These results are in line with the empirical research, which identifies three major reasons for failure of strategic partnerships: Show - Underinvestment (disagreement on revenue and cost sharing, lack of resources, lack of executive sponsorship and commitment, etc.) - Over-appropriation (coopetition, customer ownership issues, intellectual property sharing, etc.) - Misalignment (conflicting goals and incentives, unclear roles and responsibilities, difficulty in communicating the joint value proposition, extension of the internal silo mentality). In order to avoid such failures and effectively build joint capabilities, strategic partnerships should be based on trust and follow five simple steps: Strategize Quite often strategic partnerships are formed to address the competitive threats of imitation and substitution, yet while the threat of imitation should be addressed in the value channel area, the response to substitution should lie in strategies at the business model level. In general, companies that decide to pursue strategic partnerships should introduce changes at the strategy level, including organizational structure, processes, and most importantly – commitment at all levels. Companies should clearly define the areas in which partnerships should be built based on its general strategy as well as its objectives.
Search, Screen and Select One of the common mistakes businesses make when looking for possible partners is to consider only a few options instead of looking at the whole ecosystem of strategic partnerships. As a result, search, screen and selection processes remain decentralized and ad-hoc (except for the companies with developed capability and a history of successful strategic partnerships). In general, companies should use a variety of mechanisms in their searchfor possible partnership opportunities, such as existing contact networks (suppliers, research partners), specialized industry organizations, associations and conferences. In the screening phase, companies should use strategic partnerships to acquire new capabilities within existing business, and be aware of consumer insights. They should also focus on limiting the number of growth areas and finding the right business champions in the areas of interest. The selection process should take into consideration a good match in terms of capabilities, competences and culture, as well as readiness to invest “in kind.”
Structure There are multiple structures of strategic partnerships – from non-equity alliances, mostly in the form of non-traditional contracts (such as joint R&D, long-term sourcing, shared distribution/services) to equity-based partnerships in the form of minority equity investments and joint ventures. The main reasons for choosing non-equity strategic partnerships are high uncertainty in the market, the existence of several possible partners (the rationale is to start loose and maintain competition between possible partners), the risk of damaging existing partnerships, and high organizational fit. A joint venture is usually preferred when there are differences in culture and/or in the size of the companies (to minimize the risk of under-commitment by the smaller partner). Yet in order for a joint venture to succeed, it should recruit independent people to make a fresh start rather than engaging employees from both companies, who already have different cultures and conflicts of interest and who might prioritize the goals of their own companies rather than those of the JV. Overall, joint ventures are the least popular form of partnership; they are the most difficult to manage and have an average life span of around seven years. According to McKinsey,2 many joint ventures fail because they spend more time on steps where less value is at risk (50% of time spent on negotiating deal terms, which constitute only 10% of value at risk) and less time on steps that have more value at risk (only 20% of time spent on business model and structure, which represents around 40% of total value at risk). Following negotiations, the master agreement should be signed at the C-level (preferably CEO) and should explicitly summarize all the inputs and shared responsibilities and ownership of intellectual property, assets, etc., as well as conflict resolution and exit terms. Moreover, companies should avoid money investments by investing “in kind” (equipment, technology, people, buildings) to increase the commitment of both partners, because as soon as money is involved everything becomes a transaction rather than a long-term joint endeavor. It is important to understand that all the aspects of negotiations, as well as the successful launch of a strategic partnership, are vastly affected by cultural values, such as individualism vs. collectivism, egalitarianism vs. hierarchy, high vs. low context. Such cultural and language differences can become the root cause for misunderstandings and conflicts, which can be diminished by mutual respect, awareness of cultural differences and misinterpretation of the other party`s behavior through your own cultural values.
Start and Stabilize Developing a supportive culture within the company is vital to ensure that a strategic partnership is efficient and productive. This means recognizing partnerships as a corporate priority (with inclusion in the corporate communication strategy). Support from senior leadership should be coupled with support from partnership leaders and teams. Nevertheless, conflict is inevitable, especially in the early stages, and interest-based problem solving is the best way of tackling them. This requires separating people from the positions, emotional aspect from the rational issues, focusing on interests, generating mutually beneficial options, developing a contingency plan, and clarifying the commitment of both parties. Yet the most important first step is to identify and agree on the issues to be resolved. The contract should include a coordination aspect – an opportunity to revisit the contract, as well as conditions for escalating the issues, who should be escalating the issue, to what level, veto rights, and so on. Study and Steer Quite often, companies form a special unit (with a clearly defined role – pull vs. push) that is responsible for enabling and supporting strategic partnerships. These units usually hold a portfolio of strategic partnerships or projects within the partnership to make coordination more efficient, increase the scope of partnership and build up expertise. A portfolio approach to strategic partnership increases effectiveness since, according to BCG, the broader the scope for the partnership, the more successful it will be. Such a coordination unit ensures brokering knowledge, legitimizing competence and institutionalizing organizational memory, as well as transferring best practices across its portfolio.
Key takeawaysWith the significant increase in strategic partnerships, companies should bear in mind that success depends heavily on adopting a proper strategy, alignment (within the company and between the partners) and seamless integration into the organization’s processes and operations. Nevertheless, it is essential to focus on sharing commitment and competencies to create value. Open communication lays the foundation for successful strategic partnerships, ensuring clarity of objectives, trust and strong relationships. On the operational level, the most important group to involve, from both companies, is middle management since their objectives are often conflicting. Creating special mutually accepted metrics to measure the success of the alliance is also important. When structuring the partnership, equity serves as a substitute for trust. If trust is weak, the partners tend to feel “it pays to cooperate,” whereas strong trust stimulates partnerships to the level of personal relationships, reflecting solidarity and similar cultural values.
References [1] http://www.pwc.com/us/en/ceo-survey-us/2014/assets/2014-us-ceo-survey.pdf [2]http://www.mckinsey.com/insights/corporate_finance/avoiding_blind_spots_in_your_next_joint_venture. |