Strategic alliances and joint ventures: making them work - corporate collaborations

Business Horizons, July-August, 1994 by Bruce A. Walters, Steve Peters, Gregory G. Dess

Companies are continually striving to gain access to new markets and new supply sources, capitalize on technology, use assets better, and become more profitable. They commonly use three methods to achieve these objectives: internally developing physical assets and company skills, acquiring these assets and skills, or agreeing with other companies to pool physical and human resources. The latter is commonly known as a strategic alliance or joint venture. Although the distinction is not important for our purposes, and the terms will be used interchangeably, the two forms of partnership between companies differ. Joint ventures entail creating a third-party legal entity, whereas strategic alliances do not. In addition, as a general rule, strategic alliances focus on projects that are smaller in scope than joint ventures.

Just as acquisitions were extremely popular during the early and mid-1980s, international and domestic joint ventures have been formed extensively since the mid-1980s. A report by David Ernst and Joel Bleeke of McKinsey & Company indicated that ventures between U.S. and international companies have been growing by 27 percent annually since 1985 (Sherman 1992). Some believe, however, that alliances are more faddish than substantive. Others believe that alliances are inherently bad, and that they result in reduced competition and ultimately higher prices for consumers.

WHY FORM ALLIANCES?

Strategic alliances are formed for a variety of reasons, which include entering new markets, reducing manufacturing costs, and developing and diffusing new technologies rapidly. Alliances also are used to accelerate product introduction and overcome legal and trade barriers expeditiously. In this period of advanced technology and global markets, implementing strategies quickly is essential. Forming alliances is often the fastest, most effective method of achieving objectives. Companies must be sure the goal of the alliance is compatible with their existing businesses so their expertise is transferable to the alliance. Firms often enter into alliances based on opportunity rather than linkage with their overall goals. This risk is greatest when a company has a surplus of cash. In recent years, Mercedes-Benz and Toyota Motor Corporation have been investing surplus funds into seemingly unrelated businesses, with Benz already facing difficulties as a result.

Selecting a Partner

Before initiating a more detailed review of the primary reasons for forming strategic alliances, we need to discuss the selection of the appropriate partner or partners. Without the proper partner, a company should never undertake forming the alliance, even for the right reasons. Each partner should bring the desired complementary strength to the partnership. Ideally, the strengths contributed by the partners are unique, for only these strengths can be sustained and defended over the long term. The goal is to develop synergies between the contributions of the partners, resulting in a win-win situation for both, or all. Moreover, the partners must be compatible and willing to trust one another.

It is important that neither partner has the ability or the desire to acquire another partner's strength, or the necessary mutual trust will be shattered. Dow Chemical Company, a frequent and successful alliance practitioner, uses the negotiation process to judge others' corporate cultures and, consequently, their compatibility and trustworthiness.

Commitment to the joint venture is essential. This commitment must be both financial and psychological. Unless there is senior management endorsement and enthusiasm at the operating level, an alliance will struggle, particularly when tough issues arise.

Entering New Markets

Often a company that has a successful product or service has a desire to introduce it into a new market. Yet perhaps the company recognizes that it lacks the necessary marketing expertise because it does not fully understand customer needs, does not know how to promote the product or service effectively, or does not understand or have access to the proper distribution channels. Rather than painstakingly trying to develop this expertise internally, the company may identify another organization that possesses those desired marketing skills. Then, by capitalizing on the product development skills of one company and the marketing skills of the other, the resulting alliance can serve the market quickly and effectively. Alliances may be particularly helpful when entering a foreign market for the first time because of the extensive cultural differences that may abound. They may also be effective domestically when entering regional or ethnic markets.

The partnerships between Time-Warner, Inc. and three black-owned cable companies in New York City are examples of joint ventures created to serve a domestic market. Time-Warner built a 185,000-home cable system in the city and asked the three cable companies to operate it. TimeWarner supplied the product, and the cable companies supplied the knowledge of the community and the know-how to market the cable system. Joining with the local companies helped TimeWarner win the acceptance of the cable customers and benefit from an improved image in the black community.