The airlines Air France/KLM, Delta and Alitalia jointly operate an alliance with gross revenues of $10 billion. The alliance is based on an extensive contract that stipulates precisely the costs and revenues that are shared, which activities are part of the alliance and which are not and the responsibilities of the partners. A well-defined contract is not the only source of the alliance's success. The organizations involved have a long history of collaboration between them, have invested in personal relationships and have implemented a governance structure to manage the turbulence expected in the business of airlines. The alliance partners recognized that the contract could not foresee all future possibilities and, hence, developed a governance structure to guide and initiate change within the alliance.
Even more flexible was German supermarket METRO's coalition involving approximately 50 partners that aimed to build the supermarket of the future. The coalition's legal backbone is a very short memorandum of understanding. Still, the partners to METRO's Future Store Initiative were able to create one of the industry's strongest engines for innovation. The secret? No complex contracts were necessary because METRO selected partners that they knew and trusted. In addition, METRO created a compelling vision for the alliance with clear benefits for all. Consequently, partners were highly motivated to contribute and dispensed with the need for a myriad of complex control mechanisms.
In September 2009, Danone, the French food and beverage company, announced that it would sell its 51 percent stake in its joint venture (JV) with Wahaha, its Chinese counterpart. This sale ended a successful $2 billion joint venture and a prolonged struggle between the companies. Danone accused Wahaha of breaching their agreement by copying the joint venture in other parts of China and keeping all of the profits. Wahaha claimed that Danone invested in its Chinese competitors, despite the fact that their collaboration was exclusive. For two years, the companies fought each other in court and engaged in extensive mudslinging before reaching what they called āan amicable settlement.ā1
In 2012, BP announced that it intended to sell its 50 percent stake in TNKāBP,2 its joint venture with AAR, an investment vehicle owned by three Russian businessmen. The sale would result in BP losing one-third of its production, reserves and profits. The reason behind the proposed sale was a series of conflicts, among others over an attempt by BP to set up a joint venture with the Russian gas company Gazprom. According to AAR, this attempt represented a breach of their confidential shareholder agreement, which stipulated that such a deal should have been concluded via TNKāBP. The Gazprom deal fell through and TNKāBP's British chief fled the country in fear of his safety. The dispute did not end there. The relationship soured and another deal by BP with the Russian state-owned oil company Rosneft to explore oil in the Arctic was contested in a Swedish court and halted. In the meantime, the joint venture became ungovernable after one of the Russian businessmen resigned from its board. During and after difficult negotiations involving Russian President Vladimir Putin in early 2013, the joint venture was sold to Rosneft for ā¬40 billion. The secret shareholder agreement and the less than transparent Russian oil sector make it difficult to judge which party was wrong or right; regardless, significant interests were clearly at stake and the conflict did not help anyone's business.
These four examples are of high-profile alliances. The last two show that even financially successful alliances may falter. More importantly, the examples show that owning a majority or 50 percent of the shares does not mean that a company is in control of its joint venture. The behavior of the partners (do they or do they not adhere to the terms of the contract?) and other contractual provisions (did Wahaha have the right to imitate the joint venture? Was the collaboration between BP and AAR exclusive?) are also very relevant elements of the joint venture structure. In fact, in these cases, these elements completely overrode the shareholding arrangements. The lesson is that the formal elements in the design of an alliance are not sufficient to ensure good governance; the predictability of the partner's behavior must also be considered. METRO built on this insight by aligning itself only with trusted partners. Air France/KLM recognized that alliances were more than contracts and, for that reason, invested in personal relationships. A good alliance design takes into account all such hard and soft elements.
However, balancing the hard and soft elements is a challenge. Because partners do not always behave in the manner desired, control mechanisms must be implemented. Too many control mechanisms make the alliance inflexible and smother creativity. Too few control mechanisms may undermine the clarity of the direction of the alliance and open up space for partners to behave in a manner that benefits their own interests, which damages the alliance. These cases show that alliances with many control mechanisms can be successful (the airlines) but may also fail (TNKāBP). Few control mechanisms and high reliance on trust (the Future Store Initiative) may result in success but leave the partners vulnerable to opportunistic behavior by their collaborators. Therefore, the key dilemma in designing alliances is balancing trust with control. Given specific circumstances, what is the right equilibrium between these two? Designing successful alliances requires answers to this question.
Why is alliance design relevant?
Alliance design is relevant because alliances have become a standard to organize businesses. An alliance represents a collaboration between at least two independent organizations aiming to achieve a competitive advantage that each cannot achieve on its own. An alliance is characterized by joint goals, involves some form of sharing of revenue, costs and risk between the partners, provides for joint decision making and is based on open-ended or incomplete agreements.3 These open-ended agreements are an important characteristic of alliances. Standard purchasing contracts are āclosedā: company A delivers to company B a fixed number of products at a certain price. In alliances, closed contracts do not exist, and alliance contracts are open ended: they do not specify what each partner must do in every conceivable situation, simply because doing so is not possible or is too expensive.
Implied in this definition of alliances is that many forms of alliances exist. A basic distinction is between equity alliances and contractual alliances. Equity alliances involve a shareholding arrangement, which can be a minority share of one company in another, a cross-shareholding or a joint venture, which is a separate legal entity in which two or more companies hold shares. However, most alliances are contractual and the diversity of contractual alliances is probably as significant as the number of alliances itself. In fact, this diversity shows the strengths of alliances and one of the major reasons for their popularity: each agreement can be perfectly customized to the specific needs of the partners. Simultaneously, typical alliance forms have emerged in practice, the most important of which are discussed in this book.
The increased importance of alliances has been documented extensively. In 2007, companies entered into 12 new alliances, and by 2011 that number had risen to 18. The total number of alliances has increased to such an extent that, in 2011, companies reported that one-third of their market value depended on them.4 The 2012 IBM CEO study found that almost 70 percent of CEOs partnered extensively.5 For the 21st century organization, having a smooth-running internal organization is no longer sufficient. Its external relationships also need to be effectively organized.
The reasons for the increase in alliances are the usual suspects. The speed of technological development has two effects. First, a company may no longer want to commit resources to only one technology because it runs the risk of betting on the wrong horse. Spreading risk through alliances makes more sense. Second, the existence of numerous technologies makes keeping track of all of them impossible, even for the largest organizations. Gaining access to these technologies through alliance partners enables companies to learn from others and, if necessary, integrate those technologies into their products. Increased competition is another reason for entering into alliances. By combining resources, companies may be able to face greater competition. Competition also forces companies to be world class in only a few products or services, and complementary products and services may be obtained through alliances. Customer demand is another driver of alliances. Customers are not primarily interested in the individual products offered by large IT companies such as SAP, Oracle, Microsoft, HP, IBM and Cisco. Instead, they want those products to work together in coherent solutions. For that reason, these companies have established alliances that ensure that their products are compatible. Alliances do not stop there. They also enable companies to jointly bring these products to market. Internationalization is also a driving force for alliances. Demand arises in a variety of markets across the globe, and entering markets on one's own is not always possible or desirable. Local partners are often instrumental to gaining a foothold in a new country. Finally, the allian...