Business alliances as a ´winning strategy´

Santiago Iñiguez

20 March 2003

The creation of strategic alliances between companies and organisations is one of the most frequently adopted formulas to fuel business growth and development in an increasingly and irreversibly globalised environment.

Every day we read about some new alliance initiative between firms from highly diverse sectors. According to consulting firm Booz Allen & Hamilton more than 20,000 alliances have been formed worldwide in the last two years, 75% of which were cross-border alliances. The same company predicts that by 2005, up to 40% of all revenues of U.S. and European companies will be sourced from alliances. All this despite a failure rate of 50%, while 80% conclude with the sale of one of the partners to the other.

The most frequently alleged reasons for this boom in business alliances include ever-increasing research and development costs, the shortening lifespan of many products or services, and the convergence of technologies. Moreover, the last few decades have seen barriers to mobility brought down, blurring boundaries between sectors and generating new forces that have transformed the structure and competitive characteristics of sectors ranging from soft drink manufacturers to telecommunications. In one sector after another, globalisation has first affected demand, then supply, followed by competition, and finally, the competitive strategies of companies.

Globalisation has acted as a catalyst not only for the creation of alliances, but also for other concentration strategies like M&A. The strategic alliance, however, offers benefits that include flexibility, reduced risk, a trial period and greater speed of execution. As both professional and academics are apt to say, alliances have a more invertebrate structure that renders them more adaptable, freer, ready and able to evolve as the environment changes.

A recent study by consulting firm McKinsey reveals that alliances are better received than M&A in fast-moving, highly uncertain industries such as electronics, mass media and software. They are also the preferred choice for companies trying to build up new businesses, enter new markets, or access new distribution channels. The same study shows that the announcement of strategic alliances can affect the stock prices of the companies involved, which underlines the need to dovetail the implementation of alliances and parallel communication actions. The study further concludes that 52% of large alliances - i.e., agreements that involve major corporations or mega deals – really do create value for the shareholders, at least in the short term. This is probably due to the fact that big agreements generate a great deal of media attention, thus arousing the interest of potential investors.

[*D Legal and political restraints *]

The airline industry is a field where the creation of alliances like One World, Star Alliance or Sky Team is now par for the course. The driving forces behind such alliances were, basically, the need to achieve critical mass and combine resources, as well as to catalyse the wide impact of new technologies on added value, particularly in ticket reservation systems. These alliances have permitted airlines to cover the main markets and provide integrated solutions for clients. Another important reason was to overcome legal and political restraints in an industry where existing rights of use of airport slots and routes obstructed open competition. The airline industry is now poised for further consolidation of alliances in the light of increasing competition from low-fare companies, and we will no doubt see further exploitation of potential synergies in the coming years.

No company, neither small and mid-sized enterprises nor major corporations, remains untouched by the alliance phenomenon. In the case of smaller-scale companies, alliances are the most common means to confront the challenges of new markets or to undertake intensive technology projects. Larger companies turn to alliances with other organisations in order to jointly carry out activities that lie beyond their core competencies, with a view to increasing their competitiveness or gaining a foothold in markets that prove difficult to access for structural reasons. This is the case of some media conglomerates whose global ambitions run parallel to a need to adapt to local or regional consumer preferences. CNN, for example, has changed its growth strategy from opening foreign news bureaus abroad to the creation of more than 700 video content broadcasting exchanges set up around the globe to provide locally based coverage, including the famous Al Jazeera Television.

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