How to Manage Alliances Strategically

Why do so many strategic alliances underperform — and what can companies do about it?

Since its initial public offering in 2010, the electric car manufacturer Tesla Motors Inc. has had some substantial successes. For example, in the summer of 2016, the company boasted a market capitalization of around $30 billion, an appreciation of more than 800% over its initial public offering price in 2010. Tesla’s leading executives (including cofounder and CEO Elon Musk, chief designer Franz von Holzhausen, and cofounder and chief technical officer J.B. Straubel) deserve much of the credit for this. However, it’s also important to recognize the role played by Tesla’s strategy of creating alliances with larger, more established companies. Two key strategic alliances in particular — one with Daimler AG and the other with Toyota Motor Corp. — were crucial to Tesla’s early success. The Daimler partnership provided a much-needed cash injection; the Toyota partnership gave Tesla access to a world-class automobile manufacturing facility located near its headquarters in Palo Alto, California.

Initially, Tesla, which began selling its all-electric Roadster model in 2008, had neither a market nor legitimacy. Moreover, it was plagued with both thorny technical problems and cost overruns. Yet it managed to overcome these early challenges, in part by turning prospective rivals into alliance partners. In 2009, the year before its IPO, Tesla worked out the alliance with Daimler, whose roots in automobile engineering extend back to the early days of the automobile powered by an internal combustion engine about 130 years ago. The deal provided Tesla with access to superior engineering expertise and a cash infusion of $50 million, helping to save the company from potential bankruptcy.

The alliance with Toyota, signed the following year, brought other benefits. It enabled Tesla to buy the former New United Motor Manufacturing, Inc. (NUMMI) factory in Fremont, California — created as a joint venture between Toyota and General Motors Corp. in 1984 — and to learn large-scale, high-quality manufacturing from a pioneer of lean manufacturing. As it happened, the NUMMI plant was the only remaining large-scale car manufacturing plant in California, and some 25 miles from Tesla’s Palo Alto headquarters. Without this factory, Tesla would not have been able to initiate production planning for its recently announced Model 3, which received more than 350,000 preorders within three months of its announcement.

References

1. M. Richtel, “Elon Musk of Tesla Sticks to Mission Despite Setbacks,” New York Times, July 24, 2016.

2. For a careful analysis and discussion of how to select and execute across different corporate strategy initiatives, see L. Capron and W. Mitchell, “Build, Borrow, or Buy: Solving the Growth Dilemma” (Boston, Massachusetts: Harvard Business Review Press, 2012).

3. For an insightful discussion of competitive implications when adding alliances to an existing alliance portfolio, see U. Wassmer, P. Dussauge, and M. Planellas, “How to Manage Alliances Better Than One at a Time,” MIT Sloan Management Review 51, no. 3 (spring 2010): 77-84.

4. Recent survey data estimates the failure of alliance portfolios to be about 50%, and Benjamin Gomes-Casseres estimates that 33%-66% of all alliances break up within 10 years. In 2001, Jeffrey H. Dyer, Prashant Kale, and Harbir Singh estimated that almost half of alliances fail. See, respectively, The Association of Strategic Alliance Professionals, “Fourth State of Alliance Management Survey,” 2012, www.strategic-alliances.org; B. Gomes-Casseres, “Remix Strategy: The Three Laws of Business Combinations” (Boston, Massachusetts: Harvard Business School Press, 2015), 12; and 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. While alliances may be terminated for a host of reasons, including the achievement of the intended alliance goals, the estimates above suggest that many alliance portfolios do not deliver the expected strategic benefits. There are several explanations of why the estimated alliance failure rate has not improved over time. As the business environment has become more uncertain (due to technology change, regulatory changes, political factors, financial crises, etc.), a greater variety of external factors can limit alliance benefits. Alliances also tend to be more complex today and thus are more challenging to manage at the alliance-portfolio level. However, although the average failure rate does not appear to have changed much, if any, over time, individual companies may improve their alliance performance, as we detail in this article.

5. H. Hoang and F.T. Rothaermel, “The Effect of General and Partner-Specific Alliance Experience on Joint R&D Project Performance,” Academy of Management Journal 48, no. 2 (April 2005): 332-345; and H. Hoang and F.T. Rothaermel, “Leveraging Internal and External Experience: Exploration, Exploitation, and R&D Project Performance,” Strategic Management Journal 31, no. 7 (July 2010): 734-758.

6. R. Gulati, T. Khanna, and N. Nohria, “Unilateral Commitments and the Importance of Process in Alliances,” MIT Sloan Management Review 35, no. 3 (spring 1994): 61-69.

7. F.T. Rothaermel, “Tesla Motors, Inc.,” McGraw-Hill Education, December 17, 2015; see also E. Musk, “The Secret Tesla Motors Master Plan (Just Between You and Me)” (blog), August 2, 2006, www.tesla.com.

8. F.T. Rothaermel, “Technological Discontinuities and Interfirm Cooperation: What Determines a Start-Up’s Attractiveness as Alliance Partner?” IEEE Transactions on Engineering Management 49 no. 4 (2002): 388-397; and T.E. Stuart, H. Hoang, and R.C. Hybels, “Interorganizational Endorsements and the Performance of Entrepreneurial Ventures,” Administrative Science Quarterly 44, no. 2 (June 1999): 315-349.

9. F.T Rothaermel and D.L. Deeds, “Exploration and Exploitation Alliances in Biotechnology: A System of New Product Development,” Strategic Management Journal 25, no. 3 (March 2004): 201-221.

10. G.P. Pisano, “Science Business: The Promise, the Reality, and the Future of Biotech” (Boston, Massachusetts: Harvard Business School Press, 2006).

11. Wassmer, Dussauge, and Planellas, “How to Manage Alliances.”

12. Jonathan Hughes and Jeff Weiss provide fresh insights but focus on the effective management of a specific alliance. In a similar vein, Ranjay Gulati, Maxim Sytch, and Parth Mehrotra provide a helpful framework on how to plan an exit from a specific alliance. Other authors highlight the importance of a dedicated alliance function. By contrast, we focus on the entire alliance process from initiation to termination in a holistic fashion, as well as providing guidance pertaining to alliance portfolio management. In sum, our approach is more strategic in nature, and thus more likely to help companies gain and sustain a competitive advantage. See J. Hughes and J. Weiss, “Simple Rules for Making Alliances Work,” Harvard Business Review 85, no. 11 (November 2007): 122-131; R. Gulati, M. Sytch, and P. Mehrotra, “Breaking Up Is Never Easy: Planning for Exit in a Strategic Alliance,” California Management Review 50, no. 4 (summer 2008): 147-163; and Dyer, Kale, and Singh, “How To Make Strategic Alliances Work.” For a complementary treatment on how to create and capture value from broader corporate development activities including alliances, joint ventures, and acquisitions, see Gomes-Casseres, “Remix Strategy.”

13. F.T. Rothaermel, “Lego’s Turnaround: Brick by Brick,” in “Strategic Management: Concepts,” 3rd ed. (New York: McGraw-Hill Education, 2016), 457-459.

14. F.T Rothaermel and D.L. Deeds, “Exploration and Exploitation Alliances in Biotechnology: A System of New Product Development,” Strategic Management Journal 25, no. 3 (March 2004): 201-221.

15. Hoang and Rothaermel, “Leveraging Internal and External Experience.”

16. A.M. Hess and F.T. Rothaermel, “When Are Assets Complementary? Star Scientists, Strategic Alliances and Innovation in the Pharmaceutical Industry,” Strategic Management Journal 32, no. 8 (August 2011): 895-909.

17. H. Hoang and F. Brice, “Rebuilding Lego Group Through Creativity and Community,” INSEAD case study (Fontainebleu, France: INSEAD, 2007).

18. J. Lerner, H. Shane, and A. Tsai, “Do Equity Financing Cycles Matter? Evidence From Biotechnology Alliances,” Journal of Financial Economics 67, no. 3 (March 2003): 411-446. The academic literature highlighting how contracts and governance support alliance goals is summarized in D.J. Schepker, W.-Y. Oh, A. Martynov, and L. Poppo, “The Many Futures of Contracts: Moving Beyond Structure and Safeguarding to Coordination and Adaptation,” Journal of Management 40, no. 1 (January 2014): 193-225.

19. Adaptive partnership governance is discussed by F.A. Martinez-Jerez, “Rewriting the Playbook for Corporate Partnerships,” MIT Sloan Management Review 55, no. 2 (winter 2014): 63-70.

20. An extensive literature dissects these challenges and offers strategies and tactics to boost the likelihood of a successful negotiation. See, for example, D.A. Lax and J.K. Sebenius, “3-D Negotiation: Powerful Tools to Change the Game in Your Most Important Deals” (Boston, Massachusetts: Harvard Business Review Press, 2006).

21. Gulati, Sytch, and Mehrotra, “Breaking Up Is Never Easy.”

22. F.T. Rothaermel and D.L. Deeds, “Alliance Type, Alliance Experience, and Alliance Management Capability in High-Technology Ventures,” Journal of Business Venturing 21, no. 4 (2006): 429-460.

23. Hoang and Rothaermel, “The Effect of General and Partner-Specific Alliance Experience”; and Hoang and Rothaermel, “Leveraging Internal and External Experience.” For a careful study of the positive performance impact of dedicated alliance functions in large companies, see 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 (August 2002): 747-767.

24. Dyer, Kale, and Singh, “How to Make Strategic Alliances Work”; and Kale, Dyer, and Singh, “Alliance Capability.”

25. D. Lavie, “Alliance Portfolios and Firm Performance: A Study of Value Creation and Appropriation in the U.S. Software Industry,” Strategic Management Journal 28, no. 12 (December 2007): 1187-1212.

26. Capron and Mitchell, “Build, Borrow, or Buy.”