Strategic Alliances: Three Ways to Make Them Work

Why Ally?

If you’re reading this book, most likely you’ve formed strategic alliances with other companies or are considering starting one in the future. You may have already had some success, but just as likely, you may also see the wreckage of failed alliances all around you.

More than two thousand strategic alliances are launched worldwide each year, and these partnerships are growing at 15 percent annually.¹ Yet despite all the growth and headlines, slightly more than half of all strategic partnerships fail. More than one-third of companies that take part in alliances struggle with them. Only 9 percent consistently build alliances well.²

This performance begs three questions: What is a strategic alliance? Why should companies continue to focus resources on creating and managing these relationships considering the poor success rate? After all, isn’t it always easier to do something yourself ? As someone with the responsibility for overall shareholder return, you must certainly ask these questions. You want to know whether an investment in a strategic alliance stacks up against your company’s other investment opportunities.

But more important, I believe there’s a right, and a wrong, way to build alliances. Do them right, and you will achieve significantly higher and more consistent shareholder returns. Your company will grow faster and more profitably when you leverage alliances instead of going it alone.

Let’s start by defining the term strategic alliance. While there are many viewpoints, simply put, it is a relationship between one or more organizations that—through the combination of resources—can create significant and sustainable value for everyone involved. Over the years we at Cisco have evolved five basic criteria to identify and characterize such relationships:

Significant business impact with sustainable value:Significant is always defined relative to the stakeholders, and sustainable means generating acceptable profit margins over a multiyear period.

Broad and deep initiatives:Broad to me means several, and deep signals significant initiatives within the alliance that cut across the value chains of both companies.

Strong organizational commitment: Such commitment must flow from the CEO down and be marked by clear ownership at senior levels and by accountable alliance management teams.

Substantial investment by both companies: Investment can be people, capital, intellectual property, or all three.

Strategic alignment and fit: The companies’ strategies in the targeted space must be well aligned. Although their cultures may be different, the companies must be able to establish an environment of trust.

I believe there are three reasons why alliances are a must-do investment for any company competing in the global marketplace:

Product life cycles: Product life cycles are becoming shorter and shorter. This requires companies to quickly achieve global share and significant volumes to compete and generate adequate return on investment. Few companies have the necessary ability and capital in all segments of their value chain to achieve these objectives operating solo.

Anytime/anywhere communication: Enhanced communication technologies and cheap bandwidth are enabling services and capabilities to be delivered from anywhere in the world. That puts severe pressure on companies as products and processes become commoditized and static value chains become disaggregated. You must focus on what you do well while relying on partners to complete the pieces of the value chain needed for your business to grow profitably.

Customer expectations: Both businesses and consumers expect and demand more integrated solutions to solve their needs, pushing companies to work together to create differentiated offerings. No company has enough expertise or capital to go it alone. Having the skills to create, modify, and sustain these integrated solutions will be key for any company in the evolving global environment.

You can see the advantages of partnering across a wide range of industries. To address the problem of higher drug development costs and long approval lead times, pharmaceutical companies like Eli Lilly are increasingly pursuing relationships with networks of small companies to develop and market new drugs. In the high-tech field, Sony and Ericsson have combined their mobile-handset units in a joint venture to leverage both companies’ R&D and distribution competencies to take on larger competitors, like Nokia and Motorola. In transportation, three major airline alliances now account for half of the global passenger market, offering more flights to more locations, better connections, and consolidated frequent-flier programs on a global scale. In the energy business, Chevron and Texaco have a time-tested alliance in the Middle East that produces more than $11 billion in revenues for both companies.³

Strategic alliances have been invaluable in helping Cisco grow and move into new markets, ranging from storage switching to wireless LANs to IP telephony. It’s also helped us move into key vertical markets and accelerate growth in new regions like Japan, eastern Europe, and India.

We’ve worked with IBM, for example, to develop multiple solutions integrating the technologies and services from both companies. Examples include supply chain management for manufacturers, branch banking for the financial services community, and IPTV for major telecom service providers. On another front, we worked with HP and Norwegian medical software company Baze Technology to develop a digital hospital infrastructure. Doctors and nurses can now collaborate on patient diagnosis and treatment in real time anywhere on a medical campus with a range of wireless devices. We’ve also built products for telecom service providers that enable them to provide unified communications to the smalland medium-business marketplace. The list goes on and on. Strategic alliances have helped fuel Cisco’s growth. The company wouldn’t be where it is today without its partners.

When an Alliance Is Not the Answer

When selecting a business strategy, it is important to remember that strategic alliances are just one business tool that, if used at the wrong time, can materially hurt an organization. You must be able to step back and look at your three options. Should you build a capacity yourself, buy it through an acquisition, or strategically partner? You don’t have to choose one option. The real power and benefit to your organization often comes when you understand how all three of these strategic options can be used simultaneously to help your company address a new market opportunity.

Alliances do not make sense when your organization has the requisite skills and resources necessary to win a battle on its own in a targeted market