The Alliance Analyst
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TF O R THEHE N I G H T L YA R E P O LLIANCERLLIANCE T T O S E N I O R E X E C U T I V EA S A N DNALYST NALYST A L L I A N C E M A N A G E R S MARCH 18TH 1996 Managing alliances—skills for the modern era Thoughts from David Ernst of McKinsey & Company N THE PAST, alliance managers I were a lot like gentlemen Brits run- ANALYSIS FROM— ning the middle distance. Their approach was decidedly unsystematic: training little, eating all wrong, drinking cham- ¯ David Ernst pagne one night and winning the Olym- Senior Consultant pic mile the following noontime. All tal- McKinsey & Co ent. No regimen. Quite civilized. Then the entire world started to take the competi- tion so very seriously. Winners were in- ¯ Michael Stern VP, Business creasingly backed by countries with pow- Affairs erful sporting machinery: training centers, General Magic coaches, and ever-more scientific meth- ods of monitoring performance. And that lithe, talented Brit started having a diffi- cult go of it. This change is now happening with alliances. usually to enter a new business; Colgate- In the future, firms with the best internal alliance Palmolive used alliances to gain insider posi- infrastructure are more likely to be standing tions on its way to selling soap, shampoo, and among the winners. Without understanding toothpaste to consumers in just-emerging mar- that—and without pinpointing and building kets. some of those capabilities—it will become ever In the year 2000, firms will look back nostal- harder to compete, especially in industries where gically to this era. By then, alliances are expected alliance complexity is rising. to account for better than 20% of the average large firm’s revenues. Alliances will involve competi- Complexity rising tors, multiple partners, and stretch well beyond the familiar confines of the firm’s home indus- Imagine the world a decade ago: the average try. Alliances will also take on all sorts of new multinational had to concern itself with just a few variations—from the product cobrandings to alliances, and even those were often of a similar joint ventures used as viable alternatives to out- ilk. Fujitsu’s major alliances were equity stakes right divestitures. There is little in Sprint's past, in two western computer companies, Amdahl for instance, to prepare it for managing a $4 bil- and ICL; Corning was primarily focused on in- lion multimedia alliance with TCI, Comcast, and dependently-operated joint ventures, formed Cox (see Monitor, page 9). CHARTING YOUR SKILL - pages 2 & 3 TOO MANY COOKS - page 8 GENERAL MAGIC - page 11 Four levels of internal alliance capa- Why two famous communication alli- Why three alliance managers work bilities, and understanding where ances are tangled in turmoil. Blame too one partner. you fit. many partners. TO THE MODERN ERA These changes will create new pressures. United-SAS, or with one of several other indus- Who will manage these alliances? It is unlikely try groups. And European media groups weigh to be expat country managers (perhaps the only the merits of aligning with Europe Online ver- group of executives with significant alliance ex- sus the ever-growing association massing behind perience); they have little relevant knowledge to the Microsoft Network. Because alliance blocks— Implementation is apply to the new wave of mostly domestic part- especially where assets or operations are en- the graveyard of nerships. In the future, firms will need to be twined—are far less likely to unravel than bilat- alliances adept managers of corporate culture clash, not eral alliances, joining one can be a once-in-a- national culture clash, as was the common con- decade decision. Making the right choice re- cern among the old cross-border alliances. quires a set of strategic planning and alliance Starbucks Coffee, for instance, is almost certainly skills which few firms yet have. driven by a whole different set of values, per- Below these strategy issues, lurking like a sonalities, and goals than its recent marketing snake in the grass, is the matter of execution. A partner, United Airlines. McKinsey study found that 50% of alliance fail- Firms will also have to understand the im- ures are due to poor strategy while 50% are the plications for joining alliance blocks. These rep- result of poor management. Such sentiments resent real strategic turning points. Today, na- were echoed in a Conference Board speech by tional phone companies debate whether to join Chuck Knight, the chief executive of Emerson WorldPartners, Concert, or Global One. Airlines Electric. "I do not believe that [alliances] fail in decide whether to link with the trio of Delta- the planning stage," he said, "they fail in imple- Swissair-Singapore Airlines, with Lufthansa- mentation—that is the graveyard of corporate Few companies have worldclass alliance capabilities LEVEL 2: BREAKING FREE • best practices codified • awareness of alliance evolutionary issues • internal training • some established processes, such as standard LEVEL 1: THE PACK licensing contracts or marketing agreements • some sense of best practices, largely anecdotal • business units often generate alliance ideas • alliances formed reactively • alliance structure not linked to overall strategy • most alliances developed and run at business unit level • few true alliance practitioners in company Excellence at JVs Best practice skills—individual Legal/financial alliance Capabilities structuring skills Source: McKinsey & Co and The Alliance Analyst 2 THE ALLIANCE ANALYST MARCH 18TH 1996 TO THE MODERN ERA America." And as alliance complexity rises and from any one alliance success story, no matter experienced human resources are pulled ever- how detailed and true, have limited applicabil- thinner, the challenges of follow-through will be- ity. They also tend to focus on the alliance itself, come more acute. not noticing what resources either parent de- Lotus, Xerox, and votes to supporting alliances in general. Yet HP are as A snapshot of the future those capabilities can determine whether an al- good as it gets liance is bungled or well-managed. today What will a winner look like? In the past—when What then should an enterprising corporate alliances were infrequent and not widely var- strategist do? A reasonable first step is to iden- ied—firms could draw lessons from individual tify a few companies with internal alliance capa- success stories. An enterprising corporate strat- bilities, and then draw some lessons from them. egist could pick a high-profile, successful alli- Lotus, Xerox, and Hewlett-Packard are ance such as Siemens-Corning or GE-Snecma, among the leaders in building internal capabili- gather as much information as available, sort ties. Lotus has a 40-person alliance group, an es- through it, and pin a diagram to the wall. He tablished hierarchy of sales and marketing part- could then start cutting out such lessons as when ners, and three dozen alliance rules of thumb. to use alliances instead of mergers or internal Xerox, despite a smaller team of central alliance growth, when to use joint ventures over equity staff, has articulated corporate-wide policies stakes or contractual agreements, and how to and, through a management group known as the search for, and negotiate with, potential partners. Third Party Arrangement Council, communicates Today, this approach is insufficient. Lessons its message across divisions. Hewlett-Packard LEVEL 4: TOMORROW'S CHAMPIONS • learning from key alliances systematically spread throughout organization LEVEL 3: CURRENT WORLDCLASS • clear career path for alliance managers • partner-partner communication • formalized alliance procedures, tools, and checklists • generalized approach for alliance learning • emergence of senior alliance executive position • hierarchy of alliances • alliances integrated with corporate strategy • database of key alliance case histories • ongoing monitoring of partner activities Best practice skills— Adapted corporate wide management alliances process Strategy process integrating Internal Excellence at JVs, equity alliances and database, tools, stakes, and non-equity industry structure communication alliances forums Wider communications Capabilities to prioritize, manage tools wide variety of corpo- rate relationships THE ALLIANCE ANALYST MARCH 18TH 1996 3 TO THE MODERN ERA has institutionalized an alliance training process, alliances. Perhaps most important, companies at as well as debriefings after every negotiation and Level III have a very clear view of what kinds of regular status checkups throughout the lives of alliances should be pursued to leverage specific key partnerships. All three firms will soon have strengths, execute growth strategies, or fill capa- a central, online repository of alliance knowl- bility gaps. Alliances, now, have at last become an edge—a tool which can be accessed from the integral part of the strategy process. There are prob- most remote corners of their organizations. ably no more than ten companies who exist at this worldclass level. The nature of the journey Admittedly, this framework is a simplifica- tion. But it allows executives to compare their Yet Lotus, Xerox, and Hewlett-Packard did not internal alliance capabilities with others, to de- Worldclass compa- simply wake up one morning and decide, in a termine whether to invest in added capabilities nies are pushed moment of managerial clairvoyance, to create and, most important, to understand what those to create alliance policies, hierarchies, staff, education more advanced skill sets might look like. capabilities tools, and communication channels. External catalysts were as responsible as internal vision. Building skills The introduction of Notes required Lotus to shift from a direct-selling business model towards an Consider an alliance between General Electric indirect one. The linking of office copiers and and Honeywell (detailed in the Analyst, 1.23.96 printers into wider networks forced Xerox to and 2.5.96). In 1993, the partners agreed to have work closely with computer and software mak- their sales forces cross-sell a large number of in- ers.