Corporate Strategy Group Project

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Purpose of alliances

Alliances have mainly two types of purpose: (1) sharing risks and (2) gaining access to “something” that the firm does not have. Risk sharing is a driver for alliances typically in the oil industry (e.g. exploration joint-ventures as an example from the experience of our team), but is also observed in other industries such as car manufacturing (development of a common vehicle platform). Alliances for “access” apply to various situations. A firm may have to enter an alliance to gain access to a foreign market where regulations require partnering with a local company. A firm may seek access to a specific technology or skill; or a particular capability along the value chain (marketing, distribution). Whether they are established between competitors (oil industry, car manufacturing) or companies in different positions on the value chain (e.g. large pharmaceutical-biotech), alliances always imply a degree of cooperation and some reciprocal benefits.

Challenges and failure of alliances

Unlike M&A, alliances are always meant to seek a win-win outcome. This is an intrinsic merit of alliances, however it is also their key weakness –the “win-win” may not always materialise, or at least not be felt as such by one or both parties, leading to a break-up. What is success for an alliance? Is it the achievement of sales goals or development according to scientific or technical specifications? Or is it meeting the expectations of parties? –and do they have a common understanding of those expectations?

However one defines success, reality is that between 50-70% of alliances fail. For example, the rate of failure in pharmaceutical and biotech alliances is estimated at 67%3, mainly in the form of not meeting scientific goals (71% of respondents4) and missing sales targets.

Other general and common forms of failure in alliances are: (i) disagreements on sharing of contributions to and / or returns from the alliance; (ii) the loose border between gaining access to and acquiring (skills or technology); (iii) the ambiguity around cooperation versus competition5.

The causes of failures can be broadly grouped into external –no direct control by the parties- and internal –within control of the parties. Examples of external factors are technology changes and reduction of market potential. Examples of internal factors are: different expectations about time; lack of commitment; culture clashes (e.g. “not invented here” syndrome); lack of communication between parties (57% respondents in pharmaceutical-biotech alliances); undefined partner roles (43% of respondents); insufficient management attention and lack of resources / leadership to implement the deal (40% of respondents); strategic motives misfit. Most often alliances fail for internal reasons. Therefore, if management is aware, prepared and sufficiently skilled at running alliances, the rate of success can much higher.

The figure below shows three key challenges of alliances (two internal and one external). Each challenge is illustrated by real life examples, and recommendations on how to address those challenges are proposed.

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