Alliances are a competitive necessity

In an increasingly global and competitive world, alliances have become a matter of competitive necessity, and in some industries, not having alliances can put you at a significant disadvantage, observes Nitin Pangarkar, Associate Professor, Department of Strategy and Policy, NUS Business School, National University of Singapore ( >http://bit.ly/F4TNitinP ). These industries tend to be characterised by rapid development (technology or otherwise), great rewards for being early to the market and variation in skill levels of firms (encouraging specialisation and alliances), he explains, during the course of an interaction with Business Line , on the sidelines of India Strategy Conference held recently in ISB, Hyderabad.

Adding that alliances can, in fact, be less risky than acquisitions since acquisitions have greater possibilities of culture clash, Nitin notes that alliances also allow sequential build-up in the sense that they can be converted into acquisitions down the road. “Such conversion is less risky because the substantial resources for acquisition have been committed after building familiarity with the partner. Alliances are prevalent among Indian companies also. According to one recent study, Ranbaxy had 31 deals with foreign firms, Nicholas Piramal had 16, and Dr Reddy’s, 15. While all of these deals may not be alliances, many probably are.” Our conversation continues over the email.

Excerpts from the interview.

Is cost a major consideration when entering into alliances?

Though cost management is often important (for example, large multinational pharmaceutical firms have forged alliances with India-based pharmaceutical companies to reduce their costs), alliances can be formed for a variety of other reasons. Alliances can help you better focus on your core competence and leave other tasks to specialised agencies. Big banks and technology companies (e.g. Cisco Systems) are outsourcing their IT and backroom functions to Indian software companies such as Infosys or Wipro, for instance. Not only does this reduce costs, but the alliance partner (Wipro or Infosys) may simply be better at the task assigned to it than the bank or the technology company. In the above example, the banks can focus on the core business of banking and, presumably, do a better job.

Toyota, similarly, outsources a number of key components to its alliance partners such as Denso. Toyota holds equity stakes in some of its suppliers so that they are not simply arm’s length arrangements. Toyota can focus on the tasks of designing, assembling and marketing cars. Other examples in this regard include Apple and Nike.

Post-alliance, how critical is cost to the sustaining of relationship? Are there other factors that come to the fore?

While costs can provide some initial results and excitement, alliances may not be sustainable if there is not something other than costs. Alliance partners must have a continued mutual need to sustain their relationship. For instance, the printer engine (mechanical assembly) of every HP laser printer is made by Canon, a key rival of HP simply because Canon is a world leader in that particular aspect. As HP aims to develop newer printers (more compact, with more features etc.), Canon also must keep pace and deliver by offering HP the best of the breed technology in terms of mechanical assembly.

Procter and Gamble has recently placed increasing emphasis on getting close-to-market technology from its partners but using its channel strength and marketing expertise to ensure the greatest impact in the marketplace. Its Mr Clean Magic Eraser is based on a technology developed by BASF, the German chemicals company. While honouring BASF, P&G’s V-P of Purchasing Rick Hughes said: “P&G is at our best when we have fostered relationships with our external business partners that enable collaboration in achieving our mutual goals, addressing challenges and delivering ongoing innovation.”

A few examples of successful alliances, with a focus on financial efficiencies.

Renault-and-Nissan is one of the most successful alliances. Without this alliance, Nissan would probably have gone bankrupt and Renault’s global position would have been much weaker. The two partners have helped each other save costs, enter new geographic markets, launch new models, cross-fertilise best practises such as manufacturing processes and even launch new products.

The alliance between Nestle and General Mills (a predominantly US-based manufacturer of breakfast cereals) is also extremely successful. The joint venture (called Cereal Partners Worldwide) has grabbed a significant market share globally, and established leading positions in rapidly growing emerging markets. It has managed to become a strong #2 to Kellogg which has been around for a long time and thus had a huge head start. The alliance combined the product expertise of General Mills and the distribution and global expertise of Nestle to create a strong global competitor.

Boeing’s new 787 Dreamliner model is a result of alliances with several partners spread around the world. Like Toyota, Boeing is more of a designer, assembler and marketer in this instance. Boeing has tapped the specialised expertise of many of its partners to come out with a cutting edge product. While some people might be sceptical about the delays that have plagued the launch of the 787, it is worthwhile noting that the delays could have been worse (and/ or the product may not have been as cutting edge) without the alliances.

Apple’s alliance with Foxconn as well as other suppliers has enabled Apple to bring highly successful new products (iPhone, iPad etc.) to the market. Apple specialises in software development (the operating system), suppliers such as Samsung provide cutting edge hardware.

Your research was about alliances in biotech. Do you see relevance of these findings to other industries, too?

Alliances can be useful in any industry. They are essential in biotech industry because the locus of innovation is dispersed in the biotech industry. Big firms can tap the innovative energies of small firms by forging alliances. Small firms, in turn, can get access to the regulatory and marketing expertise of big firms.

Alliances have been forged and have led to good results in several industries including biotech/ pharma, aircraft manufacturing, consumer goods and consumer electronics (many LCD TV manufacturers source panels from key firms such as Sharp and Samsung), among others.

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