Most businesses form long-term relationships with customers and other businesses
that yield mutually beneficial win-win results. In today’s business, several factors
necessitate the need for partnerships and alliances. For example, factors like a
product’s time-to-market, development costs, need to define industry standards,
and desire to gain market clout are associated with high risks, and it therefore
makes sense to partner with an ally and jointly develop a business.
In general, businesses partner with each other so that one firm has access to resources
and skills that, if developed in isolation, would be costly in terms of either money
or time. Partnering enables firms to gain access to resources and skills each requires
to develop and deploy the product quickly. Moreover, the biggest resulting advantage
is the short time-to-market, which is the time to develop a product and bring it
into the market. All the partnering firms can work together and develop complementary
products that increase each individual firm’s market share. For example, Cisco,
a strategic technology company, partnered with Cerent because the Cerent’s products
make it less expensive for Cisco to transmit voice and other data over fiber optic
lines. Cisco also formed partnerships with Motorola, IBM, HP, EDS, and several other
companies that will allow all to contribute to each other’s growth.
As can be seen with Cisco, collaboration is also important to define standards,
especially for new technologies. Customers will not hesitate to buy a new technology
product if it is compatible across different components and platforms. An incompatible
product often raises uncertainty and doubt about the right product to buy. As standards
of compatibility become popular, more and more customers purchase the associated
products. As a result, the companies’ customer base would increase. Moreover, as
the customer base increases, the partnering firms can launch complementary products.
The success of complementary products is largely dependent upon the installed base
of the product. For example, software developers are more willing to write applications
in Java or .Net compared to Pascal or Fortran because the former programming languages
have wider penetration in the market.
Business alliances can be classified into three different types:
- Vertical alliance
- Horizontal alliance
- Customer relationship
At times, companies form vertical alliances with other firms that are at different
levels in the supply chain. These partnering firms can be either suppliers or distribution
channel members. Such relationships are used for gaining efficiency and effectiveness
in accessing the primary market. Vertical relationships assist the manufacturer
by providing information about the competitive advantage, market intelligence, and
customer reaction. Manufacturers, for instance, frequently rely on suppliers who
are at different levels on the supply chain to implement inventory systems, among
other systems. For example, the alliance between Apple (iPhone) and AT&T can be
described as a vertical alliance. In this case, Apple provides the iPhone and AT&T
provides the service. Similarly, when real estate market is examined, commercial
estate developers & builders collaborate with land owners to develop real estate
properties. Such an alliance can be termed as a vertical alliance.
In several situations, firms that are at the same level in the supply chain form
horizontal alliances. These firms have to potential to compete with each other.
HP and Kodak, for instance, elected to collaborate with each other to develop HP
printers. The photo-paper compatible printers turned profits for two companies who
were on equal footing, and both gained considerable advantages from the alliance.
At times, firms form direct relationships with customers through surveys and interviews.
Such relationships often benefit both the firms and the customers. Firms will get
a chance to understand what the customer wants and redesign their products accordingly.
The customer, then, gains a better product when the firm exclusively develops solutions
for the customer’s needs. This sort of relationship is very useful for both the
firm and the customer.
Alliances can potentially fail because of a number of issues. First, working with
other firms increases the complexity of the project. Decisions have to be made jointly
and as more teams put their mind share, decision making comes to a halt. Issues
such as incompatible corporate cultures, lack of attention, inadequate resources
allocated to taking the relationship forward etc badly affect the outcome of most
alliances. Second, loss of trade secrets is another hurdle that companies have to
deal with. The partnering company can learn the business secrets, break the partnership
and become a competitor. Firms that form an alliance should trust each other to
ensure a successful relationship. Finally, strategic alliances face the risk of
Federal anti-trust prosecutions. US anti trust laws are very tough on corporate
relationships especially when large corporations are involved in the relationship.
Partnerships however can succeed if the partnering firms take certain steps to ensure
a secure relationship. First, all the firms should be interdependent. All parties
must be dependent on the others for some vital resource that is difficult to obtain
elsewhere. Second, all the partnering firms should have a commitment or the desire
to continue the relationship into the future. This is an important element for successful
strategic alliances. Third, the partnering companies should be able to trust their
allies. Trust leads to more effective information sharing and a willingness to allocate
scarce and sensitive recourses to shared efforts that benefit all the partnering
firms. Fourth, corporate cultures of the partnering firms should be compatible with
each other. For example, RedHat and Microsoft can never form a partnership because
of their corporate philosophies and cultures differ too strongly to create an effective
alliance. Finally, conflicts should be resolved using industry-standard negotiation
techniques. At times, some partners try to coerce other partners to make them fall
in line, going as far as threatening partnering companies who do not adhere to the
leading company’s wishes. Partnerships will be successful only if all the partnering
firms adhere to the true spirit of cooperation. If alliances can be made to function
well, firms can make business wonders possible.
Pradeep Tumati (Principle, go4funding.com)