Final Strategic Alliance

8/4/2019 Final Strategic Alliance

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Strategic alliance

Types of strategic alliance

Steps of strategic alliance

Advantages& pitfalls

Legal issues

Conclusion

Types of strategic alliance

Joint Ventures

A joint venture is an agreement by two or more parties to form a single entity to undertake a certainproject. Each of the businesses has an equity stake in the individual business and share revenues,expenses and profits.

Joint Ventures are agreements between parties or firms for a particular purpose or venture. Their formation may be very informal, such as a handshake and an agreement for two firms to share abooth at a trade show. Other arrangements can be extremely complex, such as the consortium ofmajor U.S. electronics firms to develop new microchips, says Charles P. Lickson in A Legal G uide forSmall Business.

Joint ventures between small firms are very rare, primarily because of the required commitment andcosts involved.

Equity strategic alliance is an alliance in which two or more firms own different percentages of thecompany they have formed by combining some of their resources and capabilities to create acompetitive advantage.

Non-equity strategic alliance is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitiveadvantage.

Global Strategic Alliances working partnerships between companies (often more than two) acrossnational boundaries and increasingly across industries, sometimes formed between company and aforeign government, or among companies and governments.

Outsourcing

The 1980s was the decade where outsourcing really rose to prominence, and this trend continuedthroughout the 1990s to today, although to a slightly lesser extent.

The early forecasts, such as the one from American Journalist Larry Elder, have been shown to notalways be true:

Outsourcing and globalization of manufacturing allows companies to reduce costs, benefitsconsumers with lower cost goods and services, causes economic expansion that reduces

unemploy ment, and increases productivity and job creation.


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Affiliate Marketing

Affiliate marketing has exploded over recent years, with the most successful online retailers using it togreat effect. The nature of the internet means that referrals can be accurately tracked right throughthe order process.

Amazon was the pioneer of affiliate marketing, and now has tens of thousands of websites promotingits products on a performance-based basis.

Technology Licensing

This is a contractual arrangement whereby trade marks, intellectual property and trade secrets arelicensed to an external firm. Its used mainly as a low cost way to enter foreign markets. The maindownside of licensing is the loss of control over the technology as soon as it enters other hands thepossibility of exploitation arises.

Product Licensing

This is similar to technology licensing except that the license provided is only to manufacture and sella certain product. Usually each licensee will be given an exclusive geographic area to which they cansell to. Its a lower -risk way of expanding the reach of your product compared to building yourmanufacturing base and distribution reach.

Franchising

Franchising is an excellent way of quickly rolling out a successful concept nationwide. Franchiseespay a set-up fee and agree to ongoing payments so the process is financially risk-free for thecompany. However, downsides do exist, particularly with the loss of control over how franchisees runtheir franchise.

R&D

Strategic alliances based around R&D tend to fall into the joint venture category, where two or morebusinesses decide to embark on a research venture through forming a new entity.

Distributors

If you have a product one of the best ways to market it is to recruit distributors, where each one hasits own geographical area or type of product. This ensures that each distributors success can beeasily measured against other distributors.

Distribution Relationships

This is perhaps the most common form of alliance. Strategic alliances are usually formed because thebusinesses involved want more customers. The result is that cross-promotion agreements areestablished.

Consider the case of a bank. They send out bank statements every month. A home insurancecompany may approach the bank and offer to make an exclusive available to their customers if theycan include it along with the next bank statement that is sent out.

Its a win -win agreement the bank gains through offering a great deal to their customers, theinsurance company benefits through increased customer numbers, and customers gain throughreceiving an exclusive offer.


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THE STRATEGIC ALLIANCE PROCESSThe Strategic Alliance Process involves planning, implementation and evaluation. An alliance has afive-stage life cycle, and a structured metho dology is applied to preparation and negotiations at eachstage.

1. Setting alliance strategyThe first step in creating a successful alliance is to develop a well-thought-out alliance strategy. Thisis a critical step. We have found that too many organiz ations find a potential partner and then either develop their strategy or fall into it. It is worth remembering that if you do not follow your strategy in apartnership, you will follow someone elses. The result will be catastrophic. An alliance strat egy stemsfrom the business strategy. An alliance is not the answer for all businesses, but once a business doesdecide that a partnership is desirable, it must develop an alliance strategy. This is best accomplishedthrough a structured,disciplined process in an Alliance Strategy Session. An alliance strategy is mosteffectively developed jointly by the business team and an objective third party, whether the latter is anexternal consultant or part of the organization. The business team includes an executive sponsor,who is the head of that business, or, in a corporate alliance, the president and CEO. If senior

executives do not support the initiative, the alliance will die. The team also includes key contentexperts and decision makers for that business. An Alliance Strategy Session needs to address thevision and strategy for the partnership, and include a market analysisand a competitive assessment.Also required is an honest self assessment that articulates the organizational strengths andweaknesses, as well as the organizational culture. The outcome of such a session includes analliance game plan, partner selection criteria, a cultural self-assessment and a negotiating strategy.

2. Selecting a partnerThis is based on the criteria identified in the strategy session. Once the partner is selected, the key isto determine if both organizations are strategically aligned and culturally compatible. A Joint StrategySession where both (or multiple) organizations articulate their vision and strategy will determine if theorganizations are strategically aligned. It will also become clear whether all parties have like ambitionsand are culturally compatible. This also becomes the ideal opportunity to identify any strategic gaps

and previously unanticipated opportunities. Any deal-breakers for either party are articulated at thisstage. Alliance governance is another aspect that is important to discuss at the very early stages. If itis a joint venture, thought needs to be given to the structures for management and the board. Notethat at this stage, due diligence has not yet occurred. The strategic alignment must first be ensuredbefore due diligence is begun. At the outset, it is extremely important to determine if the partners arestrategically aligned and cultur ally compatible. No positive results on due diligence or a greatfinancial deal will overcome the lack of strategic alignment. Without this assurance, the alliance isguaranteed to fail.

3. Structuring the allianceThis is the step that has traditionally received the greatest amount of attention; it is during this stagethat the deal is financially and legally structured, and negotiated. While important, the stage is notworth entering into unless the first two stages involving the strategy have been completed. It is

important to keep an open mind regarding the structure of the deal until the alliance strategy has beendeveloped. A joint venture is not always the best route, nor is majority ownership. Preconceivednotions about the deal structure can bias the strategy, including conversations with the potentialpartner. Ideally, the strategy dictates the optimal structure. Negotiation is also an aspect that requiressignificant attention. Some best-practice companies rehearse their negotiations before meeting thepartner. It is critical to be clear about your deal- breakers, and the floor and ceiling of your negotiating points. A negotiating strategy is critical, and developing one must begin at the alliance-strategy stage. A key point to remember is that negotiations with a potential partner begin long beforeyou first sit down at the table. It begins the first time you meet the partner. Every interaction revealsinformation that is consciously and subconsciously stored for future reference. Every allianceagreement should include an exit strategy. This does not imply a pessimistic view of the relationship,but rather recognizes that all alliances have a natural life. The average lifespan of an alliance is sevenyears. It may be necessary to recognize that an alliance is impermanent in order to maximize its

useful life. Finally, at this point, a solid view of, and agreement on, alliance governance is important.This work is begun at the alliance strategy stage and needs to be negotiated before signing thedefinitive agreement.


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4. Managing the allianceOnce the ink is dry, the hard work begins. Making the relationship work on an ongoing basis is achallenge. In a well structured alliance, an implementation plan is developed before the deal issigned. A full launch strategy needs to have been jointly developed before the deal is announced. Tohit the ground running, an implementation plan with specific action plans, and the resources assignedto the alliance, must be known. Ideally, some members of the alliance team would have been involved

from the very first stage.Conflict in any alliance is inevitable. It is not the fact that it occurs that is aproblem, but rather how it is dealt with and resolved. A conflict-management process is an importantelement of alliance management. This is another stage where the alliance can be derailed. Aspreviously noted, the lack of strategic alignment is a key cause of failure. This is not only the case atthe outset but throughout the life of the alliance. Periodic checks are critical. If a shift in a partnersstrategic direction is taking place, there is a risk that the alliance may no longer be a strategic priorityIn the case where an alliance partner has sold its interest to another organization, it will be necessaryto ensure that the new partner has the same strategic vision and interest in the alliance Periodicstrategy sessions become a valuable means of ensuring strategic alignment, as well as a vehicle forrevisiting the strategys market relevance. As w ith conflict management, these sessions are bestmanaged with the support of an objective third party.

5. Re-evaluating the alliance

Measuring the results of an alliance is critical. You must regularly determine if the alliance is achievingits objectives. The metrics need to be tailored to the alliance and include both qualitative andquantitative criteria. In the earlier stages, qualitative criteria, which are the hardest to measure, aremost meaningful. Some examples are the level of trust, and the ability and willingness for cross-organizational co-operation and collaboration. These are all leading indicators of future performance.The qualitative metrics need to be clear and specific, in line with the way each organization sets itsperformance standards. The discussion about performance standards must have taken place as earlyas stage one. The relationship will no succeed if both parties do not have the same expectation forsuccess. If one party is expecting results within the first 12months, and the other has a three-yearhorizon, conflict is inevitable. The key is to agree on standards and metrics jointly, before the finalagreement has been signed. In the re-evaluation stage, it is also necessary to take stock of thealliance and determine the next steps. As previously stated, alliances are impermanent; this should betaken intoaccount when planning an alliance. This does not mean that the relationship should end

when the alliance itself ends. Infact, towards the end of the life of the alliance it is worth revisiting thealliance strategy. Here one wants to determine towhat extent the original goals have been achieved,andwhether the partnership can be reconfigured to serve othermarket needs. The goal is to make adecision as to whether thealliance should be terminated as the exit strategy has prescribed, orwhether it still has life and new opportunities to partner.Maintaining a good relationship will usuallymean thatthere will be opportunities to continue to work together. It ismuch easier tomanage multipleor reconfigured relationshipswith an existing and known partner than it is to manage multiplerelationships with different partners. Therefore wherepossible, deep relationships are always moredesirable. For example, by reconfiguring and reinventing their relationship,Fuji and Xerox haveremained partners for close to 40 years,well above the seven-year average.It is absolutely necessaryto evaluate and further developthe alliance at each stage of the life cycle. The strategy sessionscreatea str uctured, disciplined forum for recapturing the lostart of conversation. It is essentially through thisconversationthat gaps are identified and opportunities discovered. In ourhurry to achieve, we at timesforget to assess whether we are pursuing something that is worthwhile.

Advantages

competitive advantages are as follows:

Setting new global standards Entering into an alliance can be the best way toestablish standards oftechnology in the sector.

Confronting competition When a high-volume producer decides to attack a newgeographic market,defense is difficult if it does not have comparable size. Alliancebetween companies is a responsewhich has often led to positive results. It is equallyvalid to attempt an attack on a leader that has

consolidated its own positions.


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Overcoming protectionist barriers Alliances can allow companies to avoidcontrols on importationand overcome barriers to commercial penetration. Alliancescan also be a way to respect the bondsposted by the host country regarding valueaddedlocal content and participation in the capital of localbusinesses.

Dividing risks For certain projects, risks of failure are high, and even higher wheninvestments are

elevated.

Economy of scale There are many alliances designed to divide fixed costs ofproduction anddistribution, seeking to improve volume.

Access to a market segment In mature segments, a company often wants todevelop in a marketsegment where it is not present through an agreement withanother company.

Access to a geographic market A strategic alliance is often a way to enter a marketthat is protectedby (national) tariff and other barriers, or dominated by anothercompany with particular competitiveadvantages.

Access to technology Convergence among technologies is the origin of manyalliances. It is

increasingly more frequent that companies need to appeal to theircompetition in different sectors ifthey want to realize a product line.

Uniting forces Some projects are too complex, with costs that are too high, to bemanaged by asingle company (military supplier contracts, civil infrastructureconstruction).

Bridging a gap If a company does not have the resources or capabilities necessaryto develop aparticular strategy, an alliance with one or more companies is the mostlogical solution. Making analliance to gain access to resources and capabilities thatare lacking internally is perhaps the mostfrequent motive leading a company to seekPartners.

Anticipating a play The advantages and risks of pioneering are significant. In many sectors, thefirst company to enter the market with a new product achieves advantages that are difficult for the

competition to overcome. The company is the first along the experience curve. It gets the bestpositions for distribution. It invests initial profit margins in the production process, distancing itselffurther from the competition. The strategic alliance can have the scope of utilizing the pioneeringexperience of one of the partners. If this experience is brought to the alliance, it confers theadvantages on the other partners as well.

ALLIANCE PITFALLSThere are seven common pitfalls in the alliance cycle.

Stage 1: Too many organizations do not have an alliancestrategy that addresses the gaps in theirbusiness strategy.Consequently, and unnecessarily, they underperform.

Stage 2: Many organizations do not develop an explicitjoint strategy with their partners.Consequently, the organizationwith the strong direction leads the alliance, while theother partner doesnot realize the full benefit, or worse still,follows someone elses strategy.

Stage 3: Too often, a disproportionate amount of attentionis paid to the financial aspects of the deal,at the expense of and sometimes neglect of the strategy and the focus on implementation.Consequently, the ability to compete successfullyis compromised.

Stage 4: Lack of ongoing commitment to the alliance byeither party will derail it. Examples include notputting thebest people in the partnership or pulling key resources fromthe alliance.

Stage 5: Lack of realistic or meaningful metrics is a commonpitfall. In an attempt to quantify all resultsfrom the outset,employing meaningful qualitative metrics is often overlooked.Some of the mostmeaningful metrics which are predictorsof success include things such as the level of trustbetweenthe parties.


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Stage 6: Another common pitfall for large organizations islosing track of multiple relationships with apartner. Thisoccurs when various alliances with this partner exist in differentparts of the organization.At times, a partner is also a supplier,and this complicates the relationship. Having a goodhandle onthe extent of the relationship is critical.

Stage 7: Finally, partnering with competitors requires particularattention. One of the common pitfalls

occurs wheninsufficient boundaries are set around an alliance with a competitor.The risk is that theirnewly acquired knowledge ofyour organization makes them a more formidablecompetitor.Organizations will increasingly need to partner or risk perishing.In the global economy, allboundaries are artificial andlimitations self-imposed. Yet partnering carries with it hugerisks.Theserisks can be mitigated by creating an organizationalcompetence in strategic alliances. To makealliances work,organizations must develop a systematic, structured and disciplined process thatinvolves planning, implementation andevaluation. There are no shortcuts. It is both an art and ascience.And one thing is clear: In order to succeed, there mustbe a solid alliance strategy in place.And throughout, theremust be a keen awareness of the reasons for having undertakenthe alliance inthe first place.

KEY LEGAL ISSUES

To some extent, the key legal issues will vary depending upon the nature of the alliance. Some of themost common legal issues are as follows:

Licenses. License agreements specify the terms and conditions under which one party may takeactions that would otherwise infringe on the other party's intellectual property rights ? patents,copyright, trade secrets, trademarks. The principal terms specified include the rights being licensed,where and for what purpose the rights may be exercised and the consideration that the licensor willreceive.

Royalties . Payments for technology transfer can be made in many ways. They can consist of fixedpayments on specified dates, or connected to milestones. When it is difficult to measure the potentialfor commercial success at the point of the negotiation of the alliance, running royalties may beappropriate.

Other issues include when does the royalty obligation expire, what reporting obligations are there, andwhat right does the licensor have to audit the licensee.

Development obligations . There are sometimes development obligations that include sanctions fornon-performance, including making non-performance an event of default. If there are developmentobligations there are usually project management provisions. There must be procedures, criteria andan agreed process if the original product does not meet the criteria. There will also be anunderstanding with respect to the funding of the work.

Manufacturing and supply . Another element of some alliances is manufacturing and supplyrelationships. The buyer is required to purchase all or a specified portion of its requirements from theseller. There will be the normal terms and conditions of a supply relationship, e.g., price, quantity,delivery, etc. It may address whether or not the buyer can look elsewhere for the product and will

often provide a requirement for forecasts to be delivered to the seller by the buyer. There can beprovision for license and know-how transfer if the seller cannot meet its obligations to supply. Theremay be a provision giving the seller an out if there are inadequate orders. Changes in the form of theproduct, at the option of the seller, may also be addressed.

Transfer of Technologies . The alliance may involve the transfer of technologies and the provision oftechnical assistance. The alliance arrangements may include provision for the protection of the rightsof the licensor and give the licensor special rights of recourse in case of infringement, including theright to seek injunctive relief. In addition, the alliance agreements will set out who owns what (e.g.,improvements) and address issues related to the joint development of technology.

Representations. Like any significant agreement, alliance agreements will contain a series ofrepresentations and warranties that provide comfort to each party with respect to matters that arebeing assumed in good faith. These include the relative rights of each party to enter the agreementsfree from the risk of being challenged by a third party and the ability to carry out the party's dutiesunder the agreements without infringing the rights of other parties.


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Conclusion

10 RULES FOR FORMING AN ALLIANCE1. Create a strategic foundation for all alliances, whereyou address the strategic gaps in your

business.

2. Do not create an alliance unless you are strategicallyaligned with your partner3. Develop a clear understanding of your own organizationalculture and your potential partners(s), ensuring that you are compatible.

4. Create a win-win attitude in all partnerships5. Focus on creating greater opportunity than previouslyexpected from forming an alliance;

focus on creating a bigger pie. 6. Develop your negotiating strategy at the very outset,before the actual formal negotiation

begins.7. Allocate outstanding resources to the alliance throughoutthe life cycle, and request that your

partner do the same.8. Work to cultivate the relationship with your partnerthroughout the life cycle, as a legal

agreement is never a substitute for a good relationship.9. Develop an implementation plan before you sign thedeal so that you can hit the ground

running and make it tougher for the competition to catch up.10. Never lose sight of the reason for creating the alliancein the first place. If you are not followingyour strategy, you are following someone elses.

Final Strategic Alliance

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