18 April 2003
Contemporary alliances among companies vary widely in nature and scope. They include conventional joint ventures and franchise agreements, along with consortia, informal networks and the newly defined strategic alliances.
Strategic alliances have recently acquired a rather different form compared to the conventional joint ventures undertaken in the eighties and early nineties. The classic joint ventures were of a clearly delimited nature, with predefined goals – to develop a certain product, penetrate a specific market – and generally speaking involved few partners, in many cases just two companies.
New strategic alliances have a less clearly defined “a priori” purpose. They usually entail many partners – sometimes from diverse or complementary sectors – and do not predetermine the ways these partners will generate and capture value. Distinguished academics Doz and Hamel have identified the distinctive features of this new species of strategic alliances, as compared to former joint ventures. These include: 1) A greater uncertainty and ambiguity in the mission and objectives of the alliance; 2) The forms of creating value and the way in which partners capture value is not predetermined; 3) Relations between partners evolve in a way that proves difficult to predict; 4) Partners today may be rivals in the future, or may currently be competitors in other markets; 5) Managing the alliance over time is more important than the initial creation of a complete design format; and 6) Initial agreements are less important for success than adaptability to change.
The key to guaranteeing success during the construction phase of these new strategic alliances probably lies in identifying the alliance’s mission, broad as it may be, selecting potential partners and generating trust once negotiations have begun. One of the decisive factors in the partner selection process is the identification of compatibility of the potential partners, and anticipation, insofar as it is possible, of what contribution each of the partners could make to the alliance. As for inspiring trust – crucial in the initial stages of an alliance, much the same as in personal relationships – it is important to make every attempt to comprehend the agendas, both formal and hidden, that partners might have. It is also vital to promote solutions that accommodate the expectations of all who agree to the project. This is probably one of the overriding objectives of the architect of this type of alliance, above and beyond other legal or financial aspects of the agreement that have traditionally been afforded greater importance.
The Creation of Alliances to Foster Innovation
In the past decade the huge upswing of entrepreneurship in Europe, helped by the growth of start-up incubators and the greater availability of seed money, has led to the creation of many cross-border alliances. This ongoing transformation of European business culture, along with the future expansion of the European Union, will certainly give way to many cross-border M&A and intercompany alliances. Nevertheless, the persistence of strong nationalist sentiments will continue to result in alliances receiving precedence over M&A in the future despite the increasing homogeneity of competition laws in Europe, given that alliances are seen as an easier way to overcome the obstacles raised by localism.
Alliances do not necessarily entail the closing down of a partner’s headquarters or the disappearance of its brands, measures that often fuel indignation on a national level. Cultural and social diversity in Europe also points to alliances as the preferred vehicle to achieve business expansion and development, especially in culturally-sensitive industries: e.g. business services. The merger of two international companies in a single organisation normally entails bringing the acquired company under one system, causing conflicts that arise from the clash of different cultures. Alliances, on the other hand, preserve the identity of partners and exploit the potential synergies from diversity.
One active scheme for the expansion of alliances in R&D-intensive businesses throughout Europe is EUREKA, a pan-European network founded in 1985 under the auspices of the European Union and currently composed of 17 countries. EUREKA is designed to support market-oriented industrial R&D projects, run by consortia of companies –often mid-sized - from different countries. In the past year EUREKA supported the development of 190 projects. Some of its recent success stories include the development of 4ESP, an electronic stability system for 4-wheel cars, and Sanifogger, a humidifying device for keeping food fresh in supermarkets.
The first project was developed by Daimlerchrysler along with two other companies, one Austrian and another German, resulting in the use of this technology in the G class 4 wheel-drive cars manufactured by Daimlerchrysler. The Sanifogger was developed by two mid-sized companies: Contronics Engineering BV, of the Netherlands, and Norman Pendred & Co., of the UK. This product has helped supermarkets to reduce 60% of the wastage of fresh food as well as to lower labour costs, since the food does not require wrapping or placing in cold store overnight. Both companies are experiencing a huge increase in sales, and they already plan to launch the “travel fogger”, a travelling version for keeping food fresh in containers on long-haul journeys.
The biotech and pharmaceutical industry has been an exceedingly fertile ground for business alliances in the past years. These alliances are important for biotech companies as a much-needed source of capital, while pharmaceutical companies need them to keep their drug pipelines full. Moreover, according to a recent study, they increase their odds of winning regulatory approval. Research also indicates that the probability of a drug developed jointly passing through human testing increases by up to 30% compared with drugs developed by a single company. It would appear that products or services developed within a business alliance have better chances of reaching the final market than those launched by sole companies.
Corporate alliances of diverse types have increased exponentially in different industries over the last decade. They have become a preferred strategy for companies, small and large, to channel business growth and development given their ability to adapt to the challenges of globalisation and the ever changing business environment. The knowledge and the experience harvested by academics and managers will help future alliances to further increase their success rates and to better exploit their potential.