal entity until January 2002. In its early days, the Alliance was run as a virtual organisation with functional committees staffed by member representatives. Establishing a permanent base for activities was difficult with its members based around the world.

The virtual organisation then evolved into Star Alliance Services GmbH, a separate management company based in Frankfurt. Registered as a limited liability company, 65 full-time management staff handled the strategic responsibilities for Star Alliance. Decision-making and implementation for Alliance-wide projects and issues thus became easier. The new management company formalised Star Alliance's ownership structure. Each member airline became an equal shareholder in the new company, a significant improvement from the early days of loose and informal ownership.

Dilemma 2: how should power be distributed among the members?