5 WAYS TO MAKE STRATEGIC PARTNERSHIPS
Strategic partnerships fail more than half the time.
How can your business get them right?
By IMD Professors Charles Dhanaraj and James Henderson - October 2014
Most often, strategic partnerships are established when companies need to acquire new capabilities within their existing business. They inevitably involve challenges that have to be resolved efficiently to ensure the longevity and success of the alliance. If these challenges are not tackled, the partnership will more than likely fail, which, as the empirical research shows, happens in more than half of all cases (Dyer, Kale and Singh, 2001).
In order to avoid failure and effectively build joint capabilities, strategic partnerships should be based on trust and follow five simple steps.
Step 1: Strategize
Companies that decide to pursue strategic partnerships should introduce changes at the strategy level. This includes organizational structure, processes, and most importantly commitment at all levels. A company should clearly define the areas in which partnerships should be built based on its general strategy as well as its objectives.
The most important group to involve on the operational level from both companies is middle management since their objectives are often conflicting. Creating mutually accepted metrics to measure success is also important.
Step 2: Search, screen and select
One of the most 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. In general, companies should use a variety of mechanisms in their search for partners. In the screening phase, companies should look for strategic partnerships that will give them new capabilities within their existing business, and be aware of consumer insights. 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."
NetApp, an American computer storage and data management company, applied a well-structured systemic approach when searching for possible strategic partners in order to successfully compete with big "one-stop shop" companies like IBM and Dell. Its first step was to map the competitive landscape across all areas of cloud infrastructure. Eventually, it formed a non-equity partnership with Cisco, called Flexpod, which engages virtual teams of the best professionals from each company and forms multiple small partnerships in various locations around the world.
Step 3: Choose the structure
There are multiple structures of strategic partnerships — from non-equity alliances (such as joint research and development, long-term sourcing, shared distribution/services etc.) to equity-based partnerships in the form of minority equity investments and joint ventures. Non-equity strategic partnerships are often preferred due to high uncertainty in the market, the existence of several possible partners, the risk of damaging existing partnerships, and good organizational fit.
Joint ventures are the least popular; they are the most difficult to manage and have an average life span of around seven years. In order for a joint venture to succeed, it should recruit independent people to make a fresh start rather than engaging current employees who might prioritize their companies' interests.
Whatever the type of partnership, the master agreement should be signed at CEO level and should explicitly address shared responsibilities, intellectual property as well as conflict resolution and exit terms. Companies should also avoid money investments by investing in equipment, technology, people, and buildings. As soon as money is involved everything becomes a transaction rather than a long-term joint endeavor.
Step 4: Start and stabilize
Developing a supportive culture within the company is vital to ensuring that a strategic partnership is efficient and productive. This means recognizing partnerships as a corporate priority and having support from senior leadership, partnership leaders and teams. Nevertheless, conflict is inevitable and interest-based problem solving is the best way of tackling it. This requires separating people from the positions, emotional from rational issues, and focusing on mutual interests and clarifying the commitment of both parties. The most important step is agreeing on the issues to be resolved. The contract should identify a dispute resolution process.
In 2007 Starbucks tried to enter the Indian market through a joint venture with Future Holdings but failed. In 2010 it tried again to break into India by partnering with Tata through a non-binding memorandum of understanding which didn't resolve issues related to equity stake, branding and pricing. After intense negotiations, with each party compromising on its original positions to create a sustainable growth strategy, a 50/50 partnership was concluded. Starbucks was launched in Mumbai in 2013 and continues to branch out to other cities.
Step 5: Study and steer
A portfolio approach, wherein companies form a special unit that is responsible for enabling and supporting partnerships or projects, increases the effectiveness of strategic partnership since the broader its scope, the more successful it is. A special unit ensures institutional memory and the transfer of best practices across its portfolio.
In 2007 Nestlé created a special unit that was responsible for all strategic partnerships. By 2009 it had developed a well-established practice for strategic partnerships and a broad scope of alliances across businesses, universities, start-ups and venture capitalists.
With the significant increase in strategic partnerships, companies should bear in mind that success depends heavily on adopting a proper strategy, alignment and integration into the organization's processes and operation.
Open communication lays the foundation for successful strategic partnerships, ensuring trust and clarity of objectives. 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.
Follow the five steps above, and your business will be on its way to creating successful strategic partnerships.
Charles Dhanaraj joined IMD in 2014 as Professor of Strategy and Global Leadership. He will be leading a stream at OWP Singapore on how CEOs and senior executives can react to slower growth in emerging markets.
James Henderson is Professor of Strategic Management at IMD.