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Improving the management of complex business partnerships

Partnerships never go out of style. Companies regularly seek partners with complementary capabilities to gain access to new markets and channels, share intellectual property or infrastructure, or reduce risk. The more complex the business environment becomes—for instance, as new technologies emerge or as innovation cycles get faster—the more such relationships make sense. And the better companies get at managing individual relationships, the more likely it is that they will become “partners of choice” and able to build entire portfolios of practical and value-creating partnerships.

Of course, the perennial problems associated with managing business partnerships don’t go away either—particularly as companies increasingly strike relationships with partners in different sectors and geographies. The last time we polled executives on their perceived risks for strategic partnerships, 1 Observations collected in McKinsey’s 2015 survey of more than 1,250 executives. Sixty-eight percent said they expect their organizations to increase the number of joint ventures or large partnerships they participate in over the next five years. A separate, follow-up survey in 2018 showed that 73 percent of participants expect their companies to increase the number of large partnerships they engage in. the main ones were: partners’ disagreements on the central objectives for the relationship, poor communication practices among partners, poor governance processes, and, when market or other circumstances change, partners’ inability to identify and quickly make the changes needed for the relationship to succeed (exhibit).

In our work helping executive teams set up and navigate complex partnerships, we have witnessed firsthand how these problems crop up, and we have observed the different ways companies deal with them . The reality is: successful partnerships don’t just happen. Strong partners set a clear foundation for business relationships and nurture them. They emphasize accountability within and across partner companies, and they use metrics to gauge success. And they are willing to change things up if needed. Focusing on these priorities can help partnerships thrive and create more value than they would otherwise.

Establish a clear foundation

It seems obvious that partner companies would strive to find common ground from the start—particularly in the case of large joint ventures in which each side has a big financial stake, or in partnerships in which there are extreme differences in cultures, communications, and expectations.

Yet, in a rush to complete the deal, discussions about common goals often get overlooked. This is especially true in strategic alliances within an industry, where everyone assumes that because they are operating in the same sector they are already on the same page. By skipping this step, companies increase the stress and tension placed on the partnership and reduce the odds of its success. For instance, the day-to-day operators end up receiving confusing guidance or conflicting priorities from partner organizations.

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How can the partners combat it? The individuals expected to lead day-to-day operations of the partnership, whether business-unit executives or alliance managers, should be part of negotiations at the outset. This happens less often than you think because business-development teams and lawyers are typically charged with hammering out the terms of the deal—the objectives, scope, and governance structure—while the operations piece often gets sorted out after the fact.

Transparency during negotiations is the only way to ensure that everyone understands the partners’ goals (whether their primary focus is on improving operations or launching a new strategy) and that everyone is using the same measures of success. Even more important, transparency encourages trust and collaboration among partners, which is especially important when you consider the number of executives across the organizations who will likely rotate in and out of leadership roles during the life of the relationship.

Inevitably, points of tension will emerge. For instance, companies often disagree on financial flows or decision rights. But we have seen partners articulate such differences during the negotiation period, find agreement on priorities, and reset timelines and milestones. They defused much of the tension up front, so when new wrinkles—such as market shifts and changes in partners’ strategies—did emerge, the companies were more easily able to avoid costly setbacks and delays in the business activities they were pursuing together.

Nurture the relationship

Even business relationships that start off solidly can erode, given individual biases and common communication and collaboration issues. There are several measures partners can take to avoid these traps.

Connect socially

If executives in the partner organizations actively look for opportunities to understand one another, good collaboration and communication at the operations level are likely to follow. Given time and geographic constraints, it can be hard for them to do so, but as one energy-sector executive who has negotiated and managed dozens of partnerships noted, “It’s important to spend as much time as you can on their turf.” He says about 30 to 40 percent of partnership meetings are about business; the rest of the time is spent building friendships and trust.

Keep everyone in the loop

Skipping the step of keeping everyone informed can create unnecessary confusion and rework for partner organizations. That is what happened in the case of an industrial joint venture: the first partner in the joint venture included a key business-unit leader in all venture-related discussions. The second partner apprised a key business-unit leader about major developments, but this individual did not actually join the discussions until late in the joint-venture negotiation. At that point, as he learned more about the agreement, he flagged several issues, including inconsistencies in the partners’ access to vendors and related data. He immediately recognized these issues because they directly affected operations in his division. Because he hadn’t been included in early discussions, however, the partners wasted time designing an operating model for the joint venture that would likely not work for one of them. They had to go back to the drawing board.

Recognize each other’s capabilities, cultures, and motivations

Partners come together to take advantage of complementary geographies, corresponding sales and marketing strengths, or compatibilities in other functional areas. But it is important to understand which partner is best at what . This process must start before the deal is completed—but cannot stop at signing. In the case of one consumer-goods joint venture, for instance, the two partner organizations felt confident in their plan to combine the manufacturing strength of one company with the sales and marketing strengths of the other. During their discussions on how to handle financial reporting, however, it became clear that the partner with sales and marketing strengths had a spike in forecasting, budgeting, and reporting expertise. The product team for the first partner had originally expected to manage these finance tasks, but both partner teams ultimately agreed that the second partner should take them on. In this way, they were able to enhance the joint venture’s ongoing operations and ensure its viability.

Equally important is understanding each partner’s motivation behind the deal. This is a common point of focus during early negotiations; it should continue to be discussed as part of day-to-day operations—particularly if there are secondary motivators, such as access to suppliers or transfer of capabilities, that are important to each partner. Within one energy-sector partnership, for instance, the nonoperating partner was keen to understand how its local workforce would receive training over the course of the partnership. This company wanted to enhance the skills of the local workforce to create more opportunities for long-term employment in the region. The operating partner incorporated training and skill-evaluation metrics in the venture’s quarterly updates, thus improving the companies’ communication on the topic and explicitly acknowledging the importance of this point to its partner.

Invest in tools, processes, and personnel

Bringing different business cultures together can be challenging, given partners’ varying communication styles and expectations. The good news is that there are a range of tools—among them, financial models, key performance indicators, playbooks, and portfolio reviews—companies can use to help bridge any gaps. And not all these interventions are technology dependent. Some companies simply standardize the format of partnership meetings and agendas so that teams know what to expect. Others follow stringent reporting requirements.

Another good move is to convene an alliance-management team. This group tracks and reviews the partnership’s progress against defined metrics and helps to spot potential areas of concern—ideally with enough time to change course. Such teams take different forms. One pharmaceutical company with dozens of commercial and research partnerships has a nine-member alliance-management team charged mostly with monitoring and flagging potential issues for business-unit leaders, so it consists of primarily junior members and one senior leader who interacts directly with partners. An energy company with four large-scale joint ventures has taken a different approach: its alliance-management team comprises four people, but each is an experienced business leader who can serve as a resource for the respective joint-venture-leadership teams.

Sometimes partnerships need a structural shake-up—and not just as an act of last resort.

How companies structure these teams depends on concrete factors—the number and complexity of the partnerships, for instance—as well as intangibles like executive support for alliances and joint ventures and the experiences and capabilities of the individuals who would make up the alliance-management team.

Emphasize accountability and metrics

Good governance is the linchpin for successful partnerships; as such, it is critical that senior executives from the partner organizations remain involved in oversight of the partnership. At the very least, each partner should assign a senior line executive from the company to be “deal sponsor”—someone who can keep operations leaders and alliance managers focused on priorities, advocate for resources when needed, and generally create an environment in which everyone can act with more confidence and coordination.

Additionally, the partners must define “success” for their operations teams: What metrics will they use to determine whether they have hit their goals, and how will they track them? Some companies have built responsibility matrices; others have used detailed process maps or project stage gates to clarify expectations, timelines, and critical performance measures. When partnerships are initially formed, it is usually the business-development teams that are responsible for building the case for the deal and identifying the value that may be created for both sides. As the partnership evolves, the operations teams must take over this task, but they will need ongoing guidance from senior leaders in the partner organizations.

Build a dynamic partnership

Sometimes partnerships need a structural shake-up—and not just as an act of last resort. For instance, it might be less critical to revisit the structure of a partnership in which both sides are focused on joint commercialization of complementary products than it would be for a partnership focused on the joint development of a set of new technologies. But there are some basic rules of thumb for considering changes in partnership structure.

Partner organizations must acknowledge that the scope of the relationship is likely to shift over time. This will be the case whether the partners are in a single- or multiasset venture, expect that services will be shared, anticipate expansion, or have any geographic, regulatory, or structural complexities. Accepting the inevitable will encourage partners to plan more carefully at the outset. For example, during negotiations, the partners in a pharmaceutical partnership determined that they had different views on future demand for drugs in development. This wasn’t a deal breaker, however. Instead, the partners designated a formula by which financial flows would be evaluated at specific intervals to address any changes in expected performance. This allowed the partners to adjust the partnership based on changes in market demand or the emergence of new products. All changes could be incorporated fairly into the financial splits of the partnership.

Avoiding blind spots in your next joint venture

Partners should also consider the potential for restructuring during the negotiation process—ideally framing the potential endgame for the relationship. What market shifts might occur, how might that affect both sides’ interests and incentives, and what mechanisms would allow for orderly restructuring? When one oil and gas joint venture began struggling, the joint-venture leader realized he was being pulled in opposing directions by the two partner companies because of the companies’ conflicting incentives. “It made the alliance completely unstable,” he told us. He brought the partners back to the negotiation table to determine how to reconcile these conflicting incentives, restructure their agreement, and continue the relationship, thus avoiding deep resentment and frustration on both sides of the deal.

Such dialogues about the partnership’s future, while potentially stressful, should be conducted regularly—at least annually.

The implementation of these four principles requires some forethought and care. Every relationship comes with its own idiosyncrasies, after all, depending on industry, geography, previous experience, and strategy. Managing relationships outside of developed markets, for instance, can present additional challenges involving local cultures, integration norms, and regulatory complexities. Even in these emerging-market deals, however, the principles can serve as effective prerequisites for initiating discussions about how to change long-standing practices and mind-sets.

An emphasis on clarity, proactive management, accountability, and agility can not only extend the life span of a partnership or joint venture but also help companies build the capability to establish more of them—and, in the process, create outsize value and productivity in their organizations.

Ruth De Backer is a partner in McKinsey’s New York office, where Eileen Kelly Rinaudo is a senior expert.

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How to evaluate and execute strategic partnerships and alliances.

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Sun-Tzu, an ancient Chinese general, wrote The Art of War, an influential work of military strategy. He's often attributed with the quote, "If you do not seek out allies and helpers, then you will be isolated and weak." In today's highly competitive business environment, many business executives understand that organic growth is a very limited option to scale their business. We live in a digital race, and speed to value drives competitive advantage.

I have been involved in dozens of strategic partnerships, joint ventures, alliances and mergers and acquisitions in my career. Over the course of these deal-makings, I have seen numerous successful and failed business partnerships. Below are my tips on how business executives should evaluate the strategic fit of a potential business partnership, along with how they should execute the partnership to ensure they see results.

Types Of Partnerships And Alliances

Business partnerships come in many different types, forms and structures because they serve different strategic purposes. Some examples include:

• The joint development of technology innovation and product integration.

• A supplier and distributor relationship.

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• Co-branding and co-marketing.

• Group purchasing agreements or industry consortiums.

• Equity-based investments, joint ventures or even mergers and acquisitions.

As much as strategic partnerships are an important tool to drive growth and deliver needed capabilities, they are not without significant challenges and risks. There are so many reasons why business partnerships do not produce results or even last long. Lack of strategic fit is one key reason. Other reasons include lack of executive attention and failing to nurture the relationship.

How To Evaluate The Strategic Fit

For a business partnership to sustain and produce, it has to be a strategic fit for both parties from the onset. In my experience, a relationship without a strategic fit from the start will likely fail or not sustain; it can also create confusion and problems for both organizations. When you think about why you should or shouldn’t pursue a strategic partnership opportunity, carefully consider the following:

• Does the opportunity fit the vision of the organization?

• Does the relationship support your core business strategy?

• Would you gain new intellectual property and strengthen your product’s value proposition?

• Would you gain new market insight, or would it allow you to cost-effectively gain access to new market segments?

• Would you be able to create and deliver new experiences to your customers?

• Would you be able to increase your revenue growth or decrease your operating costs?

• What competitive advantage could you gain in competing with your key competitors? How would your competitors react to your partnership?

• Can you evaluate a return on investment before you invest in this strategic partnership? Can you quantify the benefits?

• Is your CEO, board or senior leadership team passionate and supportive of this potential business partnership?

• Is the partnership operation easily executable?

• Do the cultures of both organizations fit?

The strategic fit of a business partnership really comes down to two key aspects: the potential value creation (i.e., the attractiveness of the partnership) and operations (i.e., the ease of the partnership). For example, a partnership might be attractive and hold high-value creation if you'll be able to bring a new product to market, expand your market share, deliver a better customer experience, integrate supply chain or distribution channels or lower production costs.

Ease of operation examples could include a compatible leadership vision and culture; lower transaction costs of the alliance; the legal structure of the partnership is simple; product integration would be easy and a low technical hurdle; or there would be minimal internal competition and business redundancy.

Executing A Partnership Or Alliance

As market conditions change, the strategic fit of your business partnership might change as well. As the senior leader of your organization, you should constantly evaluate the strategic fit of your partnership and monitor its performance.

For a successful business partnership and alliance:

• Assign a leader who is accountable for the execution and result. Often, I see that there are many stakeholders who are excited and involved in the partnership discussion. The contract is signed, celebration is held, press releases are announced. But it's unclear whose job it is to provide daily oversight of operational issues and help remove hurdles. A successful partnership needs accountability from both organizations.

• Discuss operation alignment within your organization before you commit to the strategic partnership. Many partnerships will touch internal product lines; operational support and process changes; marketing and sales (to market and sell the jointly developed products); and the finance department (to count for revenue recognition and accounting report). Without internal alignment, partnerships, even strategic ones, are doomed to create internal chaos and counter-resistance.

• Hold regular partnership report meetings with the senior leaders of both organizations. Senior leadership support is vital. If the partnership is delivering great results, senior leaders need to understand why and how to help accelerate progress. If the partnership is having challenges and hurdles, senior leaders can help remove them.

The last point is also important. Market conditions change rapidly, which can affect the fit of a strategic partnership. There are times you might need to change the structure or even contractual terms of your partnership. In some instances, you might even want to acquire your partner’s organization or their products and fully integrate their business into yours. There are times, however, terminating the relationship might be the right decision for both organizations.

As vital as it is, a business partnership is a complex relationship to engage, develop and nurture. It can be rewarding and frustrating at the same time. There are many factors that influence the success of a business relationship. The evaluation of its strategic fit is the most important first step to explore a future productive relationship. And as time goes on, senior leaders need to closely evaluate and monitor the strategic partnership if market conditions change.

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Strategic partnerships

Seventy-nine participants from 50 companies attended an IMD Discovery Event that focused on the challenges involved in making strategic partnerships work.

Alliances and partnerships have always been part of human history in all areas of life – from private to public and from politics to business. Companies have worked with partners across countries, businesses or within their value chains for a variety of reasons, whether from a desire to expand or a need to cut costs. Yet, in recent years the growth of partnerships has accelerated, driven by the benefits of risk sharing and resource pooling, technology convergence, industry deconstruction (from linear value chains to industry value networks) and knowledge diffusion. The automobile and pharmaceutical industries in particular provide good examples of partnerships that have evolved from simple contingency and contractual relationships to more capability-focused ones.

According to a 2014 PwC CEO survey, more than 80% of US CEOs are currently looking for strategic partnerships or intend to do so in the near future.1 Nevertheless, in the last three years only around 65% of those seeking new strategic alliances have been successful.

What makes a partnership strategic?

In a strategic partnership the partners remain independent; share the benefits from, risks in and control over joint actions; and make ongoing contributions in strategic areas. Most often, they are established when companies need to acquire new capabilities within their existing business. Strategic partnerships can take the form of minority equity investments, joint ventures or non-traditional contracts (such as joint R&D, long-term sourcing, shared distribution/services).

Strategic partnerships inevitably involve challenges that have to be resolved efficiently to ensure the longevity and success of the alliance, such as isolating proprietary knowledge, processing multiple knowledge flows, creating adaptive governance and operating global virtual teams. 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 the cases.

A short survey conducted during the event revealed that around 60% of participants had had a positive experience with strategic partnerships, while 31% had experienced a failure (9% had no experience). Reasons for success or failure included the importance of matching the objectives, values and relevant stakeholders, effective governance and the necessity for a strategic partnership to be mutually beneficial (see Table 1).

These results are in line with the empirical research, which identifies three major reasons for failure of strategic partnerships:

• Underinvestment : disagreement on revenue and cost sharing, lack of resources, lack of executive sponsorship and commitment, etc.

• Over-appropriation : coopetition, customer ownership issues, intellectual property sharing, etc.

• Misalignment : conflicting goals and incentives, unclear roles and responsibilities, difficulty in communicating the joint value proposition, extension of the internal silo mentality.

In order to avoid such failures and effectively build joint capabilities, strategic partnerships should be based on trust and follow five simple steps:

Quite often strategic partnerships are formed to address the competitive threats of imitation and substitution, yet while the threat of imitation should be addressed in the value channel area, the response to substitution should lie in strategies at the business model level. In general, companies that decide to pursue strategic partnerships should introduce changes at the strategy level, including organizational structure, processes, and most importantly – commitment at all levels. Companies should clearly define the areas in which partnerships should be built based on its general strategy as well as its objectives.

Nestlé adopted a strategy change toward a partnership-based model in the areas of innovation and R&D in order to fight competition and imitation. Its in-house innovation system was no longer capable of sustaining annual growth of 5% to 6% and keeping up with the competition that was intensively using open-source innovation. In 2007 Nestlé’s organizational structure was a mix of functional/geographic/business divisions and did not allow for flexibility and efficiency in terms of managing strategic partnerships. In total 5,000 people were working in R&D within different business units, and only two people were responsible for partnerships. After mapping the existing R&D expertise inside the company to identify opportunities for shared knowledge and expertise, as well as potential areas for open-source innovation, a special business unit was created that was responsible for all strategic partnerships. By 2009 Nestlé had developed a profound practice for strategic partnerships and had built a broad scope of alliances across businesses, universities, start-ups and venture capitalists.

Search, Screen and Select

One of the 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. As a result, search, screen and selection processes remain decentralized and ad-hoc (except for the companies with developed capability and a history of successful strategic partnerships).

In general, companies should use a variety of mechanisms in their searchfor possible partnership opportunities, such as existing contact networks (suppliers, research partners), specialized industry organizations, associations and conferences. In the screening phase, companies should use strategic partnerships to acquire new capabilities within existing business, and be aware of consumer insights. They should also focus on limiting the number of growth areas and finding the right business champions in the areas of interest. 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 applies a well-structured, systemic approach when searching for possible partners. The global IT product and services industry is diverse, with companies ranging “from one-stop shops” (big vertically integrated IT companies, such as IBM, Oracle and Dell, which provide the whole range of services) to small companies like NetApp that do business within one segment only.

In order to successfully compete with “one-stop shops” in infrastructure for cloud computing and provide its customers with the whole range of services, NetApp started looking at establishing strategic partnerships in adjacent areas of IT infrastructure. The first step was to map the competitive landscape across all areas of cloud infrastructure, distinguishing “best of breed” companies among the small specialized companies in each area. Eventually, it formed a non-equity partnership with Cisco, called FlexPod, which engages virtual teams consisting of best professionals from each company, and forms multiple small partnerships in various areas and countries.

There are multiple structures of strategic partnerships – from non-equity alliances, mostly in the form of non-traditional contracts (such as joint R&D, long-term sourcing, shared distribution/services) to equity-based partnerships in the form of minority equity investments and joint ventures.

The main reasons for choosing non-equity strategic partnerships are high uncertainty in the market, the existence of several possible partners (the rationale is to start loose and maintain competition between possible partners), the risk of damaging existing partnerships, and high organizational fit.

A joint venture is usually preferred when there are differences in culture and/or in the size of the companies (to minimize the risk of under-commitment by the smaller partner). Yet in order for a joint venture to succeed, it should recruit independent people to make a fresh start rather than engaging employees from both companies, who already have different cultures and conflicts of interest and who might prioritize the goals of their own companies rather than those of the JV.

Overall, joint ventures are the least popular form of partnership; they are the most difficult to manage and have an average life span of around seven years. According to McKinsey,2 many joint ventures fail because they spend more time on steps where less value is at risk (50% of time spent on negotiating deal terms, which constitute only 10% of value at risk) and less time on steps that have more value at risk (only 20% of time spent on business model and structure, which represents around 40% of total value at risk).

Following negotiations, the master agreement should be signed at the C-level (preferably CEO) and should explicitly summarize all the inputs and shared responsibilities and ownership of intellectual property, assets, etc., as well as conflict resolution and exit terms. Moreover, companies should avoid money investments by investing “in kind” (equipment, technology, people, buildings) to increase the commitment of both partners, because as soon as money is involved everything becomes a transaction rather than a long-term joint endeavor.

It is important to understand that all the aspects of negotiations, as well as the successful launch of a strategic partnership, are vastly affected by cultural values, such as individualism vs. collectivism, egalitarianism vs. hierarchy, high vs. low context. Such cultural and language differences can become the root cause for misunderstandings and conflicts, which can be diminished by mutual respect, awareness of cultural differences and misinterpretation of the other party`s behavior through your own cultural values.

In 2007 Starbucks tried to enter the Indian market through a joint venture with Future Holdings, but the venture failed due to problems with government approval as well as inside the partner organization. In 2010 the FDI regulation changed, allowing 100% of foreign ownership in Indian companies, and a year later Starbucks decided to repeat its attempt and partner with a big local company with expertise in dealing with local government and building a working supply chain. Tata, India’s premium brand, which had great market knowledge and was the largest coffee grower in India, was chosen as a strategic partner. At first, a non-binding open-ended Memorandum of Understanding was signed at the top level of both companies. However, five big issues needed to be resolved: equity stake, branding, pricing, growth pace and supply chain. After intense negotiations, a JV was formed with an equity stake of 50/50 (signalling trust between partners). Each party compromised on some of its original positions to create a sustainable growth strategy. Starbucks was launched in Mumbai in 2013 and has since grown to other cities.

Start and Stabilize

Developing a supportive culture within the company is vital to ensure that a strategic partnership is efficient and productive. This means recognizing partnerships as a corporate priority (with inclusion in the corporate communication strategy). Support from senior leadership should be coupled with support from partnership leaders and teams.

Nevertheless, conflict is inevitable, especially in the early stages, and interest-based problem solving is the best way of tackling them. This requires separating people from the positions, emotional aspect from the rational issues, focusing on interests, generating mutually beneficial options, developing a contingency plan, and clarifying the commitment of both parties. Yet the most important first step is to identify and agree on the issues to be resolved. The contract should include a coordination aspect – an opportunity to revisit the contract, as well as conditions for escalating the issues, who should be escalating the issue, to what level, veto rights, and so on.

Study and Steer

Quite often, companies form a special unit (with a clearly defined role – pull vs. push) that is responsible for enabling and supporting strategic partnerships. These units usually hold a portfolio of strategic partnerships or projects within the partnership to make coordination more efficient, increase the scope of partnership and build up expertise. A portfolio approach to strategic partnership increases effectiveness since, according to BCG, the broader the scope for the partnership, the more successful it will be.

Such a coordination unit ensures brokering knowledge, legitimizing competence and institutionalizing organizational memory, as well as transferring best practices across its portfolio.

US-based Eli Lilly has a long history of successful strategic partnerships. Despite a high prevalence of M&As in the pharma industry, the company’s management decided to outgrow the industry by organic development and to leverage external capabilities through alliances. In 1999 it established the Office of Alliance Management (OAM), to build its capability to become the best in alliance management. All the external partnering activities were consolidated under three groups: the Research Acquisition group, which identified potential candidates, Corporate Business Development, which focused on the due diligence process and the negotiations, and the OAM, which supported the successful implementation of the alliance and minimized the risk of alliance failure for reasons other than scientific ones. OAM people participated in the due diligence and negotiation phase to ensure the deep understanding of the partner’s interests and business. By 2006, Eli Lilly had become a model within the industry for institutionalizing alliance capabilities within its organization, and over the years has become best in class in terms of partnering strategies within the pharma industry.

Key takeaways

With the significant increase in strategic partnerships, companies should bear in mind that success depends heavily on adopting a proper strategy, alignment (within the company and between the partners) and seamless integration into the organization’s processes and operations. Nevertheless, it is essential to focus on sharing commitment and competencies to create value.

Open communication lays the foundation for successful strategic partnerships, ensuring clarity of objectives, trust and strong relationships.

On the operational level, the most important group to involve, from both companies, is middle management since their objectives are often conflicting. Creating special mutually accepted metrics to measure the success of the alliance is also important.

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.

[1] http://www.pwc.com/us/en/ceo-survey-us/2014/assets/2014-us-ceo-survey.pdf

[2]http://www.mckinsey.com/insights/corporate_finance/avoiding_blind_spots_in_your_next_joint_venture.

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February 2012 |  Nano Tools  |  Strategy

Strategic Partnerships

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Contributor: Harbir Singh, The Mack Professor, Professor of Management; Vice Dean for Global Initiatives; Co-Director, Mack Center for Technological Innovation, The Wharton School, University of Pennsylvania

Determine what types of partnerships are the best match for your strategic goals, increasing your success in managing uncertainty, reducing risk, and driving growth.

All companies need growth strategies that minimize risk while enhancing their competitive positions. As the need to respond quickly to market opportunities accelerates, so does the difficulty and risk. And many companies don't have the necessary resources and assets available for a rapid response. Partnerships can decrease costs and increase flexibility, thereby minimizing risk. But many organizations are all too familiar with the risks of partnerships themselves; and when they avoid those risks by opting out they lose the potential of some highly advantageous alliances.

Wharton management professor Harbir Singh has developed a way to mitigate those risks — and realize the full advantage of partnerships — by employing the right kind of partnering strategy. Singh has identified three distinct strategies for successful alliances, each with unique strategic objectives, key success factors, and potential problems. By clearly identifying what you want to achieve through the partnership, and choosing the appropriate strategy, you can stretch your innovation dollars, share in the costs of investments, better handle uncertainty, and access new resources, capabilities, and markets.

• A Window Strategy uses a partnership as a window onto new technologies or developments in your industry by providing access in real time to their progress. It's appropriate when there is a high level of uncertainty because it helps you stay in the flow of new ideas, explore multiple paths, and reduce uncertainty about possible alternatives. It also lets you understand new ideas and technologies without over-investing, keeping you agile in a fast-changing marketplace. Successful Window Strategy partnerships are formed with companies that are making promising progress on one or more of your strategic objectives. Potential challenges include leakage of your firm's technologies and managing a shifting web of partnerships.
• The role of an Options Strategy partnership is to create real strategic options for the firm and/or build a capability platform by creating a combination of people, routines, and assets that can be scaled up or down. It's used when there is a moderate amount of uncertainty about which option(s) will ultimately succeed, because it lets you make a calculated bet without prematurely committing to just one option. For example, you can make moderate investments in companies with new technologies or services, with options to expand your involvement if the firm becomes a winner. The potential challenge of this strategy is that companies are often reluctant to shift quickly after investing.
• A Positioning Strategy partnership is appropriate when there is a low level of uncertainty and you want to partner with another firm to create a best-in-class advantage. It can help you achieve scale- or scope-based advantages, optimize market segmentation, or acquire a new customer base. Successful Positioning Strategy partnerships are formed between firms with complementary capabilities who seek to create a combination with the best capabilities in the industry.

How Companies are Using It

• The Medicines for Malaria Venture (MMV) partners with dozens of pharmaceutical and biotech companies to manage a large and diverse portfolio of antimalarial drug projects. MMV's partnerships are part of its Window Strategy, which aims to build a strong pipeline of molecules leading to new medicines needed to eradicate malaria. The strategy reduces the R&D timeline while increasing the number of potential effective medicines.
• French oil and gas company Total works with partners to improve the efficiency of alternative energy source Dimethyl ether, methoxymethane (DME)'s direct synthesis process. Total is experimenting with pre-commercial production of DME fuel from a pulp residue known as spent liquor as part of a European consortium led by Volvo. This partnership represents an Options Strategy , in which there is some uncertainty about both the energy source and the most effective, economical, method of production. By working with the consortium, Total has the opportunity to access future winning technologies while committing a limited amount of resources.
• Renault and Nissan began their highly successful partnership in 1999. The goal of their shared Positioning Strategy is to achieve ranking among the world's top automakers in terms of quality and value, new technologies, and profit. In an industry that experiences relatively low levels of uncertainty, the two companies together create positional advantages that neither could achieve alone.

Action Steps:

The following steps will help you determine which type of strategic partnership will help you best meet your needs and deal with current levels of uncertainty as they impact returns on the business.

• Identify the goal(s) that you want to achieve from the partnership: (A) Do you need to track technologies or developments in your industry, learn what they mean, and stay in the flow of ideas? or (B) Are you seeking to create new options for the firm and/or build a capability platform? or (C) Are you looking for scale-based advantages, market segmentation, or a new customer base?
• As you look at the level of financial and managerial resources you plan to invest in a new venture, consider both the magnitude and the level of uncertainty about the expected returns. The role, scope, and nature of alliances will change depending upon the degree of uncertainty faced by the firm. Are you experiencing (A) high levels of uncertainty, with a wide range of risky options for growth; (B) moderate levels of uncertainty, under which you can make some strategic bets on a narrower range of growth options; or (C) relatively low levels of uncertainty, when growth is possible primarily by increasing scope and/or scale?
• Identify your partnering strategy based on your answers to questions one and two. "A" answers would lead to a Window Strategy; "B" answers to an Options Strategy; and "C" answers to a Positioning Strategy. Once you've identified your approach and your goals, clarify your partnership strategy and objectives with your potential partners to ensure that it will be successful for all and ensure a sustainable long-term alliance.

Additional Resources:

• Wharton on Managing Emerging Technologies. George S. Day, Paul J. H. Schoemaker, Robert E. Gunther (Wiley, 2000). Includes a section on alliances that provides approaches for and examples of the three partnering strategies.
• The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability. Marco Iansiti and Roy Levien (Harvard Business Review Press, 2004). Argues that companies can protect and ensure their own success, or undermine it, depending on how they foster the combined health of the network they operate in. Bases insights on "keystone species" in biology that work to proactively maintain the healthy functioning of their entire ecosystem because their own survival depends on it.
• "When to Ally and When to Acquire," Jeffrey H. Dyer, Prashant Kale, and Harbir Singh. Harvard Business Review , July-August, 2004, 108-115. Provides a framework to help organizations decide between acquisition and alliance by analyzing three sets of factors: the resources and synergies they desire, the marketplace they compete in, and their competencies at collaborating.
• Harbir Singh serves as Faculty Director of and teaches in Strategic Alliances: Creating Opportunities for Growth , and Global Strategic Leadership . He also teaches in the Executive Development Program , Mergers and Acquisitions , Strategic Thinking and Management for Competitive Advantage , and other Wharton Executive Education programs.

About Nano Tools:

Nano Tools for Leaders ® was conceived and developed by Deb Giffen, MCC, Director of Innovative Learning Solutions at Wharton Executive Education. It is jointly sponsored by Wharton Executive Education and Wharton's Center for Leadership and Change Management, Wharton Professor of Management Michael Useem, Director. Nano Tools Academic Director, Professor Adam Grant.

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