Putting more strategy into strategic alliances.

• Author: Rigby, Darrell K.
• Position: Includes related article

Success is only possible by getting the strategy right. Here are the six key steps involved in creating a strong strategic fit.

Strategic alliances are in vogue. Companies as diverse as Corning Inc. in the United States and Aerospatiale in Europe are now generating 50% to 60% of their sales from alliances, while NEC has some 130 joint efforts underway. GE, Philips, and Fujitsu boast comparable numbers, and IBM claims to have established over 4,000 alliances. The number of international strategic alliances has been growing at a rate of over 30% per year, and for good reason. When they are done right, strategic alliances offer benefits that cannot be realized in any other way.

An alliance can be defined as "a union, relationship, or connection by kinship, marriage, or common interest" (American Heritage Dictionary). We define a strategic alliance as "a partnership between firms linking parts of their businesses together whereby they mutually commit resources for the achievement of common objectives." Such an alliance may involve a limited degree of cooperation and commitment, such as a joint licensing agreement, or it may require the launching of a full-scale joint venture.

The reasons for creating strategic alliances are rooted in the changing nature of business today. In an era where product life cycles are being dramatically shortened, alliances offer companies a cost-effective means of accelerating product introductions. As the cost and complexity of technology permeates every facet of the value chain, alliance-based investment sharing allows for lower capital outlays and the spreading of risks among partners. With the demand for specialized skills increasing, alliances offer access to deep skill bases without loss of focus. Finally, as the field of competition continues to shift from local to global markets, these new partnerships help multinational enterprises overcome national barriers and rapidly open access to worldwide opportunities. International strategic alliances have grown so ubiquitous that they are transforming our understanding of multinational enterprises, national sovereignty, and what it takes to succeed in a global economy.

If it were easy to create successful alliances, that would be the end of the story, and even more of them would be created. However, we have found that putting together a successful strategic alliance is not at all easy, and it is especially difficult if the partners are ignorant of the basic principles involved in making alliances work.

At Bain & Company, we have developed our insights into strategic alliances based on the personal experiences of our partners in over 200 alliances, detailed analyses of 88 individual alliances, and an exhaustive review of the public literature and research conducted by academics and other consulting firms. This research shows that out of every 100 alliance negotiations, 90 will fail even to produce an agreement. Of the remaining 10 that do result in an agreement, five will fail to meet the partners' expectations for the venture. Of the five that produce acceptable results, only two will survive for more than four years. Overall, then, only two out of 100, or 2% of all alliance negotiations, produce lasting performance improvements for the participants.

Real Risks

If we could write off failed alliances as a simple case of "nothing ventured, nothing gained," these statistics would be interesting but not alarming. However, the price of failure is actually quite high. It is often far better to forgo the intriguing possibilities of a collaboration than to try and fail.

Strategic alliances (whether they succeed or fail) are expensive exercises. They cost real money, involving large investments of time and dollars. They can take a year or more just to negotiate, and require significant levels of senior management attention. While prospective partners are negotiating, competitors use that precious time to their advantage. When joint efforts don't work, it's rarely a secret, leading to widespread loss of confidence in management's vision and judgment.

In spite of best efforts, failed alliances often result in the leakage of proprietary technology, which in turn can help to create more powerful competitors than the company faced in the pre-alliance period. Missed opportunities, a loss of customer confidence, atrophy of critical skills, and even loss of the operation itself can result from terminated alliances.

The problems associated with failure are illustrated by the attempt of K mart (a discount retailer) and Hechinger's (a marketer of home improvement products) to develop a nationwide chain of do-it-yourself discount stores. The two companies neglected to create a coherent strategy when they started the venture. As a result, contrasting operating styles, coupled with an inability to agree on basic issues such as store layout and advertising, eventually caused the project to collapse. As a result of this...