Forming a Strategic Alliance

A strategic business relationship, or strategic alliance, can be formed for a number of reasons and the potential activities of the parties to such a relationship are almost limitless; however, there is a basis continuum of steps that is typically followed in the formation process.  The first step usually will be the development of an overall strategy, including specific goals and objectives, for a proposed alliance.  At this point the company may not even have a particular partner under serious consideration although the actual partner selection will obviously have a big impact on strategy decisions.  Issues to be considered include evaluating the feasibility of the proposed alliance, identifying and defining the purposes and objectives of the alliance, determining whether there are sufficient resources (i.e., technology, personnel, capital, raw materials, manufacturing assets etc.) available for the alliance to be feasible and, finally, making sure that the alliance as contemplated would be closely aligned with the rest of the company’s business.

 

The second step should be identifying potential partners for the alliance and conducting a thorough evaluation and assessment of the strengths and weakness of each candidate to ensure that there is a reasonably high chance that the parties will be compatible and able to work together to achieve the mutual goals and objectives of the alliance.  Creating a list of potential partners begins with a focus on parties that are likely to possess the key core competencies and resources that the company lacks and which are essential to achieving a specific goal—development of new products or technologies, high volume manufacturing, or distribution and sale of products into new markets.  The company should then go through its own list of partner selection criteria and assess the goals and objectives of the party and how the management and operational practices of the other party will fit with those of the company.

 

Once a partner has been selected attention turns to contract negotiations and creation of a formal understanding regarding the business activities of the alliance and the mutually determined goals and objectives of those activities. When drafting the terms and conditions of a proposed strategic alliance it is absolutely essential for each of the parties to carefully consider, in advance, their own goals and motives for entering into the arrangement. Obviously the hope is that the alliance will be “successful,” but the key questions are just what specific business opportunities are being pursued and why is it that it makes more sense to pursue those opportunities with that particular partner as opposed to with another partner or alone.  Each of the parties should assign a team of managers and relevant specialists (e.g., engineers with particular expertise in any technology that is to be developed and/or used in the alliance) to create a complete “business case” for the alliance that demonstrates how the arrangement, including the proposed terms and conditions, fit with the strategy of the parties.  The business case should also include a definition of the short- and long-term goals of the alliance and each of the key assumptions that must be true in order for attainment of those goals to be reasonably foreseeable.  The actual contract negotiations for the alliance should be handled by experienced managers and professional advisors from each side and each step of the process should be used as an opportunity to confirm that the parties have a realistic view of the goals and objectives of the alliance and the contributions that each party is expected to make to the alliance activities.

 

The final step in the formation process occurs after the formal documentation has been completed and before the parties begin to actually commit their resources and attention to the proposed activities of the alliance.  Typically the negotiation process is quite intense and demanding the participants from both sides can get sidetracked over differences regarding relatively minor issues that must be resolved in order for the documentation to be completed.  It is important to step back one last time and review the conditions for a successful alliance to see whether the parties are on the right track.  Among other things, the parties should convene one or more pre-alliance meetings so that the managers and key employees who will be involved in the day-to-day activities of the alliance can get to know one another and learn more about each other’s management styles and company cultures.  These meetings should be used as an opportunity to create an overall business plan for the alliance and then break the activities of the alliance down into manageable pieces that can be easily measured.  The parties need to go behind the contract language to reach a clear and comfortable mutual understanding about how they will work together—governance structures, planning and control procedures, information exchanges, creation and dissemination of progress reports, and formation and management of project teams that include representatives from both parties.  Over the next few weeks I'll post some additional thoughts on ideas for increasing the chances of success for a strategic alliance.

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