Inter-organizational relations (IORs) have gone from accounting for just a small share of the revenues of large Fortune 1000 companies to more than 20%. Although the 2007 financial crisis and subsequent collapse of institutions such as Lehman Brothers have led to a significant decline in these experiences in western economies, the need to do more with fewer resources has increased interest in partnering as a basis for innovating, improving service, and controlling costs.
While IORs are not new, they have evolved due to factors such as the globalization of markets, the development of new technologies, greater market pull, the difficulty of competing throughout the value chain, and resource constraints. This paper will focus on a common type of IORs, namely, strategic alliances, placing special emphasis on governance mechanisms. To this end, it will first identify four sources of competitive advantage in this field: relation-specific assets, knowledge sharing, complementary resources, and the development of alliance governance capabilities.
The four companies examined (Mercadona, Philips, Eli Lilly, and Cisco) have all formed alliances to complement their internal capabilities and expand their international reach. One common feature of alliance management at these organizations is the existence of formal processes for the development and implementation thereof, including learning mechanisms to ensure that the lessons learned from successful past alliances are systematically incorporated into the process. Another common feature is the designation of teams responsible for managing the alliance throughout its full lifecycle. The use of systematic processes and the existence of a central unit tasked with monitoring the agreement, creating synergies, and generating institutional knowledge are also key.
The complexity of simultaneously handling multiple resource-heavy alliances can be reduced by creating an efficient infrastructure, designed to facilitate capability-building in alliances and managed by an alliance office. This office must have not only the requisite resources, but also the necessary level of recognition within the organization. In this regard, it is worth noting that three of the four companies examined here (Philips, Eli Lilly, and Cisco) use a structure similar to an alliance office, with similar functions and a working approach based on the creation of virtual teams responsible for implementing and executing each new alliance, from start to finish. Likewise instructive is the fact that companies that have built successful alliances take a long-term approach. In Mercadona’s case, the alliance network even includes suppliers, as a cost-effect way to improve internal performance.
The need to do more with fewer resources has increased interest in alliances as a basis for innovating, improving customer service, and controlling costs.
Models and Capabilities
For Kale, Dyer and Singh, the most successful companies when it comes to forming alliances are those that create a ‘dedicated alliance function,’ tasked with systematically leveraging lessons learned, a concept they refer to as the ‘4 Cs’ (capture, codify, communicate, and coach). Similarly, Isabella and Spekman have argued that infrastructure is what ensures continuity, allowing organizations to benefit systematically from accumulated knowledge. It does this by preventing the knowledge base for successful alliances from being lost whenever an executive changes companies, is promoted, or retires, a loss that would weaken the organization.
Research on alliances has traditionally focused on organizational, strategic, cultural, and personal issues. Less attention has been given to how the alliance is managed, i.e., to how the agreement is implemented over time. Companies such as Cisco, Hewlett Packard, Philips, Eli Lilly, and Nike have shown that alliances are powerful tools for boosting competitiveness and that their own business success is closely correlated to the success of their alliances. This suggests that there are other decisive factors at play, beyond the mere characteristics of the alliance partners and how they carry out their agreements.
Strategic alliances are gaining ground despite the fact that more than 50% of them fail. This is a worrisome figure for a strategic move initially undertaken to improve an organization’s competitiveness and support its development plans. The phenomenon has been studied from various viewpoints, but it is essential to understand how cooperation with others – whether suppliers, customers, or even competitors – can be helped or hindered by governance mechanisms. The risk of failure can be minimized by adopting the practices of the companies discussed below, which were chosen for their systematic approach to and high success rates with alliances.
Capability-building and the creation of a formal infrastructure help to ensure the alliance’s goals are met and allow organizations to benefit systematically from the accumulated knowledge.
Mercadona
The Valencian retail group has clearly changed since 1981, when its president, Juan Roig, purchased a meat company founded by his parents. In 1993, Roig replaced the traditional margin-based management model with an ‘everyday low prices’ formula, based on offering quality products and continuous service improvement, within a strategy of long-term cooperation with the company’s largest suppliers (called ‘interproveedores’ or ‘inter-suppliers’).
One of the keys to the group’s success is its commitment to offering private labels, as well as its special relationship with employees and suppliers. The employees work in a different environment from that found at other retail chains, with permanent contracts, a month of initial training, mechanisms to facilitate work-life balance (the stores do not open on Sundays), salaries above the industry average, and a policy of supporting workers’ skills. The suppliers (inter-suppliers) agree to submit to the same discipline and management model used by Mercadona under a contract “for life” that offers them stability and profit in return. Additionally, as part of the company’s “cross-innovation” policy, they agree to make substantial investments in new facilities each year.
Mercadona has also launched Caspopdona (its sustainable food supply chain project), an initiative through which it engages second-tier suppliers in order to boost its competitiveness, negotiating directly with suppliers of large volumes of agricultural, fishery, and livestock inputs. The group has more than 110 inter-suppliers and agreements with more than 20,000 SMEs in the primary sector.
The companies that have built successful alliances look for long-term agreements with different links in their supply chain (customers, suppliers, even competitors). Mercadona’s special relationship with its main suppliers has resulted in a highly competitive and efficient network and is a good example of alliances in the Spanish retail sector.
Philips
The multinational stands out for its use of alliances as a strategic tool to gain competitive advantages and has entered into alliances with companies as diverse as ASML, Dell, Marcilla, Ikea, LG, and Nike. The list of alliances covers most of its value chain, from the development of new products to the search for partners to penetrate new markets. For instance, it undertook a joint venture in the TV set business with the Chinese company TPV, with both sides contributing human and material resources. Philips also brought its strong brand, while the Chinese firm brought its supply chain expertise and knowledge of how to operate and work in China. The alliance allowed Philips to reduce its risk in a mature market (i.e., television sets), in which competition is very high and there are no clear technical differences between competitors, since the supply of liquid crystal panels (the main component) and other key parts is controlled by just a few global manufacturers.
To manage its alliances more efficiently, Philips has a Corporate Alliance Office (CAO). When it decides to enter into a new alliance, the team responsible for such operations is involved from day one, coordinating contacts with partners. The CAO’s activities also include partner selection, the initiation of contacts to assess the interest of the other party, acceptance of alliances, the appointment of a team leader, and support and oversight of the partnership.
Eli Lilly
A leading pharmaceutical innovator, Eli Lilly owes much of its success to alliances that have allowed it to increase its competitiveness by reducing R&D costs and adopting a much faster product development cycle than the competition. Like Philips, Eli Lilly has entered into strategic alliances with organizations around the world, including research groups, such as the University of Toronto (insulin), Genentech (new insulin formulation), Takeda Chemical (pioglitazone), Alkermes (inhaled insulin), or the UK National Research Council (antibiotics).
To efficiently handle this large number of alliances, Lilly set up an office tasked with identifying areas that could benefit from alliances, identifying potential partners, and even developing the terms of the alliance and monitoring its performance. Its alliance formation process is based on specific practices, such as: 3D analysis, which it uses to understand compatibility issues in strategic alliances; joint comprehensive analysis with potential partners of all relevant aspects of the future alliance, from the working style of each party to decision-making; strategic analysis of the future alliance, in order to develop plans, identify obstacles, and lay down the governance rules; and the ‘Voice of the Alliance’ (VOA) tool, which it uses to conduct regular evaluations and audits of the alliance and correct for deviations. These and other complementary tools have been integrated into what the company calls the Lilly Alliance Management Process (LAMP).
According to the multinational’s alliance director, most alliances fail due to the involvement of too many people with different expectations, who interpret the agreements, goals, and mechanisms differently. In his view, only a highly structured system can handle the company’s complex network of ‘virtual scientific collaborators.’ That is why Eli Lilly has established clearly defined roles and responsibilities.
Each alliance consists of a three-person team, including an executive leader, who is responsible for the entire process and whose main job is to ensure that the communication process between Lilly and its partners runs smoothly, breaking barriers whenever necessary to achieve this goal. Eli Lilly recruits the three people responsible for each alliance from non-technical functions, such as finance, marketing, or operations, to ensure they have multidisciplinary expertise and vision. The alliance’s functional leader (usually also the technical lead on the project) is responsible for the alliance’s day-to-day operation and overall project implementation, ensuring that the teamwork is carried out and that the project progresses on schedule. Finally, the head of the alliance represents the alliance office and is responsible for resources and business integration. Interestingly, the people who occupy these roles are mainly recruited from non-financial functions, such as finance, marketing, or operations, as it is considered that a large part of their responsibilities is to alert management of potential deviations, to which end it is desirable for them to have multidisciplinary expertise and vision.
Strategic alliances are gaining ground despite the fact that more than 50% of them fail. This is a worrisome figure for a strategic move initially undertaken to improve an organization’s competitiveness and support its development plans.
Cisco
The network-equipment maker manages a portfolio of alliances in multiple sectors, technologies, and geographical regions that accounts for a significant share of its business. Some of Cisco’s strategic partners are large market leaders themselves, such as Accenture, IBM, and Microsoft, among many others.
To facilitate these operations, Cisco has someone fully dedicated to alliances (Vice President of Alliances), whose mission is to identify and manage all these relations. Additionally, each alliance is assigned its own multidisciplinary team, specifically trained in complex alliance management techniques and supervised by an alliance director.
More information on alliances
Morcillo, J. & Durán, A. (2014). Capabilities Generation Mechanisms in Alliances: Case Based Analysis. Dirección y Organización, 53.
Morcillo, J., Díaz, A. & Solís, L. (2015). Improving Alliances: Insights from the Practices of Successful Companies. IUP Journal of Supply Chain Management, 12(3).
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