Companies are remarkably myopic when they go about forming strategic partnerships. Systematizing the analysis process should produce more gain and less pain.
The French food giant Groupe Danone, long a leader in the Chinese market for beverages and food products, has recently seen its position in this enormous market deteriorate drastically. The reason: Danone’s strategic partnership with Hangzhou Wahaha Group Co. Ltd. is breaking up. Wahaha became the dominant player in the Chinese bottled water and other nonalcoholic beverage market through its 1996 alliance with Danone. But by 2007, Wahaha was blaming Danone for setting up competing joint ventures with other local companies, such as Robust, Aquarius, Mengniu Dairy and Bright Dairy & Food, while Danone was suing Wahaha for using the brand outside the scope of their joint ventures. Wahaha retaliated by dragging several Danone officials to court for conflict of interest because of their simultaneous membership on the boards of the Wahaha-Danone joint venture and other competing joint ventures Danone had in China. As a result, the relationship further deteriorated, and over 30 lawsuits were eventually filed on three different continents. By the end of 2009, a settlement was reached in which Danone pulled out of the alliance, which had accounted for a dominant share of the French company’s sales in China of almost US$3 billion — about 10% of its total worldwide sales. Danone’s bungled approach to the formation of corporate alliances probably resulted in the destruction of several billion dollars’ worth of market capitalization. Our study of how companies make decisions on the formation of alliances shows that this sort of dysfunctional behavior is all too common. Most companies now maintain an alliance portfolio comprising multiple simultaneous alliances with different partners.1 In the global air transportation industry, for example, most airlines maintain broad portfolios of code-sharing alliances with other carriers, which allow them to significantly extend their route networks by offering services to their partners’ destinations. In 1994, the average number of alliances per airline company was only four. By 2008, however, the picture had changed dramatically: The average alliance portfolio size across the industry had increased to 12, with some airlines engaging simultaneously in as many as 30 or 40 alliances.2 Despite this proliferation of corporate collaborations, research reveals a troublesome pattern.