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Is your strategic alliance really a sale?

Joel Bleeke and David Ernst


Group 3 Pavan Kumar P V S - 37 Rohan Gopalakrishnan - 107

Context

Strategic vehicle of choice for product, geographic and customer base expansion Alliance 25% annual growth in past 5 years Median life span 7 years

80% end in sale by one partner!!!

Context

Result of such unplanned sale


Failed partnerships Erosion of shareholder value post sale or acquisition

Advantages of a planned evolution and sale:


Avoids disastrous partnerships Selection of appropriate partners advancement in long term strategic plan Help reveal opportunities to assess alliance as a low cost, low risk future acquisition

Crux

How to analyze an alliance


Predict probability of sale

Appropriate strategy development post analysis

Assess bargaining positions and risks for unplanned outcomes Plan evolution of partnership
Collisions between competitors Alliances of the weak Disguised sales Bootstrap alliances Evolutions to a sale Alliances of complementary equals Experience with more than 200 alliances Study on a broad range of industry and service sectors 49 strategic partnerships in US, Europe and Asia since 1989 Focus on JV

Six types of alliances

Results based on:

Avoid self deception

Alliances between competitors


One in three chance of success High tension and conflicts often

Alliances between weak companies

Weaknesses persist after sale Strengths of each is pulled down by weakness of the other

Alliances between weak and strong company

Not enough contribution from the weak company

Avoid self deception

Alliance between an established company and a new low cost competitor


Company may replace critical core products New company fails to match the established in new technology development long term

Alliance to raise capital without change in management


Works only if the partner is a passive investor Usually weaker partner loses control

Risk assessment

Key : Project relative bargaining power evolution of partners Depends on:


Initial strengths and weaknesses How strengths and weaknesses change over time

Potential for competitive conflict

Risk assessment
Strengths and weaknesses

Change over time

Potential for conflict

Specific business strengths to be analyzed


Product, technology, market access, functional

Identify important factors for long term success Identify relative position in the JV
Who controls customers? Who dominates management? More willing partner

Ideal situation : Power is balanced at start Usually tilted balance stronger acquires the weaker over time E.g. Meiji Borden alliance in Japan for dairy product distribution of Borden by Meiji

Risk assessment
Strengths and weaknesses

Change over time

Potential for conflict

Change in power comes over time Initial stages of industry development provider or product and technology more powerful Later stages of industry development- power with party controlling distribution channel and customers Scale driven company power to party with process design capabilities More members in senior management high growth in strength Power to invest more greater power Higher ability to learn and teach higher power
E.g. US chemical company alliance with Japanese company who controlled distribution

Risk assessment
Strengths and weaknesses

Change over time

Potential for conflict

Competitor alliance scenario conflicts over markets to target, customers and products leads to merger or acquisition
Different qualities minimal conflicts higher strength E.g. Lipton Pepsico for iced tea
Lipton expertise in tea business Franchise and brand awareness built to maintain bargaining power Pepsico brings access to beverage distribution channels

Risk management

Risk assessment gives six types of alliances


Type Players Strategy

Collisions between

competitors
Alliances of the weak Disguised sales Bootstrap alliances Evolutions to a sale Alliances of complementary

Alliance between equals

Usually fail, to be avoided

Alliance between a strong Risky, to be preoperly and a weak company planned Complementary equals have higher chance of success

equals

Alliance between strong companies

Risk management
Collision between competitors Bootstrap alliances

Alliances of the weak Evolution to a sale

Disguised sales Complementary equals alliance

Advantages Short term synergy consolidation of overlapping projects and market positions Shared control, power retained and synergy captured and split Disadvantages Expansion plans of each leads to conflict Example US and Asian alliance to sell point of sale terminals 3 years of loss post which Asian partner bought stakes to get control in decision making General Electric Rolls Royce alliance for jet engines Rolls Royce came up with a directly competitive model Strategy Acquisition of such competitors Alliance with different business or geography companies

Risk management
Collision between competitors Bootstrap alliances

Alliances of the weak Evolution to a sale

Disguised sales Complementary equals alliance

Two weak companies band together Usually happens in scale-intensive business Initial years neither partner has capital or resources More focus on fixing their own core issues rather than the alliance Bottom line Weak gets weaker 3rd party acquire the pieces Alliance hence should not be based on weaknesses and rather should be based on strengths Such alliances lead to less sale value in case of acquisition later due to difficulties in dissolution of alliance Erosion of skills, customers, products in interim Example Airline industry unprofitable US airlines led to significant write offs Strategy Divest outright or refocus and then go for alliance

Risk management
Collision between competitors Bootstrap alliances

Alliances of the weak Evolution to a sale

Disguised sales Complementary equals alliance

Weak company joins a strong company Short-lived, rarely lasting more than 5 years Divesture thinking vs. Alliance thinking Potential sellers should seek partners that would be the best buyers later on. Example: Siemens-Allis Chalmers venture in Power equipment Strategy: Importance of Exit Clauses Alliance should be structured so that business to sold is easily separated Sellers should recognize that their bargaining power will decline over time The fewer remaining entanglements (transfer pricing), the better

Risk management
Collision between competitors Bootstrap alliances

Alliances of the weak Evolution to a sale

Disguised sales Complementary equals alliance

Weaker company partners with a stronger company- Attempts to use the alliance to improve its capabilities Often tried, but rarely works if it does, develops into an alliance of equals Requires systematic learning program and the ability to learn Example: Alliance of Honda and Rover successful Strategy: Weak partners should structure the deal so that they retain control over one or more business elements like customer relationships Alliance should be around a series of skill building activities Government protection can increase the chances of protection for weaker partners

Risk management
Collision between competitors Bootstrap alliances

Alliances of the weak Evolution to a sale

Disguised sales Complementary equals alliance

Alliance between two strong and compatible partners Bargaining power shifts due to competitive tensions - one gets sells out to the other Delivers value to both the parties Contributions from each are significant in determining the shift Devising a formula to share the future value of the venture is important Importance of Flexibility Example: Pfizer and Taito Strategy: Partners in evolution need to be clear about their individual strategic intent

Risk management
Collision between competitors Bootstrap alliances

Alliances of the weak Evolution to a sale

Disguised sales Complementary equals alliance

Only partnership that can lead lo marriage for life! Alliance between two strong parties that remain strong throughout the duration Based on true collaboration both partners build on each others qualities rather than trying to fill gaps Balance of power, Importance of governance, clarity of leadership Examples: Dow-Corning, Fuji Xerox, Siemens-Corning Strategy: Keep the strengths and contributions in balance

Thank you!

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