No Firm is an Island: Succeeding with Alliances

High levels of uncertainty often lead businesses into predictable directions, many of them negative. Extreme risk aversion, pre-emptive layoffs, and a laser focus on the short term are all common examples. On the positive side is the forming of alliances, a move that has become increasingly popular during the pandemic. Partnering with other firms can help strengthen a competitive position by enhancing market power, increasing efficiencies, accessing new or critical resources or capabilities, and entering new markets. 

“In many instances, alliances are not only the preferred method for growth, but also the only feasible one,” says Wharton management professor Harbir Singh. Consider the race for a COVID vaccine. Multinational pharma giants Pfizer and AstraZeneca, for example, respectively joined forces with BioNTech, a boutique German firm, and scientists at Oxford University. Singh, academic director of Wharton’s Driving Growth Through Strategic Partnerships, says these partnerships were not altruistic, but instead based on self-preservation. “Improving your competitive position alone is often no longer an option. COVID has gotten companies to reexamine their footprint – they must consider how much they want to do in house versus outsourcing through partnerships.”

Alliances are invaluable not only in challenging and uncertain times, but also otherwise as a means to drive competitive advantage and growth. As the business world explores opportunities that materialized with the growth of the digital economy or efforts to address environmental sustainability, alliances and partnerships play a critical role. For example, to help clients with digital transformation, consulting companies like McKinsey or Accenture are partnering with design firms to build capabilities in design thinking to complement their in-house strategy or technology consulting skills. Walmart has partnered with Microsoft to strengthen its position in the “phygital” (physical + digital) retailing landscape. 

Avoiding the “Alliance Paradox”

But alliances are fraught with high failure rates, and the viability of an alliance-based strategy is critically dependent on a firms alliance capability. “The answer to this ‘alliance paradox,”notes Singh, “isn’t to stop forming alliances. They are and will continue to be a fast and flexible way to access complementary resources and skills that reside in other companies. Organizations need to get better at managing their alliances by developing firm-level capability. Not only will such a capability create greater and repeatable alliance success, but it will become in itself a source of competitive advantage.” 

Singh, a leading researcher in strategic alliances, is now sharing insights and guidance in a new live virtual program. He expects Driving Growth Through Strategic Partnerships to continue to draw participants from a wide range of industries and geographies. The longest-running business school program of its kind, it is taught by the same faculty as the on-campus program. “Were able to explore strategies on a number of levels, including cross-cultural. But no matter the business or the country of origin, a key measure of alliance success is how well they are supported at an organizational level. Research shows that those companies that consistently generate greater levels of alliance value have one thing in common: a dedicated alliance function.”

The Dedicated Alliance Function and Management Process

To succeed with alliances, organizations have to “get it right” at each stage of the alliance life-cycle, including creating a sound business case for forming one, selecting appropriate partners, designing the alliance to elicit the required cooperation and coordination to get the job done, and building relationship capital with partners. Organizations that coordinate their alliance activities through dedicated alliance-management efforts have a much higher success rate (about 70 percent) than firms without one (about 40 percent). These initiatives are charged with coordinating all alliance-related activity within the organization and institutionalizing processes and systems to teach, share, and leverage prior alliance-management experience and know-how throughout the company.

For example, Pfizer has an alliance infrastructure that includes internal alliance managers and groups such as External Research Solutions. The infrastructure helps improve consistencies and economies of scale, and its measuring tools clarify goals and monitor their progress. Another company, Philips, engaged in a multi-year project to improve its firm-wide capability to identify, negotiate, and manage alliances. This project substantially increased new product introduction in multiple businesses and also created corporation-wide economic value.

Timing Your Entrance—and Exit

“It’s not enough just to join an alliance,” says Singh. “You need to consider when to get in. There are advantages to getting in early, but there is also risk. Early entrants get the chance to shape the network – with no guarantee it will be successful. If you wait, though, it might be harder to join. You may or may not be attractive to the other members of the network.”

He says in addition to considering the timing of your entry, you should also think about when to leave a network. “Many companies stay too long,” Singh explains. For example, airline alliances have seen some of members leave when a competitor joined, while others weighed their options and stayed. Continental Airlines was initially part of the SkyTeam Alliance. When fellow network member Delta acquired Northwest Airlines, the merger created redundancy in terms of the uniqueness that Continental brought to the network. That redundancy diminished Continental’s relative position and power in the alliance, and ultimately led to Continental’s decision to leave. Thai Airways considered a similar move when Singapore Air joined the Star Alliance, but after consideration chose to stay.

Adding an Ecosystem Lens to Your Alliance Capability 

The benefits of a strong alliance capability can be leveraged to an even greater extent by extending it beyond one-on-one partnerships. Digital platforms like Apple iOS and Google Android create competing ecosystems with a wide range of partners to generate their respective growth and advantage. In the environmental sustainability space, Tesla has carved a leadership position in the EV space on the back of many partnerships, including initial alliances with Daimler and Toyota and a long-standing alliance with Panasonic for batteries.

Wharton management professor Rahul Kapoor, who has been researching such partnerships for over a decade, believes most firms are, in fact, “only as good as their ecosystems. Developing them is an alternative way of thinking about growth and strategy that is critical for growth and, for some firms, survival.”   

While it may sound daunting, Kapoor says most firms are already part of multiple ecosystems, but they aren’t taking full advantage of them. During a day-long session in Driving Growth Through Strategic Partnerships, he helps participants identify and map the ecosystems their companies are engaged in, understand the inherent challenges of those ecosystems, and learn tools and frameworks for working within them to maximize growth potential.

“This view goes beyond customers,” says Kapoor. “You are embedded in an ecosystem of partners, suppliers, and complimentary services and remaining a passive participant isn’t a sustainable model. You need to navigate and even orchestrate the ecosystem.” He says developing an “ecosystem lens” makes these interdependencies more explicit. “The success of any growth initiative is often dependent on other initiatives in your external environment. No firm is an island.”

But, he stresses, spending the time to create a “laundry list” of everyone in your ecosystem isn’t necessary, or even helpful. “Identify the critical players and interdependencies and determine why they are so important. Those are where the value lies.”

Kapoor says the ecosystem lens can help you better understand your competition and make wiser decisions about where and when to deploy resources. “It is as important as your growth strategy. You can’t just focus on your own challenges for growth. Understand the challenges that lie beyond your firm. What are the potential roadblocks to success, and where are they? How can you work to navigate and manage them to ensure that your strategy has a greater chance for success?”

If you are a traditional firm working on an established initiative, you’re also keeping an eye on disruptive ones, which are threatening companies in nearly every industry. Instead of looking at the individual firm that’s working on the disruptive initiative, look to its ecosystem – the technologies, service, standards, and regulations it needs to deliver on its value proposition. If it looks like that value proposition can be delivered, the question becomes: when? If the initiative is not dependent on complementary technologies (or its dependence is very low), that initiative has the potential to take over the market quickly. But if it’s high, it could be years or even decades before it becomes a viable competitor. 

Kapoor cites an example of low-dependence technology: a new light bulb that can be plugged into an existing socket. “It’s literally ‘plug and play,’” he says, “with virtually no bottlenecks from production to consumer.” But HDTV, which was recently disrupted by HDR, took three decades to take over the market. It needed the successful creation of an ecosystem that included high-definition cameras, new broadcast standards, and updated production and postproduction processes. In other words, no matter how much better the viewing experience it offered, HDTV could not take over the market quickly.

The ecosystem view has implications not only for incumbent firms working on more traditional growth initiatives, but also for those working on disruptive ones and for investors who are looking at who will grow and when. Initiatives that are highly dependent on an ecosystem that is relatively new or yet-to-exist give incumbent firms time to make incremental improvements and create a strategy for long-term survival.

“This is a very different way of thinking about growth and strategy,” says Kapoor. It requires a hands-on, active approach. “To take advantage of ecosystems, you have to be clear about which ones you are a part of, understand their growth challenges, and navigate and orchestrate them,” he says.

Ultimately, says Harbir Singh, “companies that engage in proactive efforts to build alliance capability reap substantial rewards. They generate greater stock-market wealth through their alliances and enhance the reputation of a company as a preferred partner. Hence an alliance-management capability can be thought of as competence in itself, one that can reap rich rewards for the organization that knows its worth.” 

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