How to Manage Alliances Better Than One at a Time

Companies are remarkably myopic when they go about forming strategic partnerships. Systematizing the analysis process should produce more gain and less pain.

Courtesy of Skyteam

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.

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References

1. See, for example, S. Parise and A. Casher, “Alliance Portfolios: Designing and Managing Your Network of Business-Partner Relationships,” Academy of Management Executive 17, no. 4 (2003): 25-39; W.H. Hoffmann, “Strategies for Managing a Portfolio of Alliances,” Strategic Management Journal 28, no. 8 (2007): 827-856; and U. Wassmer, “Alliance Portfolios: A Review and Research Agenda,” Journal of Management 36, no. 1 (2010): 141-171.

2. “Airline Business Alliance Survey,” Airline Business, 1994-2008.

3. J.J. Reuer and R. Ragozzino, “Agency Hazards and Alliance Portfolios,” Strategic Management Journal 27, no. 1 (2006): 27-43.

4. P. Kale, J.H. Dyer and H. Singh, “Alliance Capability, Stock Market Response and Long-Term Alliance Success: The Role of the Alliance Function,” Strategic Management Journal 23, no. 8 (2002): 747-767; and P. Kale, J.H. Dyer and H. Singh, “Value Creation and Success in Strategic Alliances: Alliancing Skills and the Role of Alliance Structure and Systems,” European Management Journal 19, no. 5 (2001): 463-471.

5. P.J. Buckley and M. Casson, “A Theory of Cooperation in International Business,” in “Cooperative Strategies in International Business,” ed. F.J. Contractor and P. Lorange (Lexington, Massachusetts: Lexington Books, 1988): 31-53; A. Madhok and S.B. Tallman, “Resources, Transactions and Rents: Managing Value Through Interfirm Collaborative Relationships,” Organization Science 9, no. 3 (1998): 326-339; S.H. Park and D. Zhou, “Firm Heterogeneity and Competitive Dynamics in Alliance Formation,” Academy of Management Review 30, no. 3 (2005): 531-554; and S. White and S.S. Lui, “Distinguishing Costs of Cooperation and Control in Alliances,” Strategic Management Journal 26, no. 10 (2005): 913-932.

6. Buckley and Casson, “Theory of Cooperation”; J. Koh and N. Venkatraman, “Joint Venture Formations and Stock Market Reactions: An Assessment in the Information Technology Sector,” Academy of Management Journal 34, no. 4 (1991): 869-892; and Madhok and Tallman, “Resources, Transactions and Rents.”

7. J.H. Dyer, P. Kale and H. Singh, “How to Make Strategic Alliances Work,” MIT Sloan Management Review 42, no. 4 (summer 2001): 37-43.

8. P. Dussauge, “Alliances, Joint-Ventures and Chinese Multinationals,” in “Chinese Multinationals,” ed. J.P. Larçon (Hackensack, New Jersey: World Scientific Publishing Company, 2008).

9.Salesforce.com and Google Introduce Salesforce for Google Apps: First Cloud Computing Suite for Business Productivity,” April 14, 2008.

10. K. Schwartz, “USAir Ends Code Share with British Airways,” The Associated Press, Oct. 24, 1996.

11. D.A. Levinthal, “Organizational Adaptation and Environmental Selection: Interrelated Processes of Change,” Organization Science 2, no. 1 (1991): 140-145.

Acknowledgments

The authors thank Silviya Svejenova for her helpful comments on earlier versions of this article. Pierre Dussauge acknowledges support from the HEC Accor-Air France-SNCF Chair on Service Management.

3 Comments On: How to Manage Alliances Better Than One at a Time

  • | April 8, 2010

    I very much enjoyed the article and agree with your view that companies need to consider the portfolio effects of individual alliances and not just manage them on a one-off basis. In addition to the several good points you make in support of your recommendations, it is our view that a portfolio approach to alliance management recognizes that each alliance makes a different contribution to strategic (corporate and/or business unit) objectives. Thus, in developing its corporate/business unit strategy, an organization needs to explicitly identify the value strategic alliances are to provide in order the organization is to realize its strategic and financial objectives. Prior to seeking out appropriate partners, the organization needs to identify the specific value sought (its strategic intent) from each alliance.

    Working towards achieving the strategic intent of an alliance and creating value for each partner implies managing the inherent complexities of the alliance. Management complexity is indicative of the time and effort required to realize the potential value of any alliance and arises because of the nature of alliance agreements and the internal and external risks that appear over the lifecycle of an alliance. Because the value actually realized from alliances is only determined as the alliance is executed and how well the alliance is executed depends on managing the complexity. Consequently, for more complex alliances, greater management is needed in order to realize the desired value.

    The key to effective alliance portfolio management is the dual ability of Alliance Management to look up at the company’s corporate strategy and determine whether the alliance portfolio is providing the value needed and at the same time use the portfolio assessment to inform the management of each individual alliance. The organizational ability to do this provides a competitive advantage.

    Jeff Shuman, PhD, CSAP
    Co-founder and Principal
    The Rhythm of Business, Inc.
    Newton, MA

  • nomadichie | July 14, 2010

    Interesting article and an equally interesting response. However, there is too much technical jargon involved thus far. How can the process be adrquately managed? What sectors are at risk of these kinds of enstrangements and the concomittant litigations? What can be done? These are the sorts of questions practitioners would be seeking answers to. I for one have previously argued about the growing disconnect between theory and practice and the issues raised in this article seem like fulfilment of the doomsday prophesy. I think we need to be clear of the degree of strategic alliances in the international business literature. Would strategic alliances between two firms in the same sector bring about rivalry, competition or cannibalism? Is this healthy, disruptive or expected? Would an alliance between two or more firms in different sectors be more sustainable? Think about strategic alliances between airlines such as Dubai-based Emirate Airlines and the English Premier League football club, Arsenal. What are the lessons to be learnt.

    NO Madichie, PhD, MCIM
    Assistant Professor of Marketing
    University of Sharjah, UAE.

  • Sriwantha Sri Aravinda | January 12, 2011

    Good point, adding some more, corporate should define the scope of any partnership (for a long period) in advance rather than being feeling jealous about the partner’s success at later stages. This would allow both parties to identify their risk in advance. Customarily setting limitation upon “smaller” partner is considered to be risky. However, knowing this situation beforehand would prevent smaller party going into the risk of having a larger proportion of their revenue coming from a single partner who does not expect their growth.

    Sriwantha Attanayake,
    Student, University of Cambridge

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