Alliances -- More Than Mergers

Dec. 21, 2004
Strategic partnering often can accomplish what M&As can't.

Global merger volume soared to a record $1.14 trillion in the first quarter of 2000. In the U.S. alone deal volume jumped to $587 million. As M&A fever sweeps across all industries, business leaders should ask themselves if this is the most prudent strategy. Often, they will find that the answer is "no." Acquisitions often occur because some organizations can move faster than others. Consequently, a merger or acquisition appears easier than partnership strategies in which control is not as clear. Given the rate of business consolidations, choosing the right approach quickly is becoming a competitive advantage. Bigger does not always mean better. As companies get bigger they tend to lose the flexibility that enabled them to grow in the first place. Look at Clinton, Miss.-based WorldCom Inc. and its pending merger with Sprint Corp., Kansas City. WorldCom is known as a flexible, forward-thinking organization. But as it tries to integrate Sprint into its culture it may not be able to maintain the flexibility needed to excel. The key to success of any merger or acquisition is flexibility and integration skills. Without flexibility, integration becomes increasingly challenging. A growing number of companies are turning to alliance structures other than mergers to help them compete quickly and effectively. Strategic alliances such as outsourcing, comarketing, licensing, private labeling, and joint research enable companies to rapidly penetrate "hot" new markets through a quick influx of talent, manufacturing capabilities, or additional distribution channels. But business alliances are an effective strategy in fast-paced times only if companies choose their alliance partners carefully. To pick a compatible partner-and to do so quickly-companies should have a list of desirable characteristics in addition to strategic and business criteria. Here are a few:

  • Cultural compatibility between partners. Time and resources must be allocated to manage cultural differences. My research indicates that the business reasons for entering into an alliance become less important over time, whereas the cultural issues become more important. Focusing on cultural issues at the inception of the alliance will increase its chances for success.
  • Customer relationships. The definition of "customer" has changed along with the growth of e-commerce and mass customization. If the company still adopts the old-school approach of looking at customers (both internal and external) without distinct differentiation and customization strategies, then it may not be progressive enough to be the best partner. Does the candidate company leverage the resources of the whole organization or just those within each silo or division? How well does the company leverage its information on its customers? Conversely, the lack of customer analysis may be a good reason to acquire a target company since in the turnaround process the acquiring firm could use data-mining methods to derive increased value from the relationship.
  • Communication protocols. Because integration depends on electronic communication, compatible systems are critical in the ultimate success of the alliance. If managed properly, internal and external communication is a strategic resource. If not, it becomes a major impediment.
  • E-readiness. Is the e-commerce initiative of the candidate company a separate division? Is it a new initiative throughout the company? How is it structured and who is driving it? It could slow you down if your company is more "e-ready" than your alliance partner.
These considerations will be of value regardless of the alliance structure used. However, the most effective alliances are consistent with the organization's strategy-and that is an issue of leadership. Leaders must pinpoint the drivers leading to the alliance. Is the goal to save costs, to get to market quicker, or to preempt the competition? Depending on the drivers, leaders may find that alliance structures other than a merger will enable them to achieve the same benefit-but at less cost, commitment, and risk. Larraine Segil is cofounder of the Lared Group, a Los Angeles-based firm specializing in strategic-alliance consulting; author of Intelligent Business Alliances (1966, Times Books); and former CEO of an advanced materials distribution company.

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