Sound Judgment and Strategic Partnerships

Business alliances remain a tricky thing. On the one hand, alliances allow companies to tap into new markets and growth platforms. At the same time, forming alliances is risky, as it demands trust building and deep knowledge sharing with external parties. This article provides a pathway for successfully managing business alliance formation.

In this article we bridge theory and practice on organizing imagination and innovation by extracting key implications and offering new insights to innovation practitioners. This article builds on Gunno Park and Jina Kang’s research Alliance Addiction: Do Alliances Create Real Benefits and provides a pathway for successfully managing business alliance formation.

Business alliances remain a tricky thing. On the one hand, alliances allow companies to tap into new markets and growth platforms. At the same time, forming alliances is risky, as it demands trust building and deep knowledge sharing with external parties. In an uncertain business environment, today’s friend may be tomorrow’s enemy. Ideally, both parties benefit equally —but what if they don’t? There are no guarantees of creative and financial success. While some companies have built their success around creative, technological or strategic alliances, others have seen profits rapidly decline. As a result, many companies refrain from forming business alliances, opting instead to focus on in-house R&D to develop new products and services.

Nonetheless, the rise of open innovation has led many to believe that collaboration has become a key way of securing future innovation and creativity —blurring the traditional lines between corporations and institutions within and across sectors. This provides new incentives to turn outwards and form business alliances.  Being externally oriented is a key source for coming up with new ideas and offers the best hunting ground for future opportunities and top talent. Venturing with like-minded partners and start-ups with complementary skills and experiences is the key in doing so successfully.

In their study, Gunno Park and Jina Kang assessed what factors influence company decision-making on alliance formation: what induces firms to form alliances? They emphasize that alliances can be great ways of complementing internal resources, diversifying risk, and allow companies to tap into new markets. There are, however, two major downsides to it: alliances lead to reduced internal R&D capability, and maintaining relations with multiple partners can be very costly. Park and Kang find that:

  • Previous alliance experience induces new alliance formation.
  • Success (or failure) of the first alliance they ever undertook and the most recent one, weigh heavily on their decision whether or not to undertake a next alliance. 

Always consider new alliances carefully, without basing your judgment on past experiences only.

Their key take-away: always consider new alliances carefully, without basing your judgment on past experiences only. Past success or failure does not guarantee future success or failure. Experience is an incredibly valuable source of value, when you use it to learn and improve business activities. But when it dominates future action and decision-making, experience can turn from friend into foe. What, then, should guide decision-making when it comes to business alliance formation?

A real skill

The first step is to realize that business alliance formation is a real skill to be built and developed. Alliance building is similar to M&A –mergers and acquisitions. There are a lot of statistics about the rate of success of this type of business development. Most research indicates that M&A activity has an overall success rate of about 50%.  Therefore, M&A is often seen as basically a coin toss and the popular explanation is that most deals look great on paper, but few organizations pay proper attention to how the deal will actually work once all the paperwork is signed. We had access to deeper research, which highlighted that good and bad deals are not equally distributed.  Some companies undertake a lot of M&A and prove very good at it.  Others undertake M&A infrequently and often fail.  When seeing M&A —and also alliance building— as a skill that can only be developed through real practice, previous alliance success does have a lot to say about the success of the next one.

Purpose, people and prenups

Many consultants and business schools stress the importance of diligent post-deal execution of alliance, and integration of acquisitions. This is crucial in cases of very clear cost synergies, however, in cases of entrepreneurial endeavors this can be unnecessary limiting. In the case of creative business alliances, however, in which the objective of the alliance is to explore together a new uncharted territory, to develop something new, and to innovate, it is impossible to map out exactly what needs to happen over the years of the alliance. In this sense, business alliances are similar to marriage: you need to be convinced of the purpose (why do you want to be together?) and people involved (two parties deeply in love). The rest is all in the future: successful joint ventures often end up very differently from the expectations upfront. Having tight contractual arrangements at the start might therefore be counterproductive.

It is valuable, however, to have a prenup in place. It is not without reason that most Hollywood marriages have prenuptial agreements in place – these marriages have a very high failure rate with a lot of financial wealth at stake, so it makes sense to be explicit upfront about the arrangements in case of a divorce.  Similarly, when the stakes are high in a business alliance it does make sense to be specific about how to settle in case parties decide to part ways.

The next generation of alliances

We are moving to a world where state actors, non-profit institutions and private sector organizations are increasingly collaborating across sector and industry —so don’t just think cross industry, but cross sector to come to new partnerships and creations.

Coca-Cola recently teamed up with former-aid worker Simon Berry to found ColaLife. They use Coca-Cola’s global supply chain to distribute medication in medically under-served regions in Africa, producing oral rehydration solutions and convenient medicine kits and partnering up with other multinationals and international health bodies. We call these “Neue Kombinationen” in reference of Joseph Schumpeter —the opportunity resulting from an alliance between parties with very difficult capabilities, knowledge, and experience.  In the business realm, the creative spark between electronic giant Philips and consumer goods company Sara Lee resulted in the coffee brewing system Senseo, while Nike and Apple collaborated on Nike + iPod, creating sport kits and sensors and are now developing new wearable technology lines.

Some creative leaders, too, attribute their success to their inter-cultural upbringing —growing up in two or more worlds. Thinking about intercultural leaders in politics, Barack Obama immediately springs to mind, but few people know that Bill Clinton, too, grew up in between two worlds. Raised in a disadvantaged area in rural —and racially segregated— Arkansas, Clinton’s family sold goods on credit to people of all races. Some say Clinton’s Third Way philosophy of governance was heavily influenced by this background, allowing him to bridge political and socio-economic divides while in office. British-Iraqi architect Zaha Hadid  —“the uncrowned queen of contemporary architecture”— is known for her neo-futuristic and hybrid style, which bridges all sorts of architectural styles and takes inspiration from her rich and diverse cultural heritage.

Similarly, creative director Oliver Rousteing was able to revive Balmain’s popularity, bringing a “much needed fresh face” to the French fashion house, blurring all sorts of boundaries between haute couture and ready-to-wear pieces, Baroque embellishments and contemporary street-style, and by taking inspiration from many different cultures. Under Rousteing, an orphan adopted by French parents, Balmain has undergone a transformation from traditional European haute couture fashion house, to a 21st century brand with global identity and presence. In large, this can be attributed to Rousteing’s focus on diversity and inclusivity. The fashion designer has spoken out against the current “ticking off the box culture” in which Western fashion brands employ models from cultural minorities as a form of window dressing. Instead, he is creating a brand that everyone can identify with: fusing and transcending race, culture, or religion. This approach seems to be paying off, reviving Balmain’s popularity in existing European markets, and successfully expanding into new markets around the globe.

By Menno van Dijk & Laurie Kemp

About the authors

Menno Van Dijk, Co-founder and Managing Director at THNK. School of Creative Leadership. Menno is a Former McKinsey Director, working in strategy, organizational design and operational improvement in Media, High Tech and Energy. Functional focus: growth, innovation, digital. Was leading McKinsey’s European Media practice for 7 years. Created NM Incite, McKinsey’s first ever co-branded JV with a third party, Nielsen. NM Incite helps businesses harness the full potential of social media intelligence to drive business performance and is active in 22 countries. Work experience in most European countries, US, Australia, South Africa, China and India. Has lived in Netherlands, Australia and South Africa.

Currently finalizing a MSc Environment and Resource Management (Energy Studies), Laurie Kemp attained a BA in Liberal Arts and Sciences at Amsterdam University College (AUC) in 2013. The broad nature of the program allowed her to delve into Social Systems from various perspectives: focusing on Law, Political Science and Economics. An avid idealist and globetrotter, Laurie is passionate about social and green innovation and bottom-up initiatives seeking to empower individuals and drive positive social change.

This article was originally published at THNK.org
Main image: partnership success and strength from Shutterstock.com

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