What are the three major types of strategic alliances firms form for the purpose of developing a competitive advantage?

Effective partnerships can be essential tools in an organization’s growth arsenal.

Strategic alliances can be vital for organizations looking to create or access capabilities they need to keep pace with a transforming business environment and to seize new opportunities. Getting these partnerships right, however, requires deliberate efforts involving strategic decisions, partner evaluation, and longer-term alliance management.

Digital technologies, ranging from artificial intelligence (AI) to big data analytics, are already changing the way organizations understand information, make decisions, develop products, and serve customers. The role that technology plays in business alliances can be seen in the life sciences sector. In 2017 GlaxoSmithKline established a collaboration with Propeller Health, a technology startup focused on connected sensor technology, to track and optimize the use of inhalers for asthma and other conditions, an advance that reduces health care costs and drives growth in a market that was otherwise slowing.¹ Similarly, Proteus Digital Health and Otsuka Pharmaceutical signed an $88 million agreement in 2018 to develop a digital pill with a sensor that allows medication use to be tracked, giving doctors new insight into treatment adherence and creating an advantage in a highly competitive market.²

Once an organization has defined its vision and strategy and has identified the assets and capabilities required to win in the markets in which it chooses to play, it is faced with the question of how best to obtain those assets and capabilities: build, buy, or partner. When industry dynamics are well understood, and an asset or capability is central to a well-defined strategy, internal (organic) development or acquisition (inorganic) may provide the optimal growth path.

In other situations, particularly when there is significant market uncertainty or the proposed initiative is not central to the organization’s strategy, a greater number of exploratory partnerships may be the stronger alternative. Forming alliances can create strategic optionality by allowing organizations to learn rapidly about a new capability or a new market space without devoting an outsize investment of time or capital.

How Alliances Create Advantages

In industries where competitive dynamics and sources of advantage are changing quickly, or remain unclear, business leaders should be prepared to work in an unstable environment, to function well amid uncertainty.

One specific benefit of a strategic alliance is the potential for accelerated speed-to-market. This dovetails with the concept of minimum viable transformation (MVT), which aims to reduce initial investment and time-to-market through incremental product and service development.³ Based on small, fast implementations combined with feedback and iterative learning cycles, the MVT approach enables organizations to learn and adapt more quickly than when they follow a “big bang” approach, which entails planning, blueprinting, and implementation all in one linear effort.

The choice between the big bang and the MVT paths is analogous to the buy-versus-partner decision. Buying represents a more traditional inorganic growth path that requires time-intensive deal planning and integration, along with greater capital commitment. Partnering represents a more agile approach that enables companies to quickly access external capabilities, test growth strategies, and refine their investment priorities iteratively. By applying the MVT approach to an organization’s growth strategy, corporate development executives can leverage an agile methodology to test desired capabilities and accelerate the time to value capture.

In addition to creating strategic optionality and accelerating the time to value capture, alliances can provide the added advantage of reducing capital requirements and thereby reduce risk. The increasing pace of innovation, ballooning valuations, and regulatory uncertainty help to position alliances as valuable alternatives to M&A.

Extracting Full Value From Partnerships

As much as strategic alliances are an important tool to drive growth and deliver needed capabilities, they come with their own challenges and risks. By one estimate, 40% of alliances fail to comprehensively address the commercial, strategic, operational, cultural, and technical leading practices that together contribute to the success of such efforts.⁴

Many organizations either lack an understanding of the leading practices that can foster the success of a strategic alliance or do not have the necessary management structures in place to implement them. To successfully execute alliances and realize their potential value, organizations need a robust alliance management capability that provides for appropriate strategic alignment, due diligence, and operational excellence.

A strong alliance management capability is characterized by the ability to formulate a clear vision, define growth pathways, and then develop a partnership with rigorous diligence and effective negotiation. Consider the following framework, which identifies specific phases in partnership creation and execution as well as specific activities within each phase:

1. The initial phase is when the organization should define its overarching strategic objectives and determine if external partnerships can enable that strategy. This requires close alignment among corporate strategy, business development, and functional leadership to assess desired capabilities and examine strategic decision factors. The most common potential pitfall in the initial phase is misalignment between business strategy and alliance strategy. In many cases, the alliance strategy is not clearly articulated, or it may have been formulated in isolation without proper consideration of key business objectives.

To avoid this, it’s important to ensure that the strategic rationale for any proposed alliance is set early in concept development. It’s crucial to articulate the anticipated sources of alliance value and to link this value to specific performance metrics such as increased sales, enhanced innovation capability, or operational improvement. Once strategy for an alliance is formulated and a business sponsor is identified, evaluation of the landscape of potential partners and the screening of partnership candidates begins.

2. Deal development focuses on taking the prospective alliance from a preliminary assessment of the strategic fit and partner suitability through a detailed partner evaluation. This entails a combination of due diligence, business case development, structuring, and negotiation. One of the common mistakes in the deal development stage is to focus only on the technical nature and commercial return of the joint offering, rather than the nature of the relationship that is being established. In most cases, the level of collaboration and interdependence is correlated with the level of risk, complexity, and potential value that may be expected.

Careful consideration of the risks and early planning in each of the three activities that make up the deal development phase can help drive better results. These activities include: developing the concept, which involves validating how the partnership will deliver sufficient value to the organization; performing diligence, which varies based on the scope and opportunity value of the deal; and negotiating and executing, which teams should view as an opportunity to set a collaborative tone and create an ongoing value-enhancing relationship.

3. Alliance management. Once launched, the partnership must be managed on an ongoing basis. Regular monitoring of performance metrics should inform adjustments to alliance design. Ongoing engagement from stakeholders with an appropriate level of decision-making authority is crucial to ensure that the alliance meets performance targets and delivers on the collective vision that underpins its creation. For some types of alliances, building a framework to audit and review each partner’s activities can not only enhance trust but also foster continuous improvement.

By embracing practices that cultivate success throughout the partnership—including agreeing on terms governing the process for its termination—companies can boost their strategic optionality. In the face of uncertain markets and unforeseen disruptions, such enhanced agility can serve as a sharp competitive weapon.

—by William Engelbrecht, leader; Tanay Shah, managing director; Aaron Schoen, manager, all in M&A and Restructuring Strategy and Diligence practice, Monitor Deloitte, Deloitte Consulting LLP; and Mike Nevin, founder and managing director, Alliance Best Practice Ltd.

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Endnotes

PUBLISHED ON: Sept. 8, 2019 8:01 pm ET

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