Growth through Strategic Alliances

Introduction
Organizations have realized that it is not always judicious to foray into every areaof interest.
The organization may lack some required capabilities or the resources. Sometimes building
those capabilities is better done in an existing business. In such situations, it is always advisable
that the organization partners with another organization which is equally keen, but one that
lacks certain capabilities as well. Both organizations pooling their resources, we call strategic
alliances. Such partnerships have fuelled growth for a large number of organizations, more so
in recent times.

Understanding Strategic Alliances

The Key Concept
A strategic alliance is where two organizations come together to fulfill a specific business
objective. At the operational level, such an objective may take any form, but at the strategic
level, the key objective is often growth. The alliance may be registered as a separate legal
entity, or may bea make-shift arrangement. At times, the strategic alliance becomes an
organization on its own. There are different types of arrangement between organizations, but
all do not qualify to be considered as strategic alliances. See figure 1i.

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As the figure shows, relationships between organizations can be either contractual or equity
arrangements. Contractual arrangements are the ones in which the organizations are bound to
deliver the commitment based on a legal (or even implicit) tie-up. On the other hand, equity
arrangements are such that there is shared ownership of the venture, making it mutually
beneficial. There is a direct gain herein—profits are directly shared by organizations entering
the equity arrangement, based on the ratio in which the equity is held. As we see from the
shaded area, the organizational arrangement should be a ‘less than arm’s-length relationship’ii
for it to be a strategic alliance.

Strategic Alliance Types and Ultimate Outcomes

Studies have shown that the final destiny of an alliance is contingent upon its type. Here, the
typology of strategic alliances is defined by the stature of the organizations involved.
Accordingly, there are six types of strategic alliancesiii, and each type is expected to follow a
particular path.

The first type is one in which direct competitors join hands. The organizations have similar
products targeted to almost the same customer segments in the same geographies. As a result,
it is felt ex ante that by collaborating, great synergy will be achieved. Indeed, there is an
increase in business since the cost of showing one organization to better than the competitor is
no longer required. Also, there is a feeling, at least during the relationship’s inception, that
neither organization is relinquishing command. However, there is another side to such strategic
alliances. It is quite possible, and is often the case, that after some time, both organizations

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develop an interest in expanding the business (keeping the same product line intact), on their
own. Once this happens, there is bound to be conflict. There are two ways of avoiding this: 1)
the organization can enter into another strategic alliance with another, such that the latter
operates in a different product and market domain, or 2) the organization can acquire its
competitor, with whom it had entered into the strategic alliance in the first place.

The second type of alliance is the one wherein two or more weak organizations (typically from
the same industry) join hands in anticipation that their combined strength will be a good way
of tackling competition. This is a recipe for disaster, as neither partner has the relevant
competencies to succeed in the industry. How then, can their coming together be of any help?
It has been shown empirically that the shareholder valueis eroded by entering into this type of
alliance, and ultimately, these businesses are sold off.

The third type of strategic alliance is where a weak organization joins hands with a big player
in that industry. This is typically a move by the weak organization’s management, when neither
organization is in a position to strengthen the business nor keen on selling it. This type of
alliance is not sustainable in the long run, and often the weak organization ends up being
acquired by the stronger partner (for more details on the concept of acquisition, please refer to
Chapter 8). Selling the weak organization at a later stage reduces its bargaining power, leading
to loss of shareholder value in the acquisition. So, if an organization understands that it is too
weak to sustain in an industry, it should ideally partner with an organization which is
potentially an ideal buyer at a later stage. The typical profile of the ideal buyer is an
organization which is a strong player in that industry, and has the sufficient financial backup
to later acquire the weaker organization. There is a word of caution that we should raise here–
the weak organization should only make such a move if it is sure that the business in question
can be separated from other businesses without any loss of overall capability.

The fourth type of strategic alliance is the one in which a weak organization enters into
arrangement with a strong organization of the same industry, with the sole aim of learning the
success mantra from the latter. The weak organization’s objective is to grow strong and then
exit the alliance for subsequent standalone operations. To succeed, its focus should be on key
functions and expertise. These arrangements, also known as bootstrap alliances, are very
difficult to execute with the learning objective in mind. In most cases, the weak organization
is not able to gain much, and is finally acquired by the alliance partner.

In the penultimate type of alliances, we see two organizations of similar high strength (also
compatible) coming together. In the initial phase of the strategic alliance, it is felt that both
organizations share similar bargaining power, butas time progresses, one partner becomes more
powerful than the other, thereby increasing its bargaining power and leading to the sale of the
other organization. This shift in relative power can be a result of internal or external factors.
An important external factor is industry dynamics; if the industry is moving in a direction
wherein the assets of one organization become more important in delivering value to
customers, then that organization is bound to become stronger in the alliance.

The most successful type of alliance is the one in which organizations of similar stature but
with distinctly complementary capabilities forge partnership. These strategic alliances tend
tolast, and there is low tendency of shift in bargaining power. The alliance partners offer
different value propositions to different markets altogether. The challenge here is operations.
Since both the organizations have quite different businesses, their management patterns and

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ethical norms are also bound to differ. Arriving at a convergence on how the alliance will be
managed will determine whether the partnership is successful or not.

Critical Success Factors in Different Alliance Stages

The above section dealt with the different types of alliances. We also need to understand that
there is no sweeping heuristic to be followed for the strategic alliance to succeed. The alliance,
as an entity, passes through different stages of life; each unique in nature, along with the factors
that decide whether the alliance will be able to address the challenges of that stage and pass to
the next or not. The different stages and the respective critical factorsiv that decide on the
success are depicted in the figure below.

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The above portrait divides the alliance’s life cycle into three stages: the beginning of partner
selection and alliance formation, formation of norms and structure, and management. This
section discusses the factors that determine the success of strategic alliances based on the three
stages.

Stage I: Pre-formation of the Alliance

Once an organization has decided that it can meet a specific business objective by entering into
a strategic alliance, the natural challenge is to evaluate the potential partner. It is not only the
partner’s qualities that matter, but their ability to gel with their new partner. Of the qualities
discussed below, some may be more important in certain situations compared to others. The
context-specific weight is left to the manager to ascertain.

The first quality that a potential partner should possess is complimentary capabilities. This
benefits both the organizations as they bring different sets of capabilities to the venture. One
organization, on its own, would not have succeeded in running the venture, as the other set of
capabilities that are equally important for the venture, are missing. Another quality that the
potential partner should have is the ability to fit well with this organization. It is quite possible
that two organizations which have very different capabilities also have different evolutionary
patterns and value systems. For the organizations to fit well, there should be some shared
norms, similar organizational culture, and a relatively equal level of ethical benchmarking.
Finally, for an organization to be considered as potential partner, it should be keen enough to
take on the venture. In the absence of sufficient interest, there is no point in forging an alliance
with an organization. On the other hand, if an organization is trulyinterested, it will neither
share the relevant complementary resources necessary for the strategic alliance nor will it forgo
a few of its standalone business opportunities for the benefits of the alliance.

Stage II: Designing Engagement Terms in the Alliance

Having decided on the organization to be partnered with, the next challenge is to decide on the
way in which the partners will get involved in the process. These terms of engagement will be
the foundation for subsequent smooth functioning, as there is a tendency for opportunistic
behaviour by one of the partners after the strategic alliance has been entered into. This can be
detrimental to the overall functioning of the alliance, and the objective with which the alliance
had been formed may be defeated altogether. However, if both partner organizations have equal
interest in the success of the venture and benefit from it, then chances of opportunistic

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behaviour are minimized. A tool to achieve this is by ensuring that both partners have equity
ownership. There is another benefit that equity participation ensures—the proportion of equity
holding determines the level of profit sharing. In the absence of such clear-cut sharing
mechanisms, there are chances of heartburn. For example, one organization may contest that
its contribution in the strategic alliance is more than the proportion of profit that it has been
entitled to, in the contract that was decided a priori. However, if there is equity participation,
then the equity ratio itself decides the contribution of each organization. There are other factors
that decide the robustness of engagement terms as well. As far as possible, the mutual
obligations and rights of both the partners should be spelled out clearly by way of contracts.
Needless to say, no business relation of this nature can exist if the organizations don’t share
trust and goodwill.

Stage III: Post-formation of the Alliance

This is the stage where the strategic alliance is actually functional. It is time for the
organizations, after being diligent enough to choose the right partner and set the right terms of
engagement, to reap the expected benefits with which the alliance was formed in the first place.
However, this is possible only if the alliance is functioning is a desired fashion.
At the functional level, smooth operations depend largely on the way the organizations
orchestrate their activities, specific to the alliance. Both partners are expected to perform
certain activities in a co-ordinated way. To achieve this, the activities and deliverables of both
the organizations should be spelt out, along with each activity’s timeline. Mutual trust between
partners is equally essential. This reduces friction, and the cost associated with developing
elaborate monitoring mechanisms is also minimal. There is another benefit that the alliance
derives out of the mutual trust between partner organizations. Post alliance formation, many
unforeseen issues can crop up—if there is trust between the partners, then fire-fighting is easier.

Benefits of a Dedicated Alliance Function

We discussed earlier the different stages of a strategic alliance (i.e., the life cycle), and also the
checklist of things that each partner organization should ensure for the success of the alliance.
To carry out the entire checklist, it would be unwise of an organization to dedicate all resources
available to it. There needs to be a function which accounts forall the expertise an organization
requires to manage all stages of a strategic alliancev. Let such a dedicated department be
labelled as the alliance function. The benefits of such a function are captured in the figure
below. Benefits are elaborated uponbelow the figure.

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Management of Learning and Knowledge

A dedicated alliance function acts as a reservoir where accumulation of knowledge from
previous alliances takes place. Once an organization decides to enter into a strategic alliance,
there are certain stage-specific life cycle capabilities that determine success (refer to the topic,
Critical Success Factors). By seeking feedback from current ventures, such a department also
imbibes learning from ongoing partnerships. This repository of knowledge is important, as it
makes the organization more competent to tackle any future pursuit in forming strategic
alliances.

Marketing the Organization

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The very fact that an organization has a dedicated alliance function makes it a sought after
partner for alliance making. This is because other players in the market get a signal that this
organization is serious about making and reaping the benefits from strategic alliances. Also, if
there is such a department, it acts a one-point-contact for other players who may want to contact
this organization with an offer of alliance formation. This makes the dealing hassle-free.
Another benefit of this alliance function is that it can manage public relations specific to
strategic alliances as well. By feeding the media with business news of newly forged alliances,
as well as landmark achievements of existing alliances, this department improves the visibility
of the organization to the market.

Smoothing Inter-Departmental Transactions

An organization’s capabilities are derived from alignment of various functions. When an
organization enters into a strategic alliance, it is natural for the other partner to expect that the
alliance will benefit from these capabilities. But different departments of this organization may
not be motivated enough to share their resources for the alliance. Such a reluctance can be
nullified if there is a dedicated function (specializing in alliances) explicitly seeking the exact
nature of resources from respective departments. This dedicated function will then also ensure
that respective departments work in sync with each other for the overall benefit of the alliance.

Monitoring and Facilitating Alliance Performance

A dedicated alliance department ensures that the strategic alliance is performing as per the
expected benchmarks. In case of any support is sought, this department can intervene and draw
resources from organizational functions. This department may also evaluate the benchmarks of
expected performance, and revisit them time and again in light of new developments.

Illustrations
Illustration I: Bharti Airtel’s Partnership with Ericsson
Bharti Airtel Limited is an integrated telecom service provider with operations spread across
19 counties in Asia and Africa. The businesses of the organization comprise four strategic
business units—Mobile, Telemedia, Enterprise, and Digital TV. Of these, the Mobile SBU
offers services in India, Bangladesh and Sri Lanka. In India, Airtel is the telecom service
provider that enjoys the largest number of customers, spread across 23 telecom circlesvi.
Ericsson, founded in 1876 in Sweden, on the other hand, is a hardware based organization, and
specializes is providing technology and services to telecom operators. The business portfolio
ranges from telecom (mobile and fixed network) infrastructure, telecom services, broadband
and multimedia solution for operators, etc.
Bharti Airtel and Ericsson have been collaborating for quite some time. In March 2010, they
entered into a partnership for network expansionvii. To us, such an alliance makes huge sense.
Both organizations have complementary capabilities—Airtel being number one in the business
of telecom services, and Ericsson’s forte being network infrastructure for telecom. Also, the
organizations operate on similar scales in their respective markets. We discussed in ‘Strategic
Alliance Types and Ultimate Outcomes’ that such alliances have highest probability of long-
term success.

Illustration II: The M-Budget Credit Card

This illustration speaks of a strategic alliance forged between GE Money Bank, Migros and
MasterCard. Before giving details, it is better that we develop a brief understanding of the three
organizations.

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GE Money Bank was established about 35 years ago, and is in the business of providing finance
to individuals for cars and other vehicles: insurance, credit cards and savings accounts. It
entered Switzerland by acquiring two banks in 1997, and then brought these two entities under
its umbrella brand of GE Money Bankviii. Migros, on the other hand, is a Switzerland-based
retail organization founded in 1925. In the country, it operates at a scale which makes it the
largest chain of supermarkets, as well as the biggest employer. M-budget is an initiative of
Migros, wherein a portfolio of around 300+ products are offered in the supermarket,
specifically targeted to customers with low incomes and big families.
In 2006, GE Money Bank and Migros entered into a strategic alliance to offer a new product,
the M-Budget credit card. Initially, it had annual fees, though much lower than other cards.
This fee was scrapped, due to a specific movement in the market. Based on the heuristics that
we discussed earlier, this strategic alliance also made sense. Both the organizations were big
players in their respective domains and were into businesses which did not overlap. The
products and markets were complementary, and strategic alliance was a good way of
integrating the strengths of both these organizations for mutual benefit. GE Money Bank had
expertise in financial products, so designing the credit card offering wasn’t a big task for it. At
the same time, Migros had the expertise in the vast distribution of products, to customers at all
strata of society. The credit card, channelled through the network of superstores, was a good
way of reaching out to a wide audience.

Illustration III: ICICI-Prudential Life Insurance Company

ICICI-Prudential Life Insurance is an equity joint venture between the ICICI Bank (India) and
Prudential Plc (UK). In this alliance, ICICI Bank has an equity participation of 74 percent and
Prudential, 26 percent. Both organizations operate in the domain of financial services, though
in different markets. The joint venture was conceived in 2000, and is today one of the largest
life insurers in India. In an annual survey conducted by The Economic Times—AC Nielsen
ORG Marg, the joint venture, has been rated the most trusted private life insurer three years in
a rowix.
There is a reason for this. Both organizations have a strong understanding of the financial
services industry. Having come together for a venture, again in financial services (life
insurance), gives them the natural benefit of previous domain knowledge. However, there could
be a future challenge for the joint venture. Both organizations are in financial services, and the
only complementarity that they enjoy is in markets in which they operate. Both may have
interest in rolling out standalone insurance operations in India once they have learned the
nuances of the business—nuances of life insurance for ICICI and nuances of the Indian market
for Prudential, Plc. Only time will tellhow valid this concern may be.

Conclusion
Strategic alliances are partnerships between two or more organizations, which come together
to meet a common business objective (‘Understanding Strategic Alliances’). As discussed
earlier, these partnerships may take the form of either contractual or equity arrangements
between organizations. It is the type of organizations that enter into strategic alliances that
determine whether the venture will succeed or not. It has been found that when organizations
with distinctly complementary capabilities come together, the chances of success are the
highest (‘Strategic Alliances Types and Ultimate Outcomes’). Different stages of a strategic
alliance dictate different requirements from partner organizations, and the management of these
requirements determines the venture’s success (‘Critical Success Factors in Different Alliance
Stages’). Management of the alliance becomes easier if the organizations have a function

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dedicated to the formation/running of the strategic alliance (‘Benefits of a Dedicated Alliance
Function’).

i
Yoshino, M. Y. and Srinivasa, R. U. (1995). Strategic Alliances: An Entrepreneurial Approach to Globalisation.
Boston: Harvard Business School Press as cited in Kale, P. and Singh, H. (2009). Managing Strategic Alliances:
What do we know now, and where do we go from here? Academy of Management Perspectives, 23 (3), 45-62.
ii
Davies, W. (2004). The art of strategic management: strategic alliances (vol 2). Mumbai: Jaico Publishing
House.
iii
Bleeke, J. and Ernst, D. (1995). Is your strategic alliance really a sale? Harvard Business Review, 73 (1), 97-105.
iv
Kale, P. and Singh, H. (2009). Managing strategic alliances: what do we know now, and where do we go from
here? Academy of Management Perspectives, 23 (3), 45-62
v
Dyer, J. H., Kale, P. and Singh, H. (2001). How to make strategic alliances work, MIT Sloan Management
Review, 42 (4), 37-43.
vi
Excerpted from
http://www.airtel.in/wps/wcm/connect/about+bharti+airtel/Bharti+Airtel/About+Bharti+Airtel/?WCM_Page.R
esetAll=TRUE&CACHE=NONE&CONTENTCACHE=NONE&CONNECTORCACHE=NONE&SRV=Page on 19th Aug,
2010.
vii
Excerpted from
http://www.airtel.in/wps/wcm/connect/About%20Bharti%20Airtel/bharti+airtel/media+centre/bharti+airtel+
news/mobile/pg-bharti-airtel-extends-partnership-with-ericsson on 19th Aug, 2010
viii
Excerpted from
http://www.gemoneybank.ch/en/ueber_uns/ueber_ge_money_bank/facts_und_figures.html
ix
Excerpted from http://www.iciciprulife.com/public/About-us/About-Us.htm on 19th Aug, 2010.

Chapter 7: Growth through strategic alliances

Figure 1: Adapted from Yoshino and Rangan, 1995.

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Figure 2: Adapted from Kale and Singh (2009)

Replace ‘Alliance formation and partner selection’ by ‘pre-formation of the alliance’; ‘alliance
governance and design’ by ‘designing engagement terms in the alliance’; and ‘postformation
alliance management’ by ‘post-formation of the alliance’.

Figure 3: Adapted from Dyer, Kale and Singh (2001)

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