A Market-Based Approach To Strategic Alliances

Corporate alliances continue to expand at an explosive clip. A new model evaluates partnerships in the airline, biotech, chipmaking, and tobacco industries, yielding insights on what to do and when.

In recent years, corporate alliances involving both public- and private-sector concerns have grown at an explosive clip. Three major forces are driving this trend: growing international competition, the accelerating pace of technological change, and the globalization of markets around the world.

As a result, alliances are being created that yield distinct competitive advantages in three types of markets: sheltered, standard-cycle, and entrepreneurial. Markets and benefits are rarely archetypical. However, the following model may help to clarify the broad range of alliance options and, once established, to sustain advantages amid rapidly changing conditions.

SHELTERED MARKETS

Alliances in slow-cycle, sheltered markets often seek to establish a monopoly, either in terms of geography or products with one-of-a-kind attributes. A product design that is not easily imitated may dominate its market for decades.

Geographic monopolies often involve alliances between public and private concerns. For example, take the recent agreements between Eastern European governments and multinational tobacco companies. These companies provide capital and expertise in return for the right to manufacture and sell both their brands and the local brands they help produce. In so doing, they widen their scope of operations and increase their scale-based advantages.

Such alliances also are common in the energy industry. Countries-particularly those making a transition to a market economy-seek outsiders to maintain and repair their infrastructures and to help them with energy conservation. This generally requires an up-front investment from companies willing to serve these markets, which typically band together in consortia. In exchange, governments grant long-term performance contracts under which operating savings can pay for the initial capital outlay.

Alliances motivated by rents from shielded markets also may be based on technology and aim to create hard-to-imitate products. Oracle Systems has allied itself with Sun Microsystems, Apple Computer, Microsoft, and Hewlett-Packard to develop software applications for its new co-operative-server data base. If successful, the alliance will help make Oracle’s product a marketplace standard, reducing the incentives for others to develop competing systems and giving the company a larger, long-term, shielded market. For other alliance members, the payoff is early access to Oracle’s system, and a share in the rents its new capabilities offer to users.

STANDARD-CYCLE MARKETS

Alliances in standard-cycle, oligopolistic markets typically strive to fuse complementary capabilities, combining large teams of workers and establishing large-scale, standardized production and distribution. Competitive advantages in such environments are generated by high volume and tight cost and resource controls.

Scale-driven alliances maximize advantages in industries that serve increasingly global markets or in situations where major national markets are too small to support efficient business operations. Another driver is the increasing cost of technology development, notably in the microelectronics, telecommunications, and airline industries.

Amid significant industry deregulation, many airlines have formed scale-based alliances. American, United, and Delta were on board early with their purchases of the former international routes of PanAm and TWA. Smaller U.S. carriers, such as Northwest, USAir, and Continental, seek alliances with foreign airlines to provide a similar global capability. KLM Royal Dutch Airlines strengthened Northwest through an infusion of equity, while benefits accrued to both companies through the creation of a single framework to coordinate advertising, schedule planning, and pricing. Alliances in the automobile industry-such as that between Ford and Mazda-have followed a similar pattern.

In addition to scale-based benefits, however, Ford sought increased access to the Japanese market, which historically has been difficult to penetrate because of its peculiar distribution system, institutional relationships, and government policies. Xerox expanded its Japanese position through an alliance with Fuji, and the pairings of Merck and Banyu Pharmaceutical; Ely Lilly and Shionogi; and. Caterpillar and Mitsubishi were cut from the same mold.

In the chipmaking business, meanwhile, U.S. and Japanese companies have hooked up to defray mushrooming R&D and production costs. The affiliations of IBM, Siemens, and Toshiba; and Advanced. Micro Devices and Fujitsu were driven by this factor.

FAST-CYCLE MARKETS

Alliances in dynamic, entrepreneurial environments take a different shape and produce different advantages. In such markets, it is critical to move quickly, before the window of economic benefit disappears. Factories often are designed for compressed lives of only two or three years. Product life-cycles, prior to imitation, may be even shorter.

The pharmaceutical industry is among the world’s fastest-and the most capital-intensive. In the U.S., corporate R&D expenditures average around 16 percent of sales, and by some estimates, it takes $250 million and 10 years to clear the regulatory process and bring a drug to market. Then, by the time a drug is ready for sale, it typically has only a few years of patent life left.

But collaboration on research and development-with responsibilities often divided on the basis of corporate expertise-increases the likelihood that a research process will yield a marketable commodity and may significantly decrease time to market. Amgen and Genetics Institute were racing to develop an anti-cancer drug, erythropoietin. Both start-ups were strapped for cash, with limited downstream capabilities and no overseas markets. Amgen established two strategic alliances, one with Johnson & Johnson and another with the Kirin Brewery of Japan. Genetics Institute paired with Japan‘s Chugai Pharmaceutical and Goehringer Mannheim of Germany. The result was a split decision, with Amgen winning the patent battle in the U.S. and Genetics Institute first to market in Japan through Chugai.

WORKING TOGETHER

Often, restrictive governmental policies or lack of public resources shapes the infusion of new economic benefits through alliance. Moving ahead, as we design public and corporate policies, the clarion call is for cooperation that benefits both sectors.

Both sectors must recognize that corporations drive economic growth. Government can assist by creating the business conditions necessary to nurture alliances that will help firms move profitably into an increasingly complex future.

Elizabeth E. Bailey is the John C. Hower Professor of Public Policy and Management at The Wharton School of the University of Pennsylvania.

Weijian Shan, a former faculty member at The Wharton School, is currently vice president and the business representative to China for Morgan Guaranty Trust in Hong Kong.